Getting a mortgage to buy a tax sale property - BE CAREFUL!
Here’s a true story that involves a municipality that we do business with. It points out a couple of dangers that you need to be aware of if you are considering getting a mortgage to buy a tax sale property.
It starts out fine
A person, who we’ll call the purchaser, submitted a tender to buy a tax sale property. As required, their tender was accompanied by a deposit of 20% of the amount tendered, by certified cheque. This cheque was for many thousands of dollars.
The tenders were opened and the purchaser had the highest tender. The municipality mailed the purchaser a notice advising the purchaser that he or she has fourteen days to pay the balance owing on their tender, plus Land Transfer Tax, GST and Accumulated Taxes. The notice also stated that this amount must be paid within fourteen days of the mailing of the notice or the purchaser will lose their deposit and the property will be offered to the second-highest tenderer.
The municipality was doing exactly as it’s required to do by law.
The purchaser phoned the municipality to tell them that it would take at least a week to pay the remaining balance, as they were arranging a mortgage. The municipality reiterated that the full amount must be paid before the fourteen days had passed.
Here comes the problem
The bank agreed to lend the purchaser the necessary money. However, before the bank would release the money, the purchaser had to give the bank a registered tax deed.
The municipality is required by law to prepare and register a tax deed only after it has received payment in full. That makes sense. Imagine what would happen if the municipality prepared and registered a tax deed, and then, for whatever reason, the money didn’t come through. It would have just given away a property for free. That is why the law states that a tax deed should be prepared and registered after the municipality has received payment in full.
So the bank wanted to see a tax deed before they would release the mortgage money, and the municipality couldn’t prepare a tax deed until after they had received the mortgage money. Meanwhile, the two weeks were nearly up. It looked like the purchaser was about to lose their deposit, which was many thousands of dollars.
The treasurer of the municipality phoned the bank manager. After much discussion, and the manager checking with the bank’s legal department, they were able to come to an agreement. The bank would send a certified cheque for the full amount owing directly to the municipality. The municipality would prepare and register a tax deed as soon as possible after that.
The municipality received the money on the fourteenth day. They then had a tax deed prepared and had it registered at the land registry office.
So the story had a happy ending. But it could easily have turned out differently. If the bank manager hadn’t agreed to the above arrangement, or if the cheque had taken one more day to arrive, the municipality would have been required by law to keep the purchaser’s deposit and to offer the property to the second-highest tenderer.
There are two valuable lessons from this story:
- If you don’t pay the balance owing on your tender, plus Land Transfer Tax, Accumulated Taxes and GST (if applicable) within 14 days of the day that the municipality mails its notice to you, you will lose your deposit!
- If you’re counting on getting a mortgage to buy a tax sale property, talk to the bank before you even submit a tender. Make sure that the bank knows that you can’t get a deed until after the municipality has been paid in full. And of course, make sure that the bank is okay with this.