Sean Cooper: Distressed housing sales can be a deal for buyers, but you should know the risks

sean-cooper:-distressed-housing-sales-can-be-a-deal-for-buyers,-but-you-should-know-the-risks

Don’t miss:

This cash back app pays actual cash A low credit score can cost you thousands in interest — here’s how you can prevent that 5 mistakes Canadian parents are making with their life insurance What is a distressed sale and how does it happen? A distressed sale is one where a homeowner is forced to sell their home, usually at a price that’s lower than market value. There are many reasons why this could happen, including falling behind on mortgage payments, or bankruptcy.

With Qtrade Direct Investing™, you can build, evaluate and test your portfolio using analyst research and tools that feature their most advanced risk analysis and portfolio-building technology.

Now get up to $150 sign-up bonus until June 30, 2023 with promo code BONUS150.

Division of Credential Qtrade Securities Inc.

Get Started

What leads up to a distressed sale? When the homeowner starts missing mortgage and property tax payments, the mortgage lender will contact the homeowner. This is usually done in the form of a letter and phone call. Once the lender has decided to proceed with a distressed sale, it usually happens in one of three ways.

Foreclosure Foreclosure is when the homeowner has fallen behind on their mortgage or property tax payments. When that happens, the lender will take the necessary steps to repossess the property, or take ownership back from the homeowner. Depending on the province, this is done through a judicial sale, where the courts are involved with repossession and sale of the property. The other option is a power of sale, which is a clause written into a mortgage agreement that allows the lender to sell the property in order to collect on their debt owed.

Short Sale A short sale is when the homeowner owes more on the property than what it is worth. When this happens, the mortgage is considered underwater. How does this happen? It’s most common when a homeowner makes the minimum down payment (as little as five per cent down in some cases) and then home prices fall. The market is currently experiencing this, with higher mortgage rates pushing home prices lower over the past several months. By selling, the lender may be losing money on the property, but at least it’s able to recoup most of the money that it’s owed.

Auction If you’ve ever bought or sold an item on eBay, you should be familiar with the auction process. Like eBay, the distressed home is listed for sale at an action and is sold to the highest bidder. An auction will also require a downpayment.

What does it mean for the buyer? When you buy a distressed property, it’s important to be aware that you may be required to close pretty quickly. The reason is simple: the mortgage lender selling the distressed home doesn’t want to be a landlord. It wants to sell the home as quickly as possible before any further physical damage is done to the property. As such, you need to have all your financial ducks in a row to make sure you’re able to close quickly. This may mean working with a private lender, as prime lenders usually need a minimum of at least three weeks to close on a home sale. That’s being said, if you can close quickly, you may be able to buy a home at a steep discount.

Don’t let your portfolio get dragged down by commission fees. Wealthsimple Trade lets you trade for $0 commission, and for a limited time, you can get two free stocks for signing up and funding your account. Will you get Apple stock? How about Air Canada?

Get your free stocks

Risks and rewards of buying a distressed property You can get a deal: Buying a property under distress can be a great way to turn a quick profit when it’s done right. Whether you intend to live in the property, or rent it out, a distressed sale can be an opportunity to buy a property far below its fair market value. This can be especially lucrative in big cities like Toronto and Vancouver, where home prices are higher.

Competition can be fierce: If you’ve been trying to buy a home for a while, a distressed sale may be a cheaper way in. Depending on the area and timing, you may have less competition. However, distressed homes can be prized items for investors, and house flippers. Some of these competitors may also be able to offer cash payments for the house, which might require you to put more money down upfront to compete.

You won’t get to do your due diligence: With a distressed sale, you’re often not able to take as much time to scope out the property. You might not be able to visit it in person or conduct a home inspection before making an offer, as some properties are sold sight unseen.

You are buying it ‘as is’: Have you ever read a real estate listing and it describes the home as being sold “as is?” Usually it’s listed “as is” for a reason. It can come with all sorts of surprises — such as broken appliances — that you will need to pay for. Many homebuyers will shy away from “as is” properties because they can end up being more trouble than they’re worth.

What to read next:

How do the Bank of Canada interest rate affect your hunt for a first home, or your mortgage? Too much to spend, too little saved. Here’s what to do with your cash while saving for a home ‘It’s not always straightforward’: The risks and rewards of buying a pre-construction home Getting a mortgage for a distressed home Assuming there are no major issues with the property, you should be able to get a mortgage at a competitive rate. The lender will usually want a full appraisal of the property, so that it knows what state it’s in. If the appraisal checks out and you have stable income and good credit, you should have no problem getting a mortgage. However, it is ideal to have a mortgage pre-approved before you make an offer on a distressed house.

However, if there are major issues with the property, that’s when you might need to go with a private lender. With a private lender, you can get the financing you need, but you’ll need to make a larger down payment; usually at least 20 per cent.

In a worst case scenario, if you can’t get mortgage financing, you would need to pay for the property in cash. It’s important to have a backup plan If this isn’t your first property. You could leverage a home equity line of credit (HELOC) from your primary residence to pay for the distressed home in case you aren’t able to get a mortgage.

From new investors to experts, Qtrade Direct Investing™ offers an intuitive experience with features including in-depth research and powerful tools.

Recognized by The Globe and Mail as a top-ranked broker for the 4th year in a row, you can count on Canada’s best online trading support for friendly and responsive client service and online self-help.

Get started today with no minimum investment and now get up to $150 sign-up bonus until June 30, 2023 with promo code BONUS150.

Division of Credential Qtrade Securities Inc.

Disclaimer The content provided on Moneywise is information to help users become financially literate. It is neither tax nor legal advice, is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. Tax, investment and all other decisions should be made, as appropriate, only with guidance from a qualified professional. We make no representation or warranty of any kind, either express or implied, with respect to the data provided, the timeliness thereof, the results to be obtained by the use thereof or any other matter.


Leave a comment

Your email address will not be published. Required fields are marked *