The mystery of foreclosures

Last week, I spoke to someone who was having difficulty making their mortgage payments. That led me to this week’s column topic: the foreclosure process.

Today’s real estate market is ‘iffy’. Half the experts think that the market is overvalued and home prices will crash. And the other half think that home prices will remain relatively constant: Is Canada’s housing market cooling or crashing?

It is certain, though, that foreclosures have been rising, which has also been the case in Kelowna: Home foreclosures skyrocket in Kelowna.

While common, do you know what is involved in a foreclosure? I suspect that most people don’t know what is involved in the process. So, here is the typical foreclosure…

To begin, most people need to borrow money to purchase a home (i.e. they need to take out a mortgage). Those people are then required to repay that mortgage. As you can imagine, problems arise when people can’t make those payments.

When no payments are made (typically for several months), the creditor/bank, who loaned the money to the debtor/borrower, will send a demand letter to the debtor, requesting repayment.

If the debtor does not make sufficient payments, then the creditor will typically start the foreclosure process. So, what does this mean? Well, it means that the bank will hire a lawyer to go to court and get a court order. That order will state that the debtor owes money (to the creditor) and it will give the debtor a set amount of time (which is known as the ‘redemption period’) to pay back ALL the money that is owed (under the mortgage). This order is referred to as an Order Nisi.

The amount of time (i.e. the redemption period) that is generally given to the debtor is 6 months. But, the redemption period can be much shorter, such as 1 day, if there is very little equity in the property.

Now, if the borrower does not repay the money (within the redemption period), then the bank’s lawyer will go back to court and get an order allowing the bank to market the property. This order is referred to as an Order for Conduct of Sale. If the creditor gets this order, then a realtor will be hired and the property will be marketed.

The realtor will market the property just like any other property. It will be placed on the MLS, be marketed in magazines, and be shown to prospective purchasers.

After an offer is made (that is satisfactory to the creditor), the creditor’s lawyer will go back to court and request that the property be sold (to the party making the offer). At this time, other offers on the property may be entertained in court (and the highest offer will ‘win’ the property). This final order is referred to as an Order Approving Sale.

You might think that you can buy foreclosures for ‘dirt cheap’. But, that isn’t true. In order for a court to approve the sale of a home to another party, the creditor’s lawyer needs to show the court that the property is being sold for fair market value. This is typically done by referring to a realtor’s marketing report, which details the efforts of the realtor to sell the property, and an appraisal, which indicates the property’s fair market value.

So, if a property has been marketed for a very short period of time and the offer is well below the appraised value of the property, it is unlikely that the court would allow the property to be sold.

Now, why does this matter? Why shouldn’t the court allow the sale of a property for ‘dirt cheap’? Well, in these circumstances, the debt (from the house that the debtor couldn’t afford) carries over and follows the debtor. The creditor could then keep chasing the debtor for the money that it is owed (that it could have otherwise got from the sale of the property). This would be unfair. The creditor should try to get as much money as it can from the sale of the property.

The foreclosure process can be complicated and can come with some pitfalls. For this reason, a lot of would-be purchasers are scared away. But, if you love the home, the trouble can be worth it.

And now you know.

**The information contained in this column should not be treated by readers as legal advice and should not be relied on without detailed legal counsel being sought.

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About the Author

Jeff Zilkowsky is a lawyer practicing at MacLean Law in the Lower Mainland and in Kelowna, and focuses his practice on family law and litigation.  

In his column, Jeff provides information about current legal events or points of interest or concern relating to the law. 

The information contained in Jeff’s column should not be used or relied upon as legal advice.

Comments are always appreciated and encouraged, so don’t hesitate to email Jeff at [email protected]

Visit Jeff’s website at www.jeffzilkowsky.com or visit the website of MacLean Law.

The views expressed are strictly those of the author and not necessarily those of Castanet. Castanet does not warrant the contents.

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