Financial hardship is never easy, especially when it puts your home at risk. Whether due to illness, divorce, job loss, or other challenges, falling behind on mortgage payments can lead to a difficult decision: Should you let your home go into Power Of Sale, or should you sell it with a realtor?
This is a situation we have encountered many times in our careers….
We believe selling your home with the help of a realtor is almost always the better option. Although banks are legally required to sell your home for market value, achieving true market value is much harder under power of sale.
What Happens In A Power Of Sale?
In a power of sale, the lender takes control of the property and forces its sale. Any remaining equity after covering sale costs is returned to the homeowner. However, the expenses involved in a power of sale are significantly higher than in a traditional sale, which can eat into your potential proceeds.
The buyers of power of sale properties are usually looking for a below-market value sale. That’s because power of sales come with more risks for the buyers.
What Does A Power Of Sale Cost?
Selling a home through power of sale comes with several additional expenses, including:
- Administrative and legal fees to initiate the process
- Lawyer fees for preparing paperwork and sending notices
- Mortgage interest during the sale period
- Realtor commissions
- Appraisal fees
- Maintenance and management costs (e.g., snow clearing, grass cutting)
- Securing the home for sale (e.g., changing locks, boarding up windows)
- Eviction fees (if the homeowner doesn’t leave willingly)
- These costs can add up quickly, leaving you with less than you might get if you sold with a realtor.
Selling Your Home With A Realtor
When faced with the choice between power of sale and selling your home yourself, selling it yourself is almost always the better financial decision. Here’s why:
In a power of sale, the lender’s primary goal is to recover their funds. Power of sale properties are sold “as-is, where-is,”. That means the bank and listing agent make no representations about the condition or livability of the home. This often makes buyers wary, because in a traditional sale, there is a homeowner who has lived in the home and knows of any defects.
When you sell your home with a realtor, you’re legally required to disclose any defects or circumstances that could affect the sale. While this might seem like a disadvantage, it actually builds trust with buyers. Buyers are more willing to pay top market value for a home if there is a seller liable to disclose any material defects with the home.
What To Do If You Can’t Keep Up With Mortgage Payments
The key is to act quickly. Many lenders offer programs to help homeowners in financial distress, such as payment deferrals or loan modifications, which can buy you some extra time. However, if you wait too long, these options may no longer be available.
If the power of sale process has already begun, you may still be able to hire your own realtor and sell the property. Some lenders will allow this, provided you actively list the home and make a genuine effort to sell it.
If the lender isn’t willing to give you the time, another option is a short-term loan from a private lender. These loans typically come with higher interest rates (4-14% above current mortgage rates). The idea of these loans is that they give you short-term capital to get the house ready for market, and sell at maximum market value. The higher sale price would theoretically offset the higher interest costs.
What If You Owe More Than the Home Is Worth?
It’s not uncommon for homeowners to owe more on their mortgage than the home’s current market value. If that’s the case, when you factor in the costs of a power of sale as well, the financial shortfall can be substantial.
If your home’s market value is less than the total owed on the mortgage and associated fees, it’s crucial to avoid selling with a realtor unless you can cover the deficit. At closing, the title won’t transfer until all parties—the bank, lawyers, realtors, and property tax—are paid in full. If you cannot close, the buyers might sue you for entering into an agreement to sell and not fulfilling it.
If you proceed with a power of sale and there is a deficit, the bank will issue you a final bill. Unpaid debts are sent to collections, and the bank may even seek a court order to garnish your wages.
Are There Alternatives To Power Of Sales?
There are two alternatives to selling your home when faced with a power of sale:
- If you still have income, the best-case scenario is to refinance your home into more affordable payments. A refinance could incorporate your higher-interest loans into a lower interest-rate mortgage. This is a great option for families with large credit card debt, car loans, and personal lines of credit. Having one larger mortgage, with lower interest, and a long amortization (like 25-30 years) could significantly lower your monthly bills.
- If you cannot refinance, the second option is to seek help from an insolvency trustee. An insolvency trustee can work with your creditors to create a repayment plan that could allow you to keep your home and mortgage. The downside of a consumer proposal is that it will go on your credit report for several years.
Final Thoughts
While power of sale might seem like a quick solution, the best solution is to sell the home yourself. Working with a realtor to sell your home allows you to maintain control over the process, achieve a higher sale price, and minimize costs.
If you’re struggling to keep up with mortgage payments, act quickly. There are solutions to this difficult time that will help you keep more of your money.
