What Power of Sale Really Means

A “Power of Sale” is also called a Contractual Power of Sale Clause.  This is a standard clause inserted into any mortgage agreement. It states that if the mortgagor is in default of their payments for an agreed upon term, the lender may sell the property in order to clear their debt without the mortgagor having to take possession of the property.

There are many conditions in which a borrower may default, initiating the power of sale process.  These are failure to make mortgage payments, failure to have proper insurance, failure to pay property taxes, extended vacancy, causing damage to the building, or using the property for unlawful acts.

The standard time that is given before a notice is sent is fifteen days after one of the above conditions has been met.  The lender should then provide at least thirty days notice in writing that the property will be sold under a Power of Sale.  The borrower then has thirty days to pay or correct the issue involved before the Power of Sale clause is executed.  This is usually deemed to be a reasonable period in a court of law.

The property is usually placed with a real estate agent in order to satisfy the condition that the best possible price must be sought on behalf of the owner.  Power-of-sale properties are usually placed on the Multiple Listing Service (MLS) at an inflated price so that the mortgagor may not be seen as selling the property at too low of a price to a new purchaser.  An appraisal, or even two, are typically sought prior to listing the property in order to verify the property value.

Once an offer has been accepted, the vendor may take out of the proceeds of the sale all costs of selling the property, property taxes that have not been paid, rent deposits, and the interest and principal that are due to them under the mortgage.  If the net proceeds of the sale are positive after all of these expenses are paid, the remainder is paid to the borrower.

If the net proceeds of the sale do not cover the money that is due to the lender, they may then sue the borrower for the remaining balance.

If the market is good at the time of listing, a Power of Sale property will generally take three to six months to sell.  No land transfer tax is payable by the vendor on a Power of Sale property; this must be paid by the new buyer.  The disadvantage to the Power of Sale clause is that the best price must be sought by the vendor/lender, or they risk legal recourse.  Very strict recordkeeping of all transactions must be observed in this situation in order to satisfy any courts that may become involved.