There are reasons in selling a house. Some of the reasons are first, when you upgrade your house and buy a bigger one. Another reason is if you want to relocate to where your new job is. A third reason is when you are in financial difficulty, you have taken all equity in your house, you are in arrears in your mortgage payments and property taxes, and to avoid a bank taking over your property through power of sale, you decide to sell your house.
There is no problem selling your house for reasons number one and number two as above mentioned. However, if you sell because of the third reason, you could be in a legal bind.
When you sell your house, as a vendor, you have the legal responsibility to clear all existing mortgages on the subject property before the ownership could be transferred to a buyer on the closing day. If your house has no equity, the proceeds of sale is not enough to pay the outstanding balance of your mortgages, and property taxes in arrears. In this scenario, you could not close the sale for there is not enough money to pay the mortgages and taxes to clear the title of your property which is the requirement before it could be transferred to a buyer.
What would be the consequence for not being able to close the transaction? This would be the beginning of your legal problem. A buyer could sue you for damages, in thousands of dollars. Moreover, a bank would initiate a power of sale process and ultimately a bank will take over your property and sell it. Since your house has no equity and it is sold through power of sale, the more the deficiency would be. Meaning, the selling price is not enough to pay the mortgage, agent commission, legal fees and disbursements. If the deficiency is $40,000.00 or whatever amount, the bank or CMHC if it is insured with them would collect the deficiency amount from you. If you could not pay, they could go to court and get a judgment. Once a judgment is enforced your wages would be garnished and your assets including your bank account would be seized.
Selling your house without equity could give you a legal problem particularly legal action by a buyer for damages as in the above case scenario.
If you have no other way of keeping your house due to financial difficulty, you are in a better circumstance by simply letting a bank take over your house and deal with the deficiency after the bank has sold it, This way you are dealing with a deficiency only, as there is no buyer who would sue you for damages for breaking a contract – your failure to close the transaction on the day of closing.