When a bank or other financial institution loans money to buy a house through a mortgage it is allowed to repossess the house if the borrower defaults and sell it on without going to court. This right is called the power of sale.
How often is power of sale used?
Power of sale is the most common method that banks use to recover the money that they have loaned after the borrower defaults. Most mortgages and deeds of trust will have a clause that allows the lender the power to sell the property by auction without needing to get permission from a court.
It sounds like a brutal exercise, but in fact can be the cheapest and fairest way to deal with what can be a very difficult time in people’s lives. The auction process tends to ensure that there are no “sweetheart deals” where the vendor sells the house for less than the market value. The lender is legally bound to get the best possible value when exercising the right of sale.
The lender can claim the money up to the value of the loan. If there is any surplus then this will be returned to the debtor. This is reasonably rare as debtors will usually be able to sell their house in these circumstances, and the power of sale clause does not tend to be claimed. What is sadly more common is that when there is any debt left over the after the power of sale has been exercised, lender has the right to sue to recover this.
This means that lenders will not simply treat these sales as a “fire sale” where they will take any money to simply get the house off their hands. They are legally obliged to get the best possible price, and can be sued when they don’t. Similarly they will only be able to sue the borrower for any shortfall, and the borrower is unlikely to be in a decent position.
The power of sale process
Lenders are not allowed to start the power of sale process as soon as a borrower defaults. There is a minimum period of 15 days after default, and this may be longer if the mortgage document allows for a longer time. After the initial period then a notice is sent out to the borrower and anyone else who has an interest in the property that notifies the borrower that the lender wishes to exercise the power of sale. The notice will also state the calculated arrears and costs.
To be legal the notice must then state that it will allow at least 35 days (they can allow more time) for the borrower to rectify the problem. During this time no further action can be taken. Only after the 35 day period has expired can the sale be advertised and arranged.
Owning a Power of Sale property
If you are buying a power of sale house then you will get full title to the house even if the bank has not recovered all their money. Neither the bank nor the previous owner has any right to the house,
Power of sale properties tend to be in poor repair. You are not buying off a willing owner. Lenders do not give any warranty that the property is in a fit state nor will they give any about the ownership (or working nature) of items such as household appliances that have been left behind.