A power of sale property is similar to a foreclosure, except in one important way, if you’re the buyer: the original owner holds a right of redemption right up to closing. That means that if they can scrounge up the money to bring the mortgage arrears current and reimburse the bank its out of pocket costs, they can retake their property, right up to the point where you would normally get the keys.
Is it a serious risk? It does happen occasionally, so if you’re the buyer, you want the earliest closing date possible to minimize that chance. The bank wants a quick closing too: they are carrying the costs of a vacant property. Sooner is better.
There are other important differences as well. Unlike the situation with a normal sale, where you can rely on what’s in the listing and the implied warranties in the agreement of sale, you need to verify everything. Nothing is warranted by the seller bank/lender; the property is “as is.”
You or your lawyer or realtor will need to check with the local municipality to see if permits were obtained for additions and improvements, and if you’re in the country, for well/sewer as well. You’ll need to check to see if utilities and property taxes have been paid. You’ll need inspections, and don’t forego a financing clause in your offer unless you have deep pockets, because your lender will want an appraisal for sure.
Your lawyer is a huge part of this transaction: get them involved right away. They will want to see your offer before it goes firm to go over it with you and let you know what parts of title insurance do and don’t apply. They will also want to do certain searches to see if there are liens on the property before you remove your conditions. Along with unpaid property taxes, a common one is for unpaid income taxes, which can result in a delay in closing because of the need to get those cleared off title.
Often the lender has shut off water to the property, and may have even winterized it depending on the season. Sometimes the bank isn’t willing to turn that water back on, which can make it impossible to do proper inspections.
Find out before you make your offer if the property manager is willing to turn the water on and any other systems that need to be operational so you can arrange inspections. If it’s a country property with a well, it’s not possible for a well inspector to take water samples if the water is shut off, as they need a hot water source, or to determine volume, so they can’t do a proper inspection. Be sure your realtor includes a clause indicating that seller will cooperate in ensuring water has been turned on prior to the inspection or have your agent get confirmation from the listing agent. Sometimes the bank will agree, but will set timelines for when you need the inspections finished so that everything can be shut off again.
If the bank won’t agree to do that, you are taking a big risk in proceeding. Try to find out when the property was vacated and when it was winterized. If it was winterized late, or if the property has been vacant for a long time, the pipes could burst when the water is turned on.
If something shows up in the inspection that you didn’t anticipate, it’s not often the lender will agree to drop the price; remember, the original owner is still involved. That owner is entitled to any surplus over what s/he owes, but is also liable for any deficiency. There may not be much wriggle room on price, and a price drop could trigger problems with your lender.
I know it seems counter-intuitive, but if there is a price reduction of anything over a couple of thousand dollars, your lender may want to know the reason and if it’s something that showed up in the home inspection, they may refuse to advance funds. At the very least, they will want to see the home inspection report and it may have things in it that you are willing to live with but that will make your bank nervous about providing you funding. Remember: this is not the typical situation where you can negotiate and ask the seller to do things before closing like remediate mould, or remove asbestos, or pigtail aluminum wiring: you are taking this property as is.
Most times appliances have been removed from the property when you see it. Sometimes light fixtures have as well. Remember to factor those costs into your budget on top of closing costs. If there are any appliances left behind, make sure they work: but also keep in mind that the seller will not warranty anything. What you see is what you get. If they worked during the inspection but not when you take possession, you are not likely going to be able to get the bank to do anything, unlike the case in a normal purchase where you may have had a clause to the effect that all chattels would be in good working order.
Be aware that once the conditions are removed and the deal goes firm, a lot of lenders will change the lockbox code and re-key the locks. (Apparently they are concerned that realtors might give the codes to their clients instead of accompanying them on all walk throughs.)
Make sure if you are going for a walk through with your agent that your agent has verified if that’s the case so that they have the proper code and you can actually get in. And keep an eye out when you are doing the walk through for any suspicious changes. One property manager told me that the original owner kept letting himself in through the window to check on things, and if someone came in, he would hide in the closet. Once you do get the property, change the locks if they haven’t been changed already.
A power of sale property can be a great deal, but it has a lot of risks associated with it, and requires a lot of extra investigative work, usually on a short timetable. Don’t cut corners. You run the risk of being out of pocket for inspections and fees if the original owner is able to redeem the property and you don’t get it. But if you don’t do them, the risk to you of something unforeseen (and potentially very expensive) is that much greater.