You’ve decided it’s time to get a bigger place. Or a nicer place. Or a better neighbourhood. For whatever reason, you’ve decided to trade up. There are possible pitfalls and temptations in this transaction that you can minimize. We have made a list of the major steps that you can follow to prevent these mistakes from taking place:
1. You will be tempted to put an offer on the new property prior to selling your existing home. Unless you have the financial resources to buy a new home without selling your existing home, don’t do it. You can make a contingency offer, based on the sale of your home, but those offers are frequently not accepted and if so, the Seller will want more money than if you are a buyer with less "baggage". Also, the sale time on your property is difficult to estimate. And Sellers don’t like uncertainty. Unless you can afford to make two mortgage payments for an extended period of time, don’t put an offer on your new home until your current home is sold.
2. Make sure your home is ready to sell. Your home will sell faster and for more money if you take the necessary steps to make it marketable. Staging is important – the closer your home is to showing like a showhome – the better!
3. Sit down and prepare a realistic budget. Make sure you can really afford this step-up. Don’t be conservative. If anything, pad the numbers to be sure you will be comfortable after the more expensive home purchase.
4. Get pre-approved. Talk to a mortgage broker before shopping for the new home. That way, you won’t be disappointed by finding the perfect home and then discovering you can’t afford the mortgage, or writing an offer and finding the Seller won't consider your offer when you have no pre-approval in place.
5. Coordinate the closings. The sale of your current home needs to close and fund prior to the closure of the purchase of your new home. This requires coordination between many different parties. Work closely with your Realtor to minimize potential chaos at closing. Also, you may want to arrange additional bridge financing with your lender as a back up measure.
Following these steps will help you sell for the most, and be in a position to have the power to buy for the least. Isn’t that what we all ultimately want to do?
7 Common Mistakes Buyers Make When Buying a Foreclosure
There are 7 mistakes that buyers tend to make when purchasing a Foreclosure property. Sometimes these mistakes will result in the missed opportunity of you losing the purchase of the home to a competing buyer in court, and sometimes these mistakes will cost you money or heartache, or both. Here are the most common mistakes:
Mistake #1: Offering Too Low a Price
Because the lender must justify the offer amount to the court, the bank is unable to accept a ridiculously low offer. The lender gets numerous appraisals on the property and knows the value. In Canada, the borrower is liable for any shortfall in a foreclosure, so it is the court’s job to ensure that borrower is protected from the bank selling the property at a substantially lower price. A super lowball offer is likely a waste of time.
Mistake #2: Offering on an Insured Property
If the lender’s mortgage has been insured by CMHC or Genworth, chances are the lender will not accept a super low offer. They have no incentive as they are guaranteed the insured amount from the CMHC/Genworth.
Mistake #3: Assuming Your Offer will be the Only Offer
Many times you will not know that a second or third offer is going to show up in court. If you get cocky and decide to stay home from court and/or not submit an alternate offer "just in case", there is always the possibility that you will lose. Be aware, be there, and be ready to adjust your price if necessary.
Mistake #4: Being Upset After Losing in Court
Be prepared to potentially lose any investment you make in the property before the court order. If you are not successful with your offer in court, any monies you spent on home inspections, etc. are your loss.
Mistake #5: Not Identifying or Accepting the Major Risks
If someone comes in and destroys the house before completion date, the lender is not required to take responsibility. They may take responsibility, but they aren’t legally required to – it usually clearly states that in the Schedule A that you are required to sign with every offer.
Mistake #6: Not Being Prepared for Contingencies
If the property is occupied during the marketing process, there is never a guarantee the “tenants” will vacate the property on or before possession date. If this happens, the bank needs to file for a possession order and forcibly evict the previous owner.
Mistake #7: Not Choosing Tenancy
You will need to advise the court whether you want title to be joint tenancy or tenants in common. If you do not advise the court prior to the court order, they usually assume tenants in common (no right of survivorship). If you wish to change after the fact, it will cost hundreds of dollars at your expense.
This is the third and last article in our trilogy on Foreclosures. For further information and foreclosure opportunities, please feel free to visit our website at www.saltfowler.com.
To read Part 1 of this series, click here.
The 6 Steps To Buying a Foreclosure
There are 6 major steps to buying a foreclosure property through the courts. They are as follows:
1. Write your offer
There will likely be a Schedule A attached which is an addendum written up by the lender’s lawyer. Read this closely.
Most Schedule A’s refer to the fact that the property you are purchasing is ‘as is, where is’, with no representations or warranties. Which means exactly as it says – what you see on completion date is what you get. Note that it may not necessarily be what you see today - if vandals ruin the place prior to possession, the lender technically has no liability. Hence the biggest risk of purchasing a foreclosure.
Schedule A’s usually state that if the borrower redeems the mortgage, the property will no longer be sold to a third party. This means you may make an offer, and then not be able to purchase it after all, as the borrower found some cash and was able to bring their payments up to date.
You cannot include any chattels – anything that is not permanently attached is not guaranteed to be there. If you try to include appliances in your offer, the lender will usually cross them out.
2. Make your Offer Subject to Court Approval
Note that even if the bank accepts your offer, the court has to approve it before you have a deal.
3. Court Date Set
A court date will not be set until all your subjects are removed (i.e. your subject to financing, etc.), and even then the court date is usually not for 3+ weeks after your subject removal date.
4. Your Offer Price is Released to the Public
Once your subjects are removed and the court date is set, your offer price becomes public knowledge. The Realtor who is working on behalf of the bank will release this information, as it is in the lender’s best interest to attract higher offers than yours.
5. Court Date Arrives
After all this time of waiting for your offer to go to court – at court date another offer (or more than one!) can be presented into the court.
All offers presented into court must be subject only to court approval and be accompanied by a bank draft for the deposit. In most cases, the judge will choose to look at all offers presented.
Often if the offers are close in price, and sometimes even if they are not, the judge will ask for a sealed bid within a certain period of time from all buyers. At this point you will have the opportunity to resubmit your confidential sealed offer at the same or different price/terms.
With a sealed bid, the best offer in terms of price and terms will usually be accepted.
6. Once the best offer is accepted, the court order is drafted
The successful buyer is then able to purchase the house and hopes that it is in the same condition on possession date as when they viewed it.
Once again, the process is complicated and risky, and not for the faint of heart.
Stay tuned for our next article, Part 3: 7 Common Mistakes Buyers Make When Buying a Foreclosure
The Foreclosure Process
Buying a foreclosure or other distress sale property can be a great way to build some immediate equity. If you buy right and have the elbow grease to fix it up (most foreclosures need some TLC), these distress sale properties can be a great way to make some quick cash.
However, buying foreclosures in British Columbia is not for the faint of heart. They can be risky and uncertain. There are a number of things you must know about the foreclosure process before you embark on a mission to buy one.
The first thing to know is how the Foreclosure process works.
Foreclosure proceedings begin when the borrower defaults on the mortgage payments. Any of the mortgage holders, if there is more than one mortgage registered against a particular property, can apply to sell the home through the courts. This process is called “conduct of sale”. This means the Foreclosure sale will be carried out under the supervision of the court and is referred to as a court ordered sale.
The lender will give a redemption period, usually six months, for the borrower to redeem the mortgage (i.e. pay up, including all owing interest plus legal fees, etc.). If the mortgage is not redeemed and the redemption period has passed, the lender can go to the courts and apply for conduct of sale. If the lender gets the approval of the court, the lender can sell the home and in Canada (unlike the US), the lender is entitled to recover the difference between the sale proceeds and the mortgage debt from the borrower. As usually these properties sell for less than what is owing to the lender, this can be a very large number.
Once the lender has been granted conduct of sale by the court, the lender can market and sell the home subject to approval of the court.
Many think that the bank will just “dump” the property, and sell it for whatever they can get, in order to get their money out. However, if you refer back to the previous paragraph – the borrower is on the hook for any difference between the sale proceeds and the mortgage debt. So for example – the mortgage owing on a property is $300,000. The Borrower stops paying. By the time the 6 month redemption period is up, the amount owing has increased to approximately $306,000 (assuming interest payments of $1,000 per month). Plus legal fees of let’s say $10,000. Now the new balance owing is $316,000. If this property sells for $300,000, the original Borrower will still be on the hook for $16,000 plus interest until the actual closing date. This is where the court gets involved to protect the Borrower and will strive to heed the advice of appraisers and Realtors to ensure the property is sold within a reasonable margin of fair market value.
As you can see, the process is complicated and we recommend enlisting the services of a Realtor experience in dealing with the foreclosure process when considering such a purchase.
Stay tuned for our next article, Part 2: 6 Steps to Buying a Foreclosure.
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