REO FORECLOSURE DEFINITION
A REO foreclosure, by definition, is a bank-owned property that went back to the mortgage lender after an unsuccessful auction in a foreclosure process. This is because most foreclosure auctions do not produce bids — if the property had enough equity to pay off the loan, the owner would have put the home on the market and paid off the bank without going through foreclosure.
Since foreclosure auctions start with a minimum bid which includes the balance of the loan, interest, legal costs, and the like, the minimum bid is usually more than the property is worth on the market, and few auctions produce successful sales. At this point the property is transferred to the lender, and it becomes a REO (Real Estate, Owned) property.
REO Foreclosure Misconceptions in Canada
Many buyers make the mistake of assuming that Canadian REO foreclosure properties can be picked up for pennies on the dollar like in the US. However, the Canadian banking system and housing market is very different than it is “down south,” and this is not necessarily true.
In Canada, the lender must protect the original property owner’s equity. This means they must try and obtain fair market value for the property in the current real estate market — they cannot simply sell it as a huge discount.
How REO Sales Work
If the property owner cannot pay off the mortgage during the redemption period, and assuming the redemption period is not extended, then the bank either takes control of the property (via a Final Order) or takes control of selling it (via a Conduct of Sale).
At this point they hire a local agent, who conducts a Comparative Market Analysis and has the property independently appraised. The bank, or the bank’s attorney, usually uses this appraisal to set the initial asking or list price.
The bank must prove in court that they attempted to sell the property for fair market value, that they marketed it properly, and that it was seen by as many buyers as possible. They can’t simply accept an offer that’s far below asking price — especially if it has not been on the market for a long time.
If there isn’t much interest in the property, the bank will usually have the real estate agent conduct a new Comparative Market Analysis every 30 days and then adjust the asking price accordingly. They will usually keep lowering the price until they receive an offer.
If the bank has title to the property (via a Final Order) then they do not have to get court approval for the sale. If they are only conducting the sale by court order, then the court will have to approve the sale.
In situations where the bank has title to the property and there is a lawyer representing the bank in the sale, the lawyer will usually have around 10% flexibility in the asking price before they have to get approval from the bank — but over all, buying foreclosure properties at half the market price simply doesn’t happen.