What Are the Risks Of Unconditional Offers When Buying A Home?
The process of buying a home and completing a real estate transaction typically centers on the offer. After finding the home you want to buy, you’ll need to submit an offer, which the seller will review before signing off on it.
But in addition to the typical clauses that are included in an offer, buyers have the option to insert “conditions” to the offer. Without these conditions, the offer will be deemed “unconditional,” and in this case, the contract will be legally binding for both parties.
There are some inherent risks with unconditional offers that buyers should be aware of. Let’s review what unconditional offers are, and how they may leave you vulnerable in some cases.
SUMMARY:
- We recommend “no condition offers” if you have the cash to buy as “Plan B.”
- We do recommend the Financing Conditions to be at least:
- “subject to lender approval of appraisal value and lender approval of property standards” and
- if less than 20% down, subject to CMHC/default insurer acceptance.
Why?
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- Any of these could stop a mortgage at a specific lender: preserved wood foundations, near a busy commercial location, too near flood zone or flood fringe for the lender, aluminum wiring, Poly B plumbing, condo docs not accepted -if condo.
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Common House Offer Conditions
There are dozens of examples of conditions that buyers can insert into their offers, but many are not often used. That said, there are certain conditions that are very commonly added to offers, including the following:
Financing Condition
Most home purchases require some form of financing to help buyers come up with the money to buy a home. But getting a mortgage requires an application and approval process. Before buyers seal the deal on a contract, they should ensure that they are able to secure a mortgage to finance the purchase.
Financing conditions are among the more common ones inserted into offers and give buyers and their mortgage lenders some time to work through the mortgage process. If they cannot get approved for financing, the buyer will be able to back out of the deal.
Home Inspection Condition
A home inspection is another common condition, which provides the buyer with a certain amount of time to have the subject property inspected by a professional home inspector. If there are any major issues that are discovered, the buyer can address them with the seller. Otherwise, the buyer can back out of the deal if they find the home inspection report unsatisfactory.
Condo Doc Review of Condo Corp. Financial Statements
In the case of a condo purchase, a review of the condo corporation’s Status Certificate is very important. The Status Certificate will detail the financial and legal health of the condo corporation.
The buyer’s lawyer will review the Status Certificate and look for any potential red flags. And if there are any, the buyer will have the opportunity to kill the deal before the condition expires if they so choose.
Sale Of Another Property
In some cases, buyers may want to make the purchase of a home conditional upon the sale of their own current home. This is more commonly seen in buyer’s markets where there is a lot of supply and not as much demand. In this case, it may take buyers a little longer to sell their homes.
Buyers who insert these conditions in their offers want to make sure that they are able to find a buyer of their own and not get stuck with two homes and two mortgages.
That said, many sellers don’t like to see these types of conditions, as it can put them at risk of the deal falling through. The time spent waiting for this condition to be filled could have been spent entertaining other potential offers that many have otherwise come through.
What Is An Unconditional Offer?
An unconditional offer is one that does not come with any conditions. There are no additional checks to be made aside from the clauses that already come with a purchase of sale agreement. Once the contract is signed off by both parties — and before the expiry date — the deal is firm and neither the buyer nor the seller can back out.
Benefits Of An Unconditional Offer
While it’s generally advised that buyers insert conditions such as a home inspection, financing, or Status Certificate review, in some cases it may be a good idea to make a “clean” offer, or one that is void of conditions. For instance, in the case of a bidding war where there are multiple buyers bidding for the same house at the same time, all buyers will want to go in with their best foot forward.
This might mean putting in an unconditional offer. These offers are more attractive to sellers because there is no waiting game that needs to take place to fulfill conditions. In some cases, sellers may even favour an unconditional offer with a slightly lower offer price than an offer with a higher offer price that has a couple of conditions that would need to be dealt with.
Risks Of Unconditional Offers
As you might imagine, there are some risks that come with unconditional offers. You’ll be left unprotected if you sign off on the contract with no opportunity to ensure all your bases are covered.
Here are a few of the risks associated with a condition-free offer:
Your Bank May Not Approve Financing
If you are unable to secure financing, you’ll be stuck with a massive financial obligation to pay for a home you do not have the money for. If you do not insert a financing condition, you won’t have the chance to make certain that you can get approved for a mortgage needed to finance the purchase.
You’ll Have to Cover Any Shortfalls in Down Payment
In the case of a bidding war, you may offer a price that’s higher than the market value of the subject property. When the property is appraised, the mortgage lender will discover that the home is not worth as much as you agreed to pay for it. As such, the lender may not approve the initial loan amount you requested.
In this case, you’ll need to bump up your down payment amount in order to make up for the difference. If your offer was not subject to a financing condition and you are not able to cover the shortfall in the extra down payment, you could risk losing your deposit and even be sued for damages.
You Could Get Stuck With A Faulty Home
If you neglect to give yourself some time to scope out the property with a professional by your side, you could inadvertently buy a “money pit” that will require a ton of money to repair.
During your initial visit to the home before you put in an offer, you may not have noticed any issues. A home inspection will give you a few hours with a home inspector to check out if there are any major problems with the home before you commit to buying it. If any are discovered, you’ll have the chance to either renegotiate a lower price with the seller, ask the seller to make the repairs, request a credit so you can make the repairs yourself, or back out of the deal altogether. But without a home inspection condition, you’ll be stuck with the house regardless.
You Could Get Stuck With A Condo That’s In Disarray
Some condo corporations may have legal issues and be in the midst of lawsuits, have reserve funds that are not enough to cover the cost of major repairs that can arise in the near future, or be poorly run. You don’t want to get stuck with a condo corporation that is mismanaged, but this is exactly what can happen if you don’t insert a Status Certificate review condition.