The following is taken from the article entitled “Representing Buyers of Foreclosed Properties” by Lubos K. Pesta, Q.C., Walsh Wilkins Creighton LLP. (I have edited out portions that relate directly to agents only)
Modifications to contract
[Of great concern to the buyer] will be the modifications to the standard Residential Real Estate Purchase Contract that will be required by the court or the lender, depending on the circumstances. As most industry members will be aware, a Schedule “A” (or “B” depending on the lawyer and bank involved) will be attached and many provisions of the standard agreement, including most warranties, crossed out of the contract used for the transaction.
While the Schedule is not standardized, in most cases the bank or the court will contract out of most normal obligations that exist in a regular sale.
This includes the obligation of the seller:
• to provide a Real Property Report, where applicable;
• to address any building location problems;
• to ensure that appliances and fixtures are in normal working order; (In fact, the ownership of appliances is not warranted and the buyer could see them repossessed by a leasing company post closing.)
• to provide vacant possession on the Completion Day; (The prior owners may need to be evicted.)
• to take responsibility for any damage to the property between the time of acceptance of the offer and possession being granted; (Property is “as is, where is”.)
• to pay any applicable GST; (This will become the responsibility of the buyer if, for example, it is discovered post closing that the prior owner substantially renovated the property.)
• in condominium transactions, to provide an Estoppel Certificate (or any other condominium documents) and to take responsibility for the payment of any special assessment due after acceptance of the offer.
I have even encountered situations where the bank’s lawyers crossed out clause 5.1, which normally provides that the property remains at the risk of the seller until Completion Day! To me, this really goes too far as the buyer will not have an insurable interest in the property and will not be able to secure insurance for the risk of loss until the purchase price is paid. We have seen circumstances where the bank’s lawyers reversed their position and reinserted clause 5.1 where they were taken to task on this issue.
In addition to unusual amendments to the Purchase Contract, in many foreclosure transactions (particularly early in a judicial listing process) the court and/or the lender will be unwilling to consider offers to purchase that contain normal conditions such as financing, property inspection and condominium document review.
Needless to say, where the buyer will be relying on mortgage financing to complete the purchase, the buyer should secure whatever reassurance that the buyer requires and is available from a mortgage lender before an offer to purchase is drawn up. In addition, a term should be inserted in paragraph 7.6 of the Contract to indicate that a portion of the purchase price will be paid by way of mortgage financing. This obligates the seller to accommodate the financing on closing.
Foreclosed properties attract buyers looking for a bargain. As you can see from this article, however, the purchase of a foreclosed property involves navigating through a minefield of potential problems. While many foreclosure transactions close smoothly and successfully, occasionally foreclosure purchases end up being a buyer’s worst nightmare. If you are not comfortable with the process or the inherent risks, then I would recommend that you simply not get involved in these types of transactions.
Lubos K. Pesta, Q.C.
Walsh Wilkins Creighton LLP
The comments expressed in this article are for information purposes only and serve to highlight general principles. Each situation is different and you should seek legal counsel before pursuing any particular course of action. These articles do not create a client/lawyer relationship and do not constitute legal advice. The opinions expressed herein are those of the author and not of AREA.
Reprinted with permission. AREA makes no guarantee as to the accuracy or completeness of this information.