A lot of people think buying a foreclosure is a great way to make a quick buck. It isn’t. It requires industry specific knowledge, and a clear understanding of how the process works. This video blog below explains what goes into the process, and the extra “homework” you need to do before you buy a foreclosure or court ordered sale.
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Transcription of the Video Blog:
Hi Everybody, it’s Rowan Smith with the Mortgage Centre. I want to address buying foreclosures today and why the represent a challenge, especially if you don’t have a lot of cash, i.e., a big down payment and when you are trying to buy with less than 20% down.
When we brokers send an approval up and we look and try and figure out how much you are qualified for, we do so, and assuming you are putting less than 20% down, we have to send it to CMHC. The catch to this is, we need to know the purchase price. So if you find a foreclosure that is listed for $400,000 and you go and take a look at it, and it looks like a fantastic deal. Then let’s say you are going to put 10% down: $40,000. We get you pre-approved for $360,000.
BUT, in a foreclosure you have to be able to go into court on the date that all offers are presented, because it is a public auction, and you have to be able to present a subject free offer; free of ANY conditions. So you can’t say, “subject to financing” or “subject to a building inspection,” etc… No, it’s sold on an “as is, where is” basis. Now why this is important is: imagine you are trying to buy a place, but you can’t get access to the property. After all, the bank is foreclosing on the seller. Do you think the person that is being kicked out of their home is going to allow convenient access, times, and people onto their property? Usually “No,” so you have to be able to get it approved often without an appraisal.
Now, everybody is in the same boat here. The only people that aren’t are pure cash buyers. Guys that are just going to write a cheque or guys that are going to get private financing for maybe 50% (or less) of the value of the property.
So, I had some clients come to me recently trying to get hold of something that was a fantastic deal. The problem is, the guy wouldn’t give them access. They said that they wanted to go in at this price (whatever it was determined they wanted to pay), but we need to be pre-approved beyond that by up to $100,000 because bidding could go up there. We’re going to put 5% down. Now the problem with this, is that we (brokers) have to send a number to CMHC. And CMHC looks at it and goes, “ok, you’re putting an offer of $400,000 in.” They do their own investigation, or internal appraisal, to determine the value of the property. If the property value is there, you are approved assuming you qualify on an income basis.
Now, if you subsequently go to court and the bidding goes $425,000…. $450,000… $475,000 … and you offer $485,000 to get the property and you in the auction now you have to go back to CMHC, and CMHC is going to say, “what happened to the property value? We had it approved at $400,000. We thought that was a fair price. You rae paying $485,000!” In that case, one of two things has to happen:
a. You have to convince them, usually by way of an appraisal (which may not be available), that this property is worth $485,000
b. You have got to pay the extra $85,000 out of your pocket. Not mortgaged.
So if you are thinking of buying a foreclosure, and you think it looks like a great deal, we need to sit down and go over your financial situation: downpayment amount, income amount, and determine what can you get approved for, and what will this property be approved for.
For The Mortgage Centre, I’m Rowan Smith.