As a Buyer’s Agent in Fort McMurray in 2017, I have become a bit emotionally dulled from viewing foreclosure listings almost every day and by, every once in a few weeks, helping a client buy one. This topic really is a tough one to write about though: Families lived in and loved in those homes, and the properties often still bear the hallmarks of those better times. When I read and see things left over from the old owners, I can’t avoid a pang of something miserable, deep down inside me somewhere.
At first, there were only a couple of this type of distressed listing on the market, but now approximately 10% of MLS® listings are owned by banks, or being sold by the courts, so they can’t be ignored.
What is a Foreclosure?
According to HOS Financial:
Foreclosure Rules in Canada
A mortgage foreclosure in Canada is a legal action the lender can take if someone who borrowed money via a mortgage stops paying it back. Foreclosure lets the lender sell or take back that person’s house after obtaining a court’s permission. Via homeownersoon.com
So whoever has lent the money (typically a bank, but sometimes a private individual, or investor) to the person on the property title (the homeowner) can sue the owner in court for breaching the terms of the mortgage contract. The court then gives the lender the right to sell the home or take ownership (this compensates them for some of their loss).
There are a few steps to the process: It starts with a court ordered sale (the property is still owned by the borrower). If the property doesn’t sell, it becomes the property of the bank (who then attempts to sell it). If the mortgage is insured, then after a certain period of time, the insurer (typically CMHC or Genworth) takes over and lists the home for sale.
As the listing goes from owner to owner, the level of motivation increases (and so the price decreases). This is accentuated by the current downward trend in home values.
Is it Risky to Buy a Foreclosure?
Normally, when we purchase a home from an individual or family, then the sellers who have lived in the home are happy to make certain promises (known as representations and warranties) about the state of the property. For example, they commit that the home is fully permitted and that improvements to the land are in the correct place (maybe with a letter of compliance from the local municipality).
They promise that there are no “material latent defects” (issues that are dangerous or expensive to fix, that cannot be found by a buyer using reasonable inspection).
But banks don’t make these promises.
The reason they don’t is that the bank has never lived in the property and therefore is not in a safe position to make those commitments. Banks are not willing to take on any of the risk associated with a real estate transaction, so the contracts they require are written in such a way (by bigshot lawyers) to shift pretty much any risk onto the buyer of the home.
I hear you say…
”Whether or not the section about disclosure of material latent defects is struck out of a contract or not, doesn’t the law still protect me? Don’t they still need to disclose those?”
Not if the bank doesn’t (and can’t) know about them.
When we buy foreclosures, we are buying homes that are being sold “as is where is” and we need to price that risk into the negotiated purchase price.
Aren’t They Great Deals?
10% of the stock of inventory today are foreclosures or court sales.
20-25% of sales are foreclosures or court sales.
That means people are buying them. They do this because of one thing: Price.
Not every foreclosure is an amazing deal, but a lot are.
The banks don’t want to be in the business of home ownership (they prefer to spend their resources doing what they usually do well ~ banking).
Therefore, banks set the list prices low to compensate buyers for taking on the burden of risk, and for taking on the responsibility of fixing them up (sometimes they are lovely, cared for homes, but not always).
What Sort of Homes are Available?
The majority of foreclosures are in the lower price ranges (under $300,000). There are a lot of apartments, mobiles and townhomes. This is because lower income families are more vulnerable to economic shocks like the one we are experiencing. It is really sad.
As time goes on, we are seeing more distressed listings in higher price ranges and more higher income housing types.
What Impact Do Foreclosures Have on the Market?
A few foreclosures doesn’t move the needle on home values, but when we see large numbers make up a good slice of inventory in a part of the market, their presence can significantly impact aggregate home values.
The reason is because the assumptions we normally make about balanced markets is no longer a good one. Here’s what I mean…
Normally in healthy, open housing markets around the world, if you get two sellers, then one isn’t that serious and delists his property (that’s the assumption). As long as you have one buyer, you have balance (prices don’t fall).
But if both of those sellers are banks (therefore determined to sell), they both remain listed and compete for the attention of the buyer, and prices fall. Even though you theoretically have the right ratio of new listings to sales for a balanced market (2:1), prices are falling!
When we look at the lower price ranges of the Fort McMurray market today, we see something similar. Homes are selling and coming onto the market at rates that you might expect to cause stable prices, but prices are in fact still falling steadily even in this price range despite a healthy level of demand. This could well be due to the stubborn (and growing) stock of foreclosures.
Conclusion: Anything Positive, Tom?
A lot of the above is more than a little bit brutal (especially if you are reading this after dark, sorry). For example: That falling markets can self-perpetuate. Who THINKS like that?
But consider for a moment what happens when someone buys a foreclosure. Think what happens to the home. Or what happens to the neighbourhood. The home gets fixed up. It gets lived in again and loved, and people love each other again in it. Over the long run, they will build equity. It’s a cycle of renewal which has some real cheerfulness to it.
That’s where I’ll leave it.