Offer conditions such as upon inspection or approved financing are important buyer safeguards - but can put home bidders at a disadvantage. Our friends at TheHousingBlock.com share what conditions you can - and shouldn't - negotiate on.
After months of searching you believe you’ve found your dream home. You’re ready to put in an offer – the only problem is you’re not alone. There are at least two other buyers interested in the property. Despite your desire to avoid a bidding war, you decide to go for it! But not so fast! Before you put pen to paper, it’s important to give your offer some serious thought. Although you may think a seller will always accept the highest offer price that isn’t always the case.
There are two main types of offers: clean and conditional offers. A clean offer is as the name suggests – free from any conditions. Once the seller accepts your offer it’s a done deal. In a perfect world everyone would make a clean offer. However, most of the time buyers make what is called a conditional offer. These offers include at least one condition that must be satisfied before the deal is firm (completed). Common conditions for buyers are condition of home inspection and financing (although you can include a condition for almost anything).
Buying a home is most likely the single largest financial transaction of your lifetime, so it’s only natural buyers would want to protect their interests. Conditions do just that. To the untrained eye a home may look in pristine condition, but with the help of a certified home inspector you may discover a host of costly repairs you’re not willing to pay. If you include a condition of home inspection and you’re not happy with the inspection report, in most cases you can walk away from the home no strings attached (as long as the seller is willing to return your deposit).
Even if you’re pre-approved for a mortgage, there’s no guarantee your lender will approve your mortgage once your offer has been accepted. That’s why it’s a good idea to include a condition of financing. If your mortgage lender isn’t willing to approve your mortgage or if the appraisal is lower than the purchase price, your conditions provide you with an escape clause.
Although conditions are a way to protect yourself, too many conditions can end up costing you your dream home. It may surprise you to hear, but all things considered equal, a seller may be willing to accept an offer for a lower amount than an offer for a higher amount if there are too many conditions.
For example, let’s say a two-story detached home in Toronto is listed for $549,000. John makes an offer over asking of $569,000, but includes condition of financing and inspection. Janice also makes an offer, but she offers $559,000 and also includes the same conditions as John. Meanwhile, Mary makes a clean offer for $567,000. Although Mary’s offer is $2,000 less than John’s, if I were the seller I would be inclined to take Mary’s offer. As the old saying goes, a bird in the hand is worth two in the bush. Accepting a conditional offer means the buyer can find something wrong and manage to get out of the deal. With a clean offer, once the paperwork is signed it’s a done deal.
As a buyer you can still protect yourself without conditions. Instead of making an offer conditional on inspection, you can do a home inspection ahead of time (a pre-inspection). Although there’s no guarantee you’ll get the property, as long as your offer price is close to the other buyers you’ll have a decent shot of being chosen.
Make sure you’re pre-approved for a mortgage and remember to not overpay for a property. If the final selling price ends up setting a new record for the neighbourhood, don’t be surprised if your lender says you have to come up with the extra funds yourself.
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