This is the third post in a series to help you master this strong sellers’ market. You may want to read the other posts, How to win a bidding war and What price to offer in multiple bid situations.
While this sellers’ market rages across much of Canada and the U.S., buyers are being challenged to make offers unconditional to be successful in buying property. There is significant risk associated with this practice, and as agents, you want to ensure that your buyers are fully informed.
I’m not advocating for or against unconditional offers. In many markets, it is the only option to purchase good quality properties. In other markets, it is a significant strategic advantage against other offers and might be something your buyers want to explore.
What could go wrong? A lot.
The property appraises at less than the selling price, and your buyer needs additional funds to meet the down payment requirements.
This happens frequently. Here’s the scenario: A property is listed at $699,900 and your buyer purchases the property firm for $825,000. The appraisal comes in at $750,000. The lender will lend on the appraised value, so they will give your buyer a 75-per-cent first mortgage of only $562,500, and your buyer will need a down payment of $262,500. Your buyers were hoping to finance 75 per cent of the purchase price, which is $618,750, and their down payment would have been $206,250. They need to come up with an additional $56,250.
If they can’t do that, they can’t buy the property unconditionally. What if the appraisal was even lower? Banks may alert their appraisers to be more cautious when they feel they are too exposed to risk as this market matures.
There are significant deficiencies in the property.
Buying a property without a home inspection or using the home inspection prepared for the sellers could leave your buyers with some expensive deficiencies in the property. Some homes look pretty good but require many upgrades in the short term. If the property needs a roof, electrical work, plumbing updates, furnace replacement and insulation upgrades, your buyers could be on the hook for over $100,000. While that large a number is unlikely, it’s possible. Are they in a situation to cover this cost? There is the additional complication of well water and septic systems for semi-rural and rural properties, which could add another $50,000 or more in unexpected expenses.
I purchased my Gulf Island property without conditions, and it has the potential to have many deficiencies. It’s an older home in original condition with well water and septic. I am prepared to spend some significant money to meet these deficiencies, so I was able to take the risk of purchasing without conditions.
If your buyer cannot take on the risk of an unconditional offer, what are their options?
If you are working in a market where most offers are unconditional, you may want to consider not taking the client on, or if you do take the client on, looking for properties that have been on the market and haven’t sold. You may be able to negotiate a successful outcome on these listings.
In a market where some conditional offers are being accepted, work hard to make your buyer’s offer as appealing to the seller as possible. I would recommend making the conditions very short and wording them in such a way as to offer the seller as much security as possible. For help with wording better clauses, reach out to your broker/manager or a good real estate lawyer.
Help your buyers make the best decisions for them. Take the time to establish a strong working relationship to protect them in this important transaction. Deliver good-quality information and give them the space to decide how much risk they can take. If they can’t take on risk, be respectful of that and either build a strategy to help them buy properties that don’t go into multiple offers or let the client go and focus your time on buyers that can buy (or even better, finding listings).
Suze Cumming is the founder of The Nature of Real Estate and Canada’s Real Estate Negotiation guru. Suze and her team have run over 5000 real estate professionals through negotiation designation courses since 2013 and have guided many top agents and teams to their success.
Her courses, the Accredited Real Estate Negotiator (AREN) and the Professional Real Estate Negotiator (PREN), are Canada’s newest and fastest-growing designation. These courses are offered live online in small interactive groups or in person for brokerages and boards.
Suze is passionate about two things. Helping REALTORS get massively successful results for their clients and for themselves. And Sailboat racing. When Suze isn’t on a stage or in a zoom room, you’ll find her racing her sailing yachts in various locations around the world.
For 38 years, Suze has been passionate about real estate and the lifestyle that it makes possible for each of us. She knows for sure that the only way to the top is to be remarkably good at what you do.
