Apr 11, 2022
THE NEW REALITY: PRIVATE MORTGAGE DEFAULTS - POWER OF SALE & FORECLOSURE - Part LXX of a Series – Ask Me Anything Part 4…
In the previous ‘power of sale’ blog LXIX posted last week, I continued a multi-part AMA – Ask Me Anything – series and examined how courts treat errors in the amounts claimed to be owing in the notice of sale. This post will answer an oft posed question regarding private sales of homes when exercising a power of sale.
The simple rule is that private sales under power of sale are discouraged. Essentially, the law imposes a rather high standard on mortgagees who sell properties under power of sale. This high standard requires the mortgagee to advertise the property, market the property and sell the property for a sale price equal to or in excess of its fair value. Fair value being generally accepted to be something close to the fair market value of the property.
If a property is sold privately, without marketing and without advertising, it will be very difficult indeed for the mortgagee seller to convince a court that its private sale price was at or exceeding fair value. Conversely, if a mortgagee contemplating the sale of a property under power of sale were to:
- get at least one appraisal for the property
- perhaps get a market valuation from a realtor
- list the property for sale on the local MLS
- do some electronic and or print advertising
- hold one or more open houses
- have the property exposed to the market for a reasonable period (if possible)
- accept the best offer
...then it is generally agreed that the sale price of a property marketed in this manner would have been sold for the fair value of the property. And it will be difficult for the mortgagor or subsequent encumbrancer to argue otherwise.
Bottom line is that if a mortgagee were to just sell the mortgaged property privately to a third party (especially a related party) without going through this procedure, the mortgagee exposes itself to liability for improvident realization (selling to low). That is why virtually all financial institutions and astute private lenders refrain from selling a mortgaged property under its power of sale by way of a private sale to a private individual.
The next post will answer the oft posed question: May a mortgagee purchase the property that it is selling under power of sale? And as always, this blog is intended for information purposes only. It is not legal advice and cannot be relied on as such. Nor is it a substitute for hiring your own legal counsel, who will be an essential member of your power of sale and mortgage default team. And lastly, this blog is just my opinion. I reserve the right to change my mind. And I reserve the right to be wrong.
Be well and stay healthy.