What is the Difference Between a Foreclosure and a Power of Sale?

What is the difference between foreclosure and power of sale? Many home buyers and investors ask me about buying bank-owned properties in Guelph. Often, I’m asked if there are Foreclosures for sale in Guelph – and how to buy them. In reality, most distress sale properties sold by banks in the Guelph area are done so under a Power of Sale provision. How is that different from a Foreclosure? Here are some of the key differences.

A Foreclosure is a legal proceeding that occurs when a lender has a mortgage borrower in default who can exhibit no means of fulfilling the terms of their loan. The bank goes to court and seeks a court order that will grant them permission to take over a property. If granted, the property becomes truly “bank-owned.” Title is then transferred to the name of the lending institution. In a Foreclosure, the previous home owner no longer bears any financial responsibility. If the bank loses money on the sale of the house, it’s the bank’s loss; similarly, if there is a profit, it stays with the bank. A Foreclosure is sometimes referred to as a “fire sale,” because price is often deeply discounted. Negotiations are often quick, or non-existent; commonly these homes are sold at auction for well under market value.

How is a Power of Sale different? One of the key differences involves ownership. We often refer to homes being sold under Power of Sale as “bank-owned.” This is a misnomer. In a Power of Sale, the lender has a provision to sell the property, but ownership does not change until the property is sold. (Note: This is one of the inherent risks when buying a Power of Sale home, because the owner has until the day of closing to bring the loan up to date and make the pending sale null and void.)

With a Power of Sale, the lender has greater obligations to the borrower. This cannot be a “fire sale;” the lender must make reasonable attempts to get fair value for the home. As a result, typically these homes are listed by a Realtor and marketed on the MLS much as any other home would be. The price is set based upon fair market value for the home, given variables such as location, condition, market activity, etc. Lastly, another key difference revolves around what happens to the sale proceeds. With a Power of Sale, sale proceeds are given to the home owner, who by the way is also responsible if there is a shortfall.

Buying a bank-owned or otherwise distressed home in Guelph can present a buyers with the possibility of getting a good deal on the home. That being said, there is a lot to learn about the process and its inherent risks. Feel free to contact me for more information.

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