Considering a subject-free offer?
Updated: Jan 14
If you're in the market for a new home in 2022, in just about any market in Canada, there's a good chance you may be facing some stiff competition for the best homes available. This situation has many buyers considering a subject-free (no conditions) offer. In many markets, this is the only way to win in a competing offer scenario.
Here are some of the rules if you find yourself in such a situation:
Rule #1: A pre-approval does not guarantee approval
There is no way in existence, on Earth, in this dimension, that anyone, ever, can write an offer with no financing condition with 100% confidence*. If you have heard differently, whoever told you does not understand mortgage financing. I hate to put it so bluntly but that's the truth. A pre-approval is a formalized gathering of ducks, and lining them up in rows. Any mortgage professional worth their salt will also take the time to review your income and asset situation in detail and address any sticking points in advance. But without the specifics of the property you are going to buy, there is nothing to approve.
Rule #2: Talk to your broker before you submit the offer
Call your broker and give them the address of the property, send them the MLS listing and notes, the zoning, constructions style, age, etc. of the property, and the property disclosure statement (BC).
Rule #3: Make sure your realtor and broker are talking
Your team of licensed professionals should be talking to each other directly. While both will understand the general scope of the other's job, neither fully understands the finer points and details that can make or break a transaction. Realtors are not up to date on current lending guidelines, and brokers are not experts in real estate contract updates. It is critical that your team is talking to each other, and not making any judgment calls about what might be possible for the other professional.
As one example, your agent may want to use a super short 1 week possession as a negotiation point to make your offer more attractive. They may not realize that the property you have selected requires approval with a lender who requires a minimum of 10 clear business days to close (very common).
Rule #4: No matter what ANYONE says, financing is never, ever, guaranteed*
even though we both you know you are the cats pyjamas and every lender would be lucky to lend you money. Still, until the lender reviews and approves your application, your documents, AND the property you are buying, there is a risk of non-approval.
Here are just a few reasons why a lender might not approve a property:
Former grow op (even if it was remediated)
Something funky on the Property Disclosure Statement (asbestos, etc.)
Short-term rentals (resort properties)
Age restricted properties
Post-tension cable buildings
Stratas/Condos with an outstanding/ongoing special assessment or lawsuit
..... and on and on
The condition period/subject removal period is where a lot of problem solving happens. Inevitably, ever file has a speedbump that requires the attention and care of your team of professionals. If your offer is not subject to financing, there is no parachute. You'll be stuck with what you bought, with great financial risk if you do not complete the purchase.
It is very much a seller's market, and those with less then great properties are taking full advantage (wouldn't you?).
Call BEFORE you buy!
*UPDATE JANUARY 2022: There an alternative lending product available that will in fact GUARANTEE your financing BEFORE you write the offer, and it approves the specific property you are buying.
The catch: you must have minimum 20% down payment (could be higher); it does not cover all lending areas; you must be willing to pay for the guarantee (application fees, usage fees, administration fees, expiration/extension fees) AND be willing to take the Plan B private financing (1.5% fee, ~8%+ rates) if Plan A (a regular mortgage) does not work out.
This is an innovative product, the first of its kind in Canada, and we are actively pursuing the ability to offer it on favorable terms. While the terms might sound a bit harsh - it can actually save a buyer a TON of money on a home purchase if they can write a subject/condition-free offer and be comfortable that they are not going to have to walk from their deposit (and maybe get sued) if they back out of the deal. It gives them aggressive, undeniable negotiating power. In some markets, this is going to be a huge hit. In many others, and for many buyers, it will not be a viable option.