Exploring Foreclosure and Court-Ordered Sales in British Columbia
For many entry-level real estate buyers, the allure of foreclosure properties, also known as Court Order Sales in BC, presents an opportunity to strike gold and potentially become millionaires. In this video, we will delve into the updated process of Court Order sales for 2023. It is important to watch till the end to understand the changes that have occurred since before 2020 and, more recently, in 2022 regarding judicial court order sales in BC.
Foreclosure or Court Order Sale Purchase Process:
Firstly, it is worth noting that these properties typically appear on MLS™, just like any other properties for sale.
What leads a property to become a court-ordered sale?
Well, there can be a variety of reasons, but mostly it is due to non-payment and a lack of available funds. In most cases, this occurs when mortgage lenders (such as banks) do not receive their monthly mortgage payments, causing the property owners to default on their mortgage loans. In the case of strata properties, a strata corporation may also initiate a court-ordered sale if the owner fails to pay their strata fees or assigned levies. When a property enters the court system, the process is known as "Conduct of Sale."
Let's walk through the process and its various stages:
Demand Letter: When the property owner defaults on their payment, either the strata or the lender submits a "Demand Letter." As the name suggests, this letter demands the outstanding payments.
Petition: If no payment is made following the Demand Letter, a foreclosure petition is filed in court by the Seller’s lawyer. This step is known as filing a petition.
Order Nisi: Following the petition, the court assigns an Order Nisi, granting the owner a designated time, usually around 6 months, to fulfill their outstanding payments.
Judicial Sale or Order Absolute for Foreclosure: If no payment is submitted, or if the Order Nisi is deemed inappropriate, the lender or strata corporation will pursue a Judicial Sale, commonly referred to as a Court Order Sale. Alternatively, they may seek an Order Absolute for Foreclosure, which removes the owner's name from the title and mandates their eviction via an "Order for Vacant Possession." At this stage, the property becomes bank-owned, and court approval for the sale is no longer necessary. The bank or lender becomes the seller, similar to any other property transaction.
In most cases, properties listed on MLS® have the same owner as the seller. However, in foreclosure situations, the owner is the individual who initially purchased the property, while the financial institution to which the owner owes money becomes the seller. It is essential to note that the real estate agent listing the property for sale does not represent the owner; rather, they represent the lender, who acts as the seller in this scenario.
Unique Aspects of Court-Ordered Sales:
In a court-ordered sale, the lawyer representing the sellers (lender or strata) assigns an agent to list the property on MLS®. Herein lies a significant difference between BC and other parts of the world when it comes to foreclosures. The seller has an obligation and mandate to secure the best possible price, demonstrating to the court that they are acting fairly towards the property owner. To achieve this, they often employ a gradual price drop strategy. For example, if a property's fair market value is $500,000, they may initially list it at $550,000 and gradually reduce the price if there is no interest or offers.
The Buying Process of a Foreclosure:
The offer writing process is similar to purchasing any other property on the market. You submit a conditional offer with financing or other subjects and conduct all due diligence. However, in this case, you must also accept the "Schedule A," which serves to protect the seller (lender or strata). This schedule contains fine print clauses and emphasizes that the property is sold "As-Is, Where-Is." It is also state that even after the offer is accepted, the lender or the stata can collapse the deal.
By accepting this schedule, you waive the seller's responsibility and liability for the property's condition. Additionally, there is no guarantee that existing appliances or chattels will remain on the property upon completion. It is crucial to understand that when purchasing a court-ordered sale property, you may not receive it in the same state as when you viewed it. Often, property owners cause extensive damage before vacating, and this should be taken into consideration.
After removing all the contingencies (Conditions) and submitting your deposit, the lawyers will schedule a court date, which can take anywhere from a few weeks to several months. Your offer is subject to court approval. This court date is publicly announced on MLS® to allow other interested parties a chance to make offers on the same property. There is typically a date assigned, usually no less than 2 business days before the court date, for all other interested parties to submit their offers to the lawyer. These offers must be unconditional. The first accepted offer price is disclosed to other bidders, allowing the first offer to have 24 hours to revise its price if there are competing offers within that 2-day period.
Changes Before 2020 and After 2022:
Prior to 2020, interested parties would appear in court to submit their unconditional offers, along with an attached deposit (with a requirement to close within 21 days after the court date). In 2020, due to the pandemic, this process shifted to a non-in-person format. Interested parties were required to submit their unconditional offers and proof of deposit to the seller's lawyer no less than 2 business days prior to the online court date. The judge would then announce all offers and select the best offer through an online platform or conference call. In 2022, the process returned to an in-person format, but offer submission remained fixed at 2 days before the court date.
The court evaluates all offers, announces them, and ultimately selects the best offer. In some cases, I have witnessed judges favoring the first offer if the price of competing offers is not significantly different from the original one, because the first offer genuinely went through a due diligence process and was the first to submit an offer.
To summarize, let's review some of the drawbacks of pursuing a foreclosure property in BC:
-Limited Showing Flexibility: Gaining access to the property can be difficult since the owner is typically uncooperative.
-Property Condition: The state of the property may be in disrepair since the current owner no longer has an incentive to maintain it.
-Is it a deal? While it is possible to find exceptional deals through foreclosures, it is equally possible to find similar opportunities with other properties by investing some sweat equity. Not all foreclosures are remarkable deals, especially in BC, where the court and lenders are mandated to act fairly.
-Uncertainty: The uncertainty surrounding the acquisition of a foreclosure property can be daunting. Uncertainties may arise from competing bidders, the owner's potential redemption of the mortgage, or their request for extended occupancy.
-As-Is, Where-Is Condition: Purchasing a court-ordered sale property means accepting the property in its current state. Even with an inspection, it is possible that the property has suffered significant damage due to the owner's neglect.
-Lengthy Approval Process: The approval process can be time-consuming, tying up your deposit and preventing you from purchasing other available properties of your choice.
By considering these factors, you can make an informed decision when venturing into the world of foreclosure and court-ordered sales in British Columbia.