Private Mortgages – What Happens in the Event of Default? (Ontario, Canada Only)

If you’ve invested in a private mortgage, which goes into default – what steps are available to redeem the mortgage and reduce any potential losses? This assumes you’ve taken all the appropriate steps to collect on past due amounts, and the prospects of keeping the mortgage in good standing seem unlikely.

In Ontario, the remedies are primarily:

·         POWER OF SALE

·         FORECLOSE

Power of Sale is a provision within the mortgage document itself, which allows the property to be sold in the event of default.  This is the most common of the two remedies noted above and the one most prevalent in the market. It is the quickest and most efficient means of resolving a mortgage default.

Two key points to bear in mind with respect to a Power of Sale – 1) it allows the lender to recover 100% of their administrative expenses (including legal fees) plus the full mortgage debt, 2) it allows the lender the right to pursue the borrower for any deficiency.

Foreclosures for the most part are very complicated (technical) and time consuming

(expensive). Circumstances under which one would  choose the foreclosure route, might include the willingness to wait on a ‘market turnaround’ (meaning 1-2 years) – particularly if the value is underwater, relative to the mortgage amount. But these are rare instances, and may end up making a bad situation even worse.

Whichever route you choose, make sure you are under the direction of a qualified lawyer who specializes in both real estate matters and handling mortgage defaults. The process is very much a legal proceeding and you need to ensure all the necessary steps are taken to successfully redeem your mortgage.

One final note, possession of the property in the event of a default is often key

in terms of how quickly you can move through the process. Pay special attention to this aspect of any default, as it can often involve untimely delays and additional legal costs.

As always, consult with experienced commercial brokers in your area, when considering default remedies and to help in evaluating the property.  

Private Mortgages - Do They Make Good Investments?

Investing money in private mortgages on commercial real estate  – UNDER THE RIGHT CIRCUMSTANCES AND AGAINST THE RIGHT PROPERTIES – can be an excellent investment strategy. As with everything in real estate, you must weigh the risk/return carefully, before tying up your hard earned capital.

Best practice is to consider the mortgage, much as a normal institutional lender would. You would want to closely examine the following areas initially:

·         Quality of the real estate (collateral)

·         Stability of the cash flow (both historically & moving forward)

·         Credit/Covenant of the borrower (credit score/net worth/character)

·         Loan to Value (LTV) Ratio ( 70% - 75% - 80%)

One of the earliest questions to consider – why is an institutional mortgage not available or possible? Chances are that it involves one or more of the above points. That should then help frame the ‘risk’ part of the deal – ie. if it’s a credit problem or possibly an LTV issue. Once you identify the risk, then you can determine whether or not the reward (return) side, justifies funding the deal.

Once the decision is made to ‘move forward’, then you enter into the due diligence part of the transaction. Typical details would include -- reviewing the most recent appraisals on the property, credit reports/employment letters on the borrowers, personal statements, property condition reports, environmental reports, and even title searches. Full disclosure of the facts surrounding the transaction is what you are after, and you almost adopt the position of the Buyer in doing so.  

Who should you involve? More than likely an experienced mortgage broker and a seasoned real estate lawyer for sure. The mortgage broker should help in the coordination of the due diligence process and all of the preliminaries. The lawyer then puts into place the actual mortgage document, ensuring your security over the term of the loan.

As always, it’s always a good idea  to consult with an experienced commercial broker in your area, when evaluating the risk/reward potential on a private mortgage.