Power of sale enables lenders to sell a property when the borrower fails to meet mortgage payments. This process is typically faster and less costly than foreclosure. This article will explore the pros, cons, and unique aspects of purchasing a power of sale property.
- Power of Sale
- Power of Sale vs. Foreclosure: Key Differences
- Purchasing a Power of Sale
- Legal Rights of Homeowners During Power of Sale
- Pros and Cons of Power of Sale for Lenders and Borrowers
- Preventing a Power of Sale
- Buyer Beware: Risks Associated with Power of Sale Properties
- Frequently Asked Questions
- Summary
Power of Sale
Power of Sale is a legal process in Ontario that allows a lender (typically a mortgagee) to sell a property when the borrower (mortgagor) defaults on their mortgage payments. Unlike foreclosure, where the lender takes ownership of the property, Power of Sale allows the lender to sell the property to recover the outstanding debt while the title remains in the borrower’s name until the sale is completed. This process is governed by the Ontario Mortgages Act and is commonly used due to its efficiency compared to foreclosure proceedings.
For homeowners facing Power of Sale, it is important to act quickly by seeking legal advice or negotiating repayment options with the lender. Buyers interested in purchasing a property under Power of Sale should also exercise caution, as these sales are typically “as-is” transactions, meaning the property may have outstanding liabilities or require repairs. Understanding the legal implications and financial risks involved can help both borrowers and buyers navigate the Power of Sale process effectively.
Power of Sale vs. Foreclosure: Key Differences
In a power of sale, the lender sells the home directly to the highest bidder, while in foreclosure, the lender must obtain legal ownership of the property before selling it. A key difference lies in the timeline. Power of sale is generally quicker.
| Factor | Power of Sale | Foreclosure |
| Ownership of Property | Borrower retains ownership until the sale is completed. | Lender takes full ownership of the property. |
| Legal Process & Timeline | Faster process, does not require court approval unless contested. Typically takes a few months. | Court-driven process, could take 1-2 years before lender gains ownership. |
| Sale of Property | Lender must sell at fair market value and return any surplus to the borrower after covering debts and costs. | Lender keeps all proceeds from the sale, even if the sale price exceeds the debt. |
| Borrower’s Right to Redemption | Borrower can stop the process by paying arrears before the sale is completed. | Once the court grants foreclosure, the borrower loses all rights to the property. |
| Lender Preference | The preferred method in Ontario due to its speed and efficiency. | Less common due to the lengthy court process and costs. |
Power of Sale Process
The power of sale process starts when the borrower frequently misses payments. According to the Mortgages Act, a lender can sell the mortgaged property anytime after three months of a mortgage default. However, the lender must provide the homeowner with a written notice at least 45 days before the sale occurs. This Notice of Sale can also be issued in writing after 15 days have passed since the mortgage default.
Foreclosure Process in Ontario
Foreclosure in Ontario is more judicially intensive than power of sale. It begins when a lender files a Statement of Claim with the court. This legal action starts the foreclosure process, notifying the borrower of the claim.
If the borrower does not address the debt during the redemption period, the lender may proceed with a legal claim to obtain ownership of the property.
To evict homeowners during the foreclosure process, lenders must obtain a Writ of Possession from the court. This document gives the lender the right to take possession of the property, leading to its sale. The foreclosure process is thus more cumbersome and time-consuming than the power of sale.
Purchasing a Power of Sale
Buying a power of sale property can be an opportunity but also comes with risks. These properties are usually sold ‘as-is,’ making buyers responsible for any repairs. This can include anything from minor cosmetic fixes to major structural repairs. The mortgage lender mainly aims to recover the outstanding mortgage balance and related fees. The property is required to be sold at market value to ensure any surplus funds reach the borrower.
Finally, hiring a lawyer experienced in real estate transactions can be very beneficial. They can review the mortgage agreement, ensure legal compliance, and help navigate any complexities during the sale process.
Legal Rights of Homeowners During Power of Sale
Homeowners facing a power of sale have specific legal rights to protect their interests. Lenders must notify borrowers in writing before proceeding with a power of sale for defaults. This notice, known as a Notice of Sale, gives homeowners a specific timeframe to settle their arrears.
A key right is the redemption period, allowing borrowers to pay off their mortgage debt after receiving the Notice of Sale. This period gives homeowners a final chance to reclaim their property by settling the outstanding mortgage balance.
If borrowers don’t address their mortgage debt within the redemption period, lenders can initiate legal action to recover the property. However, homeowners can halt the power of sale process by bringing their mortgage payments up to date before the sale occurs. This right to redemption provides a critical lifeline for those struggling financially.
If the home sells for more than the outstanding mortgage balance, the borrower receives any remaining funds after expenses. This is different from foreclosure, where the borrower isn’t entitled to any sale profit. However, if the sale proceeds do not cover the full amount owed, the lender retains the right to pursue the borrower for any outstanding mortgage balance.
Pros and Cons of Power of Sale for Lenders and Borrowers
Power of sale has several pros and cons for both lenders and borrowers. A primary benefit is that it’s generally quicker than foreclosure, often starting within weeks after a mortgage default. This speed can provide a faster resolution for lenders looking to recoup their investments.
Sale proceeds must first cover the lender’s selling expenses before addressing the mortgage debt. This ensures the lender’s costs are met, but borrowers might not see any remaining funds if the sale proceeds fall short.
If the sale results in a shortfall, the borrower may still be liable for the remaining debt. This can be a significant financial burden, especially if the borrower already faces financial difficulties. However, the redemption period gives homeowners time to rectify mortgage defaults before the lender can proceed.
For buyers, power of sale properties are sold at market value to ensure any potential surplus funds reach the borrower. This can sometimes be a fair market deal, but buyers should approach with caution, aware of potential risks.
Preventing a Power of Sale
Homeowners need to take proactive measures to prevent a power of sale. Refinancing the mortgage can provide the necessary funds to settle arrears and halt the process. Early communication with the lender can open up options like restructuring missed payments or deferring due amounts.
Using home equity to pay off mortgage arrears can help homeowners regain good standing and avoid power of sale. Acting quickly is important, as more options become available the sooner homeowners engage with their lender. Proposing a solution to resume payments can stop the power of sale process and offer a path to financial recovery.
Buyer Beware: Risks Associated with Power of Sale Properties
When buying a power of sale property, the properties are usually sold in their current state. Buyers should be prepared for any repairs and understand that most agreements do not come with warranties or guarantees about the property’s condition or contents.
Acquiring a property from the lender instead of the registered owner alters the terms of the sale. Agreements of Purchase and Sale under Power of Sale often include unilateral clauses favoring the lender that cannot be negotiated.
Frequently Asked Questions
How does the power of sale differ from foreclosure?
The power of sale allows the lender to sell the property directly to the highest bidder without needing to go through the legal process of foreclosure, which requires the lender to first obtain ownership of the property. This difference can significantly impact the timeline and process of resolving a defaulted loan.
What are the legal rights of homeowners during a power of sale?
Homeowners have the right to receive written notification, benefit from a redemption period to resolve arrears, and possibly obtain any surplus funds if their property sells for more than the mortgage owed. These protections ensure homeowners are informed and can take necessary actions regarding their property.
What should buyers be aware of when purchasing a power of sale property?
Buyers should be aware that power of sale properties are sold ‘as-is,’ meaning they may require repairs or have undisclosed issues. The buyers should also be aware that the clauses typically favour the lender in the agreements.
Summary
Power of sale offers a quicker and often more cost-effective alternative to foreclosure, benefiting both lenders and borrowers. However, it also comes with its own set of challenges and risks.
If you have any questions, contact a real estate lawyer.
The information provided above is of a general nature and should not be considered legal advice. Every transaction or circumstance is unique, and obtaining specific legal advice is necessary to address your particular requirements. Therefore, if you have any legal questions, it is recommended that you consult with a lawyer.
