When you hear the words “the property is under Power of Sale”, immediately you envisage a ‘great deal’. It may seem that you can pick up the property for a song.
A Power of Sale happens when a mortgagor (borrower) cannot or does not pay his or her mortgage payments. The mortgagee (lender) then steps in to sell the property and from the proceeds of sale will pay itself back for the monies owing by the registered owner under the mortgage.
While the price may indeed be lower in a Power of Sale proceeding than in an ordinary real estate transaction, there are inherent risks, which sometimes make the ‘great deal’ not worthwhile.
Usually, in an ordinary real estate transaction, the seller has owned the property and is selling it. The seller will provide to the buyer certain statements as to building and zoning compliance, urea formaldehyde foam insulation, payment of utilities, payment of property taxes, the existence of tenants, contamination of lands, etc.
This does not happen in a Power of Sale proceeding. In a Power of Sale proceeding, it may not be the owner but the mortgagee who is selling the property. The mortgagee is obligated to obtain fair market value for the property. As the mortgagee is not the owner, however, the mortgagee cannot provide the buyer with the same guarantees as the owner does. Therefore, the purchaser may not get a statement from the mortgagee that there is no urea formaldehyde foam insulation in the property, that the utilities are paid up to date, that there is a last month’s deposit for tenants. The mortgagee will not know if proper permits were obtained for any renovations and additions to the buildings. The mortgagee is not obligated to provide a Declaration of Possession for any issues dealing with the use of the land, nor will the mortgagee provide a Survey Declaration for the positioning of the building(s) on the lands.
If this is a commercial or industrial property, the mortgagee will not provide a Declaration as to soil contamination, a requirement of any commercial lender in financing the purchase.
While title insurance may insure you against some of these risks, it cannot insure you against all of the risks associated with a Power of Sale proceeding.
The caveat “buyer beware” applies equally to an ordinary real estate transaction as it does to a Power of Sale transaction.