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Offers: why you should never go in condition-free

With the spring market in full swing, there are a lot of buyers across the country looking to land an accepted offer on a property. And while the majority of buyers with successful offers do close on properties without much concern, there are valid reasons why you should never go in condition-free.

Sure, a realtor might tell you that, in a heated market, conditions make your offer less desirable, but considering these conditions are put in the offer to protect you in the event that something unexpected happens, I like to compare it to insurance: you might not think twice about it until you need it.

And as a mortgage brokerage owner, I’ve come across enough offers this year that have had to rely on those conditions to walk away from an offer. Conditions placed on an offer to purchase can vary from the review of a status certificate, to a home inspection, to the acceptance of satisfactory financing approval on the purchase. And that’s what I want to focus on today, the financing condition on offers.

Many buyers believe that a preapproval or prequalification can take the place of an approval and falsely waive a financing condition on offers only to find out afterwards that there are issues with obtaining financing. This could be something related to the credit worthiness of a borrower (remember, preapprovals often do not involve credit investigation); perhaps something has fallen into collections unbeknownst to you (that old cable service bill never really did get settled did it?); or, more commonly, there are issues with the property. That’s right, you might be a solid A+ client to the bank or credit union, but they might have major issues with the property you just agreed to buy. The property is the final cornerstone when it comes to determining if you will be approved for financing. That property is the collateral that, if you cannot make payments, the bank will seize and sell to recover their money. So if that was your money, would you feel comfortable loaning hundreds of thousands of dollars on a glorified shack with a fresh coat of paint? Oftentimes with insured purchases, we can request an auto-appraisal be conducted. But, in the event the bank requires a physical inspection things can start to get sketchy, especially with anything labelled as “a handyman’s delight” or “has great potential.”

I recently had what, by all accounts, looked like a wonderful house in a great neighbourhood in Toronto that a client put an offer on (conditional on financing of course). The appraisal that was ordered later came back identifying structural issues that made the property unsuitable for financing. That’s right. The deal was dead. The realtor and buyer were so confident in the property (heck, I was too) but the appraiser identified a major flaw that killed the offer. Luckily for the buyer, they were able to exercise their financing clause and back out of the offer, deposit safely returned.

So if you’re in the market for a property and are getting frustrated with offers being declined, I would recommend taking a deep breath, stepping back, and trying not to buy into the hype or fear of missing out. There are many horror stories of bad transactions that don’t close due to deficiencies in the property or poor management of reserve funds in condo corporations, to developer liens and structural issues that are identified. Having the ability to pull the emergency evacuation button when an offer starts going up in flames is never a bad idea. And just like a parachute, if you need to get out you’ll be glad you took the time to pack it. Remember, conditions are put on offers to protect you as a buyer, which is needed more now than ever in this sellers market.

About the Author

Daniel Johanis is the founder and principal broker of Pekoe Mortgages, a boutique digital mortgage brokerage that focuses on financial education and finding custom tailored solutions for borrowers. Johanis, in addition to being ranked Toronto’s top broker since 2016, holds a bachelor degree in economics and has been featured in various media outlets both nationally and internationally.

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