Evan Buhler/The Canadian Press
Real estate industry watchers are growing increasingly nervous about the number of power-of-sale properties popping up on multiple listing services.
Rising interest rates are pressuring lenders and borrowers. The Bank of Canada has raised the benchmark rate from 0.25 per cent to 5 per cent over 17 months. That is a staggering rise in the cost of ownership for those who took out loans to buy homes at peak prices.
“I get tons of phone calls from people in these positions. I spoke with an [owner] yesterday; they paid $1.2-million for a house and it’s down $300,000 in value,” said Daniel Foch, director of economic research with RARE Real Estate Inc. The same owners have seen their monthly interest payments go from $2,000 to $6,000. Mr. Foch says many distressed owners are facing the prospect of losing their homes to lenders enforcing their power of sale in a foreclosure. “If [the owners] go power of sale, they lose their entire down payment.”
“I think it’s just a ticking clock: Most of the people I speak with on the phone I ask what’s their number and they’ll say like, ‘We can do this for another 6 months,’” he said. “It’s really sad stuff to see. I’ve never felt as emotionally damaged by this industry.”
In a power of sale, if the home is sold for more money than is needed to cover the debt to the lender, the owner will be given the difference. But the owner will be evicted and their home sold without their say-so.
Michael DeLuca, a real estate broker with Royal LePage Signature Realty and a mortgage agent with Pineapple Financial, specializes in connecting buyers with power of sale opportunities. He has developed search techniques to identify listings that, while not clearly labelled “power of sale” often turn out to be just that after a little digging.
Mr. DeLuca said that, back in 2017, the last significant down period of Ontario real estate, he could usually identify about 25 to 50 power of sale properties at a given moment. Now, in early September, 2023, there are more than 140 active power of sale listings in Mr. DeLuca’s database. In his view, it’s a market that has more distressed sellers, though he would not yet call it an active disaster zone.
“From what I understand, banks and lenders are doing what they can to make arrangements where the borrower will not go into default,” Mr. DeLuca said. “There could come a time where there’s nothing more that can be done, but I don’t think we are there yet.”
The vast majority of the properties identified by Mr. DeLuca are not the kind of nightmare-scenario bank sales seen in the U.S. after the subprime mortgage bubble popped in 2009. Most of the properties marketed under power of sale come from either failed businesses or land speculators who lost their bet on the market.
“A lot of what you’re seeing is overzealous flippers; people who bought into the BRRRR method,” said Jason Geall, a former private lender. The Buy, Rehab, Rent, Refinance, Repeat model boomed in the low-interest rate environment pre-2022. “It’s amazing that was a strategy that worked for quite a while, and at some point the music stops and you can’t get refinancing.”
There are dozens of examples of properties such as those Mr. Geall describes on Mr. DeLuca’s list: condos that were leased until recently and now sit empty; triplexes that are half-rented with a history of increasingly large asking-rents for remaining units before the power of sale; homes in mid-renovation that have had a half-dozen ever-falling price changes; finished renovations that once had high-end furniture staging but now feature just an exterior photo.
One example is 86 Northdale Rd. in Toronto, which sold for $2.125-million in 2018. It underwent an extensive renovation, after which the new owners tried to sell it for $3.188-million in 2020. Now under power of sale, the lender recently listed it for $2.399-million.
Cam Cassidy, a realtor with Right at Home Realty who advises investors in the Oshawa area, says that while not all flippers are flopping and not all investors are cash-flow negative he recently spoke to a firefighter who approached him for advice on how to deleverage his 11-home rental portfolio.
“That was one of those eye-opening moments. Like, wow, how did you get 11 properties?” said Mr. Cassidy. He often sees rookie investors who bought properties where rents were unable to cover the costs of the loans when rates were low, let alone now. “They would keep their properties if they were cash-flow neutral. The firefighter, he’s not firesale-ing everything: he’s trying to hang on and not admit ‘I messed up.’”
Mr. Geall is increasingly spotting properties under power of sale that appear to be a family home where the owner ran out of money. “I think there’s a lot of people that are starting to feel it,” he said. “I would argue it’s probably 50-50 between investors and people who are struggling.”
A search of Mr. DeLuca’s list found more than a dozen homes purchased in recent years, often on the edges of the Greater Toronto Area that saw the wildest price swings between 2019 and 2023, that are sold “as is, where is” – a sure sign of a recent eviction.
For owners facing that possibility, Mr. Foch has empathy, but not a lot of advice.
“Call your lender … your lender is the only person who can fix this for you,” he said. “A lot of people call me a fearmonger, but the truth is just pretty scary right now.”