Rent to Own vs Mortgage: Knowing the Differences
September 9, 2023
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A non-REO foreclosure, by definition, is a property where the foreclosure process was completed successfully. In a non-REO foreclosure purchase, the buyer is able and willing to pay the full amount which the original owner owes the lender — including the balance of the mortgage, interest, and legal costs.
Foreclosures are a legal process where the bank or lender who holds a lien on the property can take ownership of it, or gain the right to sell it, in order to pay off a mortgage which is in default (as well as associated legal fees and costs, property taxes, and the like). In Canada, there are some significant differences that many property investors are not aware of.
In Canada, foreclosures generally take one of two routes. In the first, the bank or lender takes title to the property before selling it on the market. In the second, the bank or lender gets a court order which allows them to sell the property without ever actually having title.
To be sure, both Canadian and US banks want non-performing loans off the books as quickly as possible so they can put that money to other use. However, Canadian law requires lenders to protect property owners’ equity when they sell the property.
As a result, whichever way the lender sells the property, the Canadian Securities Act requires the bank sell the property at “Fair Market Value.” There is therefore no “back door” in the Canadian property market where investors can buy foreclosures at a huge discount.
Assuming the property owner or another loan holder does not redeem the mortgage during the redemption period, the lender will take control of the property via a Final Order (which gives them title) or a Conduct of Sale (where they simply take control of selling it).
At this point the lender hires a local agent, who conducts a Comparative Market Analysis and has it independently appraised. Usually the appraisal is the basis for the initial asking price.
Since the bank must prove in court that they got fair market value when selling the property — and that it was marketed well, and seen by as many buyers as possible — they cannot simply accept an offer that is well below the asking price. Normally if there isn’t much interest in the property the agent will present a new Comparative Market Analysis to the lender or the lender’s attorney, and the price will be dropped every 30 days until they receive an offer.