The mystery of foreclosures

Last week, I spoke to someone who was having difficulty making their mortgage payments. That led me to this week’s column topic: the foreclosure process.

Today’s real estate market is ‘iffy’. Half the experts think that the market is overvalued and home prices will crash. And the other half think that home prices will remain relatively constant: Is Canada’s housing market cooling or crashing?

 

It is certain, though, that foreclosures have been rising, which has also been the case in Kelowna: Home foreclosures skyrocket in Kelowna.

While common, do you know what is involved in a foreclosure? I suspect that most people don’t know what is involved in the process. So, here is the typical foreclosure…

To begin, most people need to borrow money to purchase a home (i.e. they need to take out a mortgage). Those people are then required to repay that mortgage. As you can imagine, problems arise when people can’t make those payments.

When no payments are made (typically for several months), the creditor/bank, who loaned the money to the debtor/borrower, will send a demand letter to the debtor, requesting repayment.

If the debtor does not make sufficient payments, then the creditor will typically start the foreclosure process. So, what does this mean? Well, it means that the bank will hire a lawyer to go to court and get a court order. That order will state that the debtor owes money (to the creditor) and it will give the debtor a set amount of time (which is known as the ‘redemption period’) to pay back ALL the money that is owed (under the mortgage). This order is referred to as an Order Nisi.

The amount of time (i.e. the redemption period) that is generally given to the debtor is 6 months. But, the redemption period can be much shorter, such as 1 day, if there is very little equity in the property.

Now, if the borrower does not repay the money (within the redemption period), then the bank’s lawyer will go back to court and get an order allowing the bank to market the property. This order is referred to as an Order for Conduct of Sale. If the creditor gets this order, then a realtor will be hired and the property will be marketed.

The realtor will market the property just like any other property. It will be placed on the MLS, be marketed in magazines, and be shown to prospective purchasers.

After an offer is made (that is satisfactory to the creditor), the creditor’s lawyer will go back to court and request that the property be sold (to the party making the offer). At this time, other offers on the property may be entertained in court (and the highest offer will ‘win’ the property). This final order is referred to as an Order Approving Sale.

You might think that you can buy foreclosures for ‘dirt cheap’. But, that isn’t true. In order for a court to approve the sale of a home to another party, the creditor’s lawyer needs to show the court that the property is being sold for fair market value. This is typically done by referring to a realtor’s marketing report, which details the efforts of the realtor to sell the property, and an appraisal, which indicates the property’s fair market value.

So, if a property has been marketed for a very short period of time and the offer is well below the appraised value of the property, it is unlikely that the court would allow the property to be sold.

Now, why does this matter? Why shouldn’t the court allow the sale of a property for ‘dirt cheap’? Well, in these circumstances, the debt (from the house that the debtor couldn’t afford) carries over and follows the debtor. The creditor could then keep chasing the debtor for the money that it is owed (that it could have otherwise got from the sale of the property). This would be unfair. The creditor should try to get as much money as it can from the sale of the property.

The foreclosure process can be complicated and can come with some pitfalls. For this reason, a lot of would-be purchasers are scared away. But, if you love the home, the trouble can be worth it.

And now you know.

**The information contained in this column should not be treated by readers as legal advice and should not be relied on without detailed legal counsel being sought.

Originally posted on Castanet.net on October 16, 2012: The mystery of foreclosures.

Fires and home insurance

Last I heard, over 1500 people have been evacuated in Peachland, B.C. because of the forest fire. I am one of those people…

After packing up, leaving, and watching the fire steadily creep down the mountain, I resolved that I wouldn’t write a column this week.

Today, as I have some time waiting to hear whether or not I can move back in and (more importantly) whether or not my home ‘survived’ the fire, I decided that I would write about an issue that will likely affect numerous people who have been evacuated.

The topic this week: when purchasing/transferring a home, who is responsible for the home insurance? The buyer or the seller?

Real estate sales are slow but of the 1500 people, I am willing to bet that some of the people had homes that were in the middle of being sold.

In the standard purchase contract (that is used by realtors and lawyers alike), there is a clause that states that the property and all items on the property will remain the risk of the seller until 12:01 am on the completion date. So, the seller should definitely insure the property until that time (at least).

After that time, the property and the included items will be at risk of the buyer (so the buyer needs to have insurance from then on).

Seems clear; but, in order to prevent any insurance “gaps”, the purchase contract should require the seller to insure the property up to the completion date (or until the sale has completed) and the buyer should arrange for insurance to run from the day BEFORE the completion date. This way, there is no doubt that the property is insured (should the unthinkable happen).

As well, it is important that the buyer purchase new home insurance and not just assume the seller’s home insurance. This is because the seller could have done something or misrepresented themselves in such a way that would cause the insurer to refuse to pay (if something horrible happens).

Also keep in mind that some wrinkles may exist with the transfer. For instance, a situation may arise in which the buyer is given possession by the seller before the sale is completed. Or, alternatively, the seller may be allowed to stay in possession of the property after the sale completed. In such cases, the buyer and seller should consult with their insurance company to arrange tenancy insurance or whatever the case may be.

With all that said, let’s hope no one loses their home…

**The information contained in this column should not be treated by readers as legal advice and should not be relied on without detailed legal counsel being sought.

Originally posted on Castanet.net on September 11, 2012: Fires and home insurance.

Be careful in real estate contracts

This week’s column is related to real estate sales, which increase this time of year.

 

Nearly everyone will buy or sell real estate at some point in their life. And when doing that, they have to sign a purchase contract, the key document in a real estate transaction. The purchase contract governs the rights and responsibilities of each party. And believe it or not, those contracts, while seemingly straightforward, are full of complex issues and pitfalls.

And while it is the key document, it is often prepared by and signed in the presence of a realtor, as opposed to a lawyer (which can be problematic). While realtors have some skills in contract preparation, they don’t have the expertise that lawyers do in drafting contracts. As you can imagine, problems sometimes occur…

I’ll give you an example: very generally, the essential terms to a purchase contract are the ‘three Ps’: parties, price, and property. Other essential terms include completion date and the particulars of any vendor financing. If a contract is not certain on its essential terms, the contract is likely unenforceable. And, if essential terms are vague and then one party asks to clarify those essential terms, the whole deal could collapse entirely. Clearly, there is a lot at stake.

After signing the purchase contract, it is common for people to go to a lawyer (typically their real estate lawyer) and ask for a legal opinion on the contract. You know: just to make sure that everything is ‘OK’ and that the other party isn’t taking advantage of them.

While there are good intentions, it is TOO LATE. Once the contract is signed, it’s signed – it’s a done deal. Even if your lawyer sees something that is ‘bad’ for you, it’s too late to change it (without possibly suffering some serious expense and/or inconvenience).

So, what’s the alternative? Well, without venturing into the realm of telling you what to put in your contract, I’d suggest talking to your realtor and letting them know that it is important that you have your purchase contract reviewed by a lawyer. They will be able to assist you in making that happen.

Contrary to public sentiment/opinion, real estate law is VERY complicated and is fraught with A LOT of risk. Do yourself a favour: whether or not you decide to retain a lawyer to review the purchase contract, make sure that you take the signing/drafting of the contract very seriously. You have a lot to gain (and lose).

**The information contained in this column should not be treated by readers as legal advice and should not be relied on without detailed legal counsel being sought.

Originally posted on Castanet.net on July 31, 2012: Be careful in real estate contracts.

Pedophiles, toxic waste, and haunted houses (in your neighbourhood?)

When buying a home, people typically consider affordability, access to hospitals, proximity to work/schools, and the property’s condition. Most purchasers do not consider whether the home is haunted or whether there is a sex offender or radioactive material across the street. For some purchasers, these were realities.

Put simply, when purchasing a property, a buyer has a duty to investigate into a property’s ‘patent’ defects. Generally, patent defects are physical and are discoverable by inspection, such a gurgling septic tank or noticeable water damage. The seller has no duty to draw attention to such defects, but, of course, they cannot actively conceal them. If the purchaser does not investigate further, then little recourse is available as ‘caveat emptor’ applies, which is Latin for ‘buyer beware’.

In addition to patent defects, there are ‘latent’ defects, which are defects that cannot be seen by inspection. For latent defects that are known, the seller (and, if applicable, the realtor) has a duty to disclose to the purchaser. If the seller conceals these defects, the purchaser may be entitled to damages and possibly rescission (the undoing) of the contract after the purchase.

A leading case on this issue is Gronau v. Schlamp Investments Ltd., [1974] M.J. No. 223. In this Manitoba case, the seller actively concealed a significant crack in a wall, knowing that the defect was serious. After the sale completed, the purchaser discovered the issue and sued the seller. The court ordered that the contract be rescinded (undone).

So, how far does this ‘disclosing defects’ duty go? Do sellers (and their realtors) also have to disclose defects that are not physical or that are not actually located on the subject property? In some cases, yes, they do.

Consider Sevidal v. Chopra, [1987] O.J. No. 732. In this Ontario case, the sellers concealed that radioactive material was found in the neighbourhood and there was a “hot spot” across the street from the property. The purchasers sued the sellers and, after trial, the sellers were found liable for damages.

Also, consider Stambovsky v. Ackley, 169 A.D.2d 254 (NY App. Div. 1991). In this New York case, neither the seller nor the seller’s realtor revealed to the purchaser that the home was allegedly haunted, as reported in newspapers, as well as in Reader’s Digest. After the sale completed, the purchaser discovered the rumours/publicity and sued the seller. The court eventually rescinded the contract.

In this New York case, it was irrelevant whether the house was actually haunted. It was, however, relevant that there was publicity regarding the haunting, which impacted its value. It was also relevant that the purchaser could not have discovered poltergeists from inspection. Put simply, the purchaser did not get what he paid for.

 

Interestingly, the duty of sellers to reveal latent defects may even extend to the presence of sex offenders in the neighbourhood. In Ontario, there is a pending case involving the sale of a property, which is located across the street from someone convicted of possessing child pornography. The presence of this individual was apparently common knowledge in the neighbourhood. The purchasers are parents of two young children and, after finding out about their new neighbour, did not want to move into the home. Not surprisingly, they are currently suing the seller (and the sellers’ realtor).

From the above, three points are clear: 1) sometimes, defects that do not relate to the physical condition of the home should be disclosed; 2) in the near future, there may be big changes in the real estate world; and 3) real property law is complicated and fraught with risk.

**The information contained in this column should not be treated by readers as legal advice and should not be relied on without detailed legal counsel being sought.

Originally posted on Castanet.net on January 31, 2012: Pedophiles and haunted houses.