Should I Avoid Writing An Unconditional Offer?

Q: I’m looking to buy a condo, but it seems all the offers I see getting accepted on the homes I’m interested in have no subjects. This makes me nervous – should I avoid doing this myself?

A: The simple answer to this question is, ideally, yes – with the caveat that if you have done all the possible due diligence prior to writing your subject-free offer, then you can proceed with some confidence.

Because of the market conditions, buyers are increasingly being pressured into going into the offer process without subjects – that is, subject to financing approval from a mortgage lender, or subject to a home inspection. It has become the buying strategy of the day, and it comes with significant risks. So an unconditional offer should not be entered into unless you are absolutely 100 per cent certain that this is a great unit and that the seller has disclosed all the relevant information about their property.

What Are You Getting Yourself Into?

My main worry with the no-subjects strategy is many buyers might not know what they are getting themselves into, especially if they are working with someone who hasn’t explained the ramifications of this approach.

  • Do you, the buyer, understand that once your deposit is submitted, you cannot back out of the transaction, and your deposit will be forfeit if you do?
  • Do you understand that if all the strata documents haven’t been provided, you have no legal recourse moving forward if the strata is underfunded, and you will be liable for any future special levies and assessments?
  • Do you understand that if you don’t put in place the option to inspect the home, you have no legal recourse if there are problems with the property, and you have bought it “as is”?

With all the bad news in today’s media about agent negligence, these are very valid concerns. If you’re working with a good agent, they will be able to explain all this to you in detail.

Beware Financing Shortfalls

The primary issue that buyers struggle with in this scenario is financing the transaction. Mortgage professionals are generally pretty uncomfortable with unconditional offers, mainly because they might not be able to find a lender who will underwrite the loan at the terms they’ve discussed initially with the client – but also because they very well might not be able to find an underwriter for the loan at all.

You should already be preapproved for a mortgage, which could be up to a certain amount – let’s say it’s $550,000, with a 10 per cent down payment. So you might think that unconditionally offering $550,000 for a home is safe. But if that property is then appraised by your mortgage lender at a value of $500,000, and will lend you only 90 per cent of that, you will have to make up the difference – double what you were planning on putting down. An offer with no financing subject substantially increases the risk to the lender, and ultimately you – the buyer – will pay a premium for that risk.

The worst case scenario is you won’t be able to get financing at all, which puts your deposit at risk. Adding a financing subject to your offer avoids this scenario outright.

Why Go Subject-Free?

If your agent tells you the offer needs to be subject-free to get accepted, make sure to ask them why that is. Doing the proper due diligence should never be a roadblock to a successful real estate transaction. It is a vital component to making certain you are buying a property that will retain its value in the future to the highest degree. Don’t let anyone convince you that your offer will never be accepted with subjects in the offer. While that may very well be true, you don’t want to buy a property that has issues with it. Adding a subject into the contract could very well save you a boatload of money in the long term.

If you enter into an offer without subjects, you are increasing the likelihood you are entering into a risky real estate purchase by a substantial amount. Make sure you are informed and that any risk you take is fully calculated, and don’t be afraid to ask the tough questions.