The Risks of Condition-Free Purchase Offers

A recent email from The Real Estate Council of Alberta (RECA) urged consumers to evaluate the risks of condition-free offers to purchase property and…

…We couldn’t agree more!

In a typical real estate transaction, most offers to purchase a home are subject to conditions. These conditions may include things like: Securing Financing, Home Inspection, Sale of Buyer’s Home, or Condo Doc Review. However, the current ultra-competitive real estate market in Alberta can make it feel impossible for buyers to win a multiple-offer situation without submitting an unconditional offer. And this pressure is starting to weigh on buyers as it becomes ‘the norm’.

Seems like a great way to strengthen your offer, right? Well, we wouldn’t be doing our job and our due diligence to buyers if we didn’t explain the risks.

The Risks of Making a Condition-Free Purchase Offer:

1) Financing falls through

A mortgage pre-approval is not a guarantee of financing. Say it with us—A mortgage pre-approval is NOT a guarantee of financing.

Pre-approvals are based on basic financial information but they do not take into consideration the actual property being purchased (type, location, condition, etc.) or changes to financial/personal situations when a buyer decides to pull the trigger.

A Pre-approval is essential to understand what a buyer can afford and can help to streamline the mortgage process—but they are not confirmation of mortgage funding.

2) Issues with home condition

If you forgo a home inspection and later discover concerns with the property's condition, you are out of luck. Sometimes, significant issues come to light after an OTP (Offer to Purchase) has already been signed, such as Poly B plumbing or Knob-and-tube wiring, that can cause issues with obtaining home insurance. If you do not have a home inspection condition, it’s important to understand you may be on the hook for major repairs within the first few months of owning the home and it’s a good idea to have some extra funds budgeted for unexpected repairs.

3) There are no exit strategies

Once you make a condition-free purchase offer—that’s it. There’s no conditional period, and no opportunities to back out. The deal is done. You are now legally obligated to purchase the home.

What if you can’t get financing?

If you discover that you cannot secure financing and therefore are unable to close on the home, you will likely lose your deposit AND you open yourself up to the risk of legal action. The seller is fully within their rights to sue you for any loss they experience as a result of you backing out of the purchase agreement. This could mean a difference in the offer price they accept, a delay in the sale of their home that increases their lender fees or rent, and other inconveniences or costs to the seller.

Buyers who cannot secure financing may have to take a short-term high-interest private loan in order to close on the home. In these cases, there should be a plan in place to move into a lower-interest loan as soon as practical. Speaking to a mortgage broker who understands these strategies is essential to find the best possible solution and protect your investment.

If You Decide to Make a Purchase Offer Without Conditions:

1) Adding a term that allows an appraiser access to the property is crucial.

In some cases, without an appraisal, you may not be able to get a funded mortgage. If an appraisal is required by the lender and the appraiser cannot gain entry to the home, this may prevent your mortgage from getting approved.

2) Budget for unexpected costs because you NEED to close.

This could include repairs due to issues not known (no home inspection), differences in mortgage amount and purchase price (the home doesn’t appraise), or requiring more down payment for private lending (can’t secure funding with a traditional lender).

3) SPEAK to your mortgage broker FIRST.

Prepare for the scenario as you are shopping for homes. Your mortgage professional will walk you through all the risks and considerations in detail based on your specific situation. It’s always better to be prepared and keep your mortgage broker in the loop so that they are able to minimize the chance of any surprises down the road.