Power of Sale

“Power of sale” is language added to a mortgage document that allows the lender to sell the property if the mortgage payments are not met, thereby permitting the lender to attempt to recover the mortgage debt.

Many buyers incorrectly assume that properties being sold under power of sale proceedings can be sold for the amount outstanding on the mortgage.  For example, if a home owner owes $50,000 on a house worth $200,000 the lender simply can’t sell the house for $50,000 because that is the amount owing to the lender.  However, that is nothing more than myth.  The lender is required by law to try to sell the property for it’s true market value.  The Mortgages Act allows the lender to retrieve only what it’s entitled to and no more.  However, if there is a surplus (the house sells for more than the outstanding mortgage amount), the owner in default of payment is entitled to the remaining funds (less any expenses incurred by the lender such as legal fees).

If a homeowner suspects a lender of selling the property below market value, the owner can request an accounting of the sale.  For this reason, lenders are very careful to establish fair market value and fully expose the property to the open marketplace.  Sometimes a prospective buyer is aware that a particular property is subject to power of sale proceedings and contacts the lender directly before the property is offered for sale in an attempt to buy the property quickly.  Nevertheless, the lender will be unlikely to do so knowing of their responsibilities to the homeowner in default.

When buying a property that is sold by “power of sale”, there are several important considerations to be aware of:

Right Of Redemption.  Depending on the terms of the mortgage document, the owner may be able to bring the mortgage into good standing with the lender even after the lender has accepted an offer on the property.  Therefore, even if you submit an offer on a property being sold by power of sale there is a chance that before closing the owner could make outstanding payments and reclaim the property.

As Is Condition.  Banks selling property by exercising their right to do so under Power of Sale proceedings always sell the property in “as is” condition for very good reason.  Banks are unable to provide any representations regarding the condition of the home since they are unfamiliar with the home other than having made a loan to the owner to purchase the property.  As with the purchase of any property, the best way to protect yourself is to make you offer conditional on your satisfaction with a home inspection.

Ownership.  The lender never takes ownership to the property but rather exercises the right to sell the property.  As a result, the lender won’t be able to include the fridge and stove in the house in your offer to purchase since the lender doesn’t ever take ownership of the house or its contents.  However, when a property is sold by power of sale the homeowner generally no longer resides in the home and everything left in those will likely remain in the house when you take possession (but you can’t count on it).

In twenty years of selling real estate, which has included the sale of several properties sold under power of sale, I’ve never encountered a homeowner that has used their right to redeem.  Nor have I ever experienced any contents left in the house after the  homeowner vacated it removed on the completion date. But there’s always a first time for everything so knowing all of the legalities of buying a power of sale won’t leave you out in the cold!

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