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In the fall of 2016, there was a massive structural change in the mortgage world…
Written by Steve Pipkey
Subject-free offers mean that there are no conditions whatsoever when offering to purchase real estate. Typical conditions include; financing, inspection, strata/condo document review, title review, and satisfactory disclosure forms. There are more, but these are the most common. When real estate markets are hyperactive, and in favour of sellers, we tend to see of lot of people enter into bidding wars. The winners, typically, secure the property by offering over the listing price, and without subjects.
Pre-approvals can be very misleading. Lenders don’t underwrite mortgage pre-approvals, so they’re not worth the paper they’re written on. This means that you may think you’re pre-approved, based on what one banker/broker is telling you; however, the reality is that you may be in for a nasty surprise if, in fact, you’re not. Under such a scenario, you would forfeit your deposit to the seller and potentially be responsible for other legal damages. Banks and insurers only fully underwrite live deals (meaning you have an accepted offer).
The property might stink! Let’s assume you’ve dealt with a reputable banker/broker and are truly pre-qualified. Everyone wants to lend you a mortgage. Now, let’s suppose you purchase a property that is perceived to be less than marketable by a bank (i.e., former grow op, relatively large land value, restrictive zoning, stigmatization, etc). You, likely, will not be aware of any property issues, but you’ll be out of luck to secure a mortgage at this point or will have to seek alternative financing/private money to complete the deal. Alternatively, you’ll have to walk from the deal and lose your deposit.
You may overpay. Multiple bids tend to create a bit of irrational exuberance. People (not all, but some) lose their minds during these situations. They’re stressful and unpleasant. As such, some buyer’s just want to get in so they don’t miss the proverbial real estate train and they just “go for it”. They pay a lot. Maybe (probably) too much. If you overpay, and an appraiser disagrees with the price (yes, you’ll need a bank certified appraisal), the banks will always lend on the lesser of the purchase price or appraised value. The difference between the two values will have to be made up, in cash, by you.
Inability to appraise the property. Let’s suppose you’re the successful subject-free offeror, but you have neglected to either pre-appraise the property OR include it as a contractual term (not a condition/subject). The bank will likely want an appraisal and the seller, at this point, may refuse access. If such a scenario were to arise, you could quickly be out of luck, purely because of bad preparation or general ignorance.
It’s pretty easy, actually. 1. Work with a reputable broker or banker. 2. Understand the financial and legal risks. 3. Do your due diligence on the property. You can minimize the risks by being vigilant throughout the process.
We get it. In a seller’s market, having an offer fraught with subjects isn’t going to do anything but waste everyone’s time. Subject-free offers are an unfortunate reality of every real estate cycle. The good news is, if you’re diligent and manage the risks, you can put yourself in a good position to participate in a bidding war.