Foreclosure and Power of Sale are two ‘buzz’ words most of us are hearing a lot in the last couple of years, thanks to the housing bubble burst and financial crisis during 2008-2009.
In general, both of them mean the legal action which allows the lender (usually a bank) to sell a property that is default in mortgage payments, and use the proceeds to pay off the balance of mortgage, as well as any legal fee, court fee, property taxes, or any other commissions during the process.
Normally a bank can start a Foreclosure of Power of Sales process 15 days after the borrower default on the payment, first by sending a notice, then followed by a demand letter from lawyer. However, there are clear distinction between both methods in terms of legal ramification and procedure taken by various parties involved.
Foreclosure is a legal action taken by the bank to take the ownership of the property. Court is part of the whole process, and the bank must file a lawsuit against the defaulting party at court before any further action can be taken. Bank will become the registered owner of the property. Consequently, any gain or loss on the sale of the property will belong to bank.
Power of Sale
On the contrary, Power of Sale will allow the bank to sell the house without court involvement. The ownership of the property only changes hands once the property is sold. Any extra money sold shall be given back to the bank; and the owner will also responsible for any shortfall on sales as well.
Power of Sale is a practice adopted by most of the banks in Canadian provinces of Newfoundland, New Brunswick, P.E.I., and Ontario.
There is another Canadian term called Judicial Sale, which is more similar to Foreclosure, and was practiced mostly in Canadian provinces of British Columbia, Albert, Saskatchewan, Manitoba, Quebec, and Nova Scotia.
US vs. Canada
As it illustrated above, Foreclose is the process where lender has its own discretion on the treatment of the house. This is the common practice in US, where bank usually auction the house quickly at deep discount, either because they want to clear their balance sheet quickly or because the homeowner don’t have too much equity in the house (they may bought the house with zero down.).
This is not the case for Canadian banks, where Power of Sale is the most common practice. Canadian banks have a mandate to protect homeowners’ interest. While selling a Power of Sale house, bank must ensure the house comes to the attention of a broad segment of market, which usually means listing on the MLS. The bank must try to obtain the fair market value of the property.
Despite all that, there is always risk and reward in purchasing this type of properties. Power of Sale house still presents as a potential profitable opportunity for real estate investor who do their due diligence and homework.