Realtors often get a bad rap thanks to a minority of selfish 'me-first' agents. And with stiff competition in housing markets across the country, you’re now more likely to find “pushy” Realtors trying to get a quick sale.
One of the ways this manifests is when real estate agents pressure buyers into unconditional home purchase offers. In other words, they try to get people to buy without a protective clause that lets them out if they can’t secure financing.
Realtors like unconditional offers because, while riskier for the buyer, it raises the probability of a sale, and a quicker commission for the agent.
“I have a file right now, [and the] Realtor wants my clients to buy before they sell, and they don’t even have the deposit let alone the money needed to pay off the debt,” one mortgage broker wrote in a prominent industry thread recently.
Buying a home can be stressful enough without having a salesperson working against your best interests. Here are a few tips on how you can protect yourself in these cases…
1. Leverage a mortgage broker
Roughly a third of homebuyers end up working with both a real estate agent, who handles everything related to the sale or purchase of a home, and a mortgage broker, who specializes in the financing.
Mortgage brokers—at least those worth their salt—are paid to ensure financing is solid. They don’t want you blaming them when your financing falls through after you put an offer on a home.
“I tell my clients that the Realtor’s job is done when they go [with a firm purchase offer], and if they follow their Realtor’s advice, it’s at their own risk,” another mortgage broker wrote.
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Engaging a mortgage broker before renewing can help you make a better decision. Mortgage brokers are an excellent source of information for deals specific to your area, contract terms, and their services require no out-of-pocket fees if you are well qualified.
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2. Stick to your guns
As a buyer, you should have a good idea of your maximum budget—not what a lender qualifies you for, but what you can actually afford.
You should also get honest advice on offer conditions. Purchase agreement conditions, such as a home inspection or a financing clause, are there to protect you, despite the fact they may cost you the property when in a multiple-bidding situation.
The temptation can be strong to bid higher than your budget, or remove your conditions if it improves the chance your offer will be accepted. This is especially true in aggressive markets where there can be a dozen or more competing offers on your dream house.
But caving to pressure, whether it comes from a Realtor or your own personal desire to “win” the house bidding, could be financially disastrous if your lender declines you for reasons you never anticipated. Better to lose a home than lose your deposit and be sued for breaching your purchase agreement and not closing.
3. Have a backup plan.
If you succumb to pressure and do an unconditional offer, you’ll need a plan B or C in the event things don’t go as planned. This could include not being able to sell your home before closing on your new purchase, or not being able to secure financing from your lender.
The end result could be that you have to walk away from your offer, which entails its own set of problems and costs. (See: Walking Away from Your Purchase Offer – Know the Consequences)
If you go in firm (no conditions), what’s your backup plan if:
- The appraisal comes in too low;
- The lender wants a guarantee the property has no material defects;
- The lender or default insurer doesn’t like the condo;
- Your existing home doesn’t sell and you can’t get your down payment funds to close on the new home;
- The lender won’t approve all your income?
One couple we came across this week came to their broker to get financed after putting in a no-condition offer with less than 20% down. They were horrified when the lender wouldn’t accept the wife’s income because her contract expired in August and the home was closing in June. They had no other resources to put down a bigger down payment, other than their parents. Fortunately, their parents came to the rescue and gave them enough for 20% down, and the couple was able to get approved at a non-prime lender at a much higher interest rate.
They could have conceivably lost their deposit and been sued had their parents not bailed them out.
The moral is, always get pre-approved before buying without conditions, or be darned sure you can put down a 20—35% down payment if a bank won’t approve you.
And remember, pre-approvals aren’t foolproof. The lender—and default insurer if you’re putting down less than 20%—still have to approve all your documents. So, make sure you get a “fully underwritten” pre-approval where the lender signs off on all key income, MLS (listing) and down payment documents before you make your offer.
And note, lenders also have to approve the property, its valuation and—if it’s a condo—its condo documents. They often don’t do that until after you apply for a full (non-pre) approval.
Non-conditional offers should be made by only a minority of risk-tolerant, well-qualified borrowers who are willing to pay more to get “worst-case” financing. If you don’t have other assets, stable verifiable income, excellent credit, etc., don’t cave to pushy Realtors, and be sure to add protective conditions.