Don’t. Just don’t.
Have you heard stories about what happened when the Cabbage Patch dolls came out in 1976?
People were fighting in stores trying to get the last doll off the shelf? Our housing market is starting to feel a bit like that.
Our housing market is crazy. Off-the-charts crazy. I was looking for a more professional description, but that word really seems to fit the best.
I am seeing an increasing number of clients wanting to write subject-free offers on homes, generally at a figure well over asking price.
Each and every time we have a similar conversation, clients ask “Are you OK with us writing a firm offer?”
Each and every time, my answer is the same. No.
- No, I am not comfortable with you (my client) writing a subject-free offer.
- No, I am not comfortable with you putting your financial future in jeopardy in case something goes sideways.
I think that using the term pre-approved can be misleading for clients. Being pre-approved means that you, as a borrower, have been vetted and are pre-qualified to purchase a suitable property at a certain price-point, based on your current financial situation.
And here’s the rub. It is decidedly a seller’s market. Inventory is low. So many offers are coming in on each listing that clients are looking for any kind of edge or advantage that puts them in a more favourable position.
What are some of those possible advantages?
- Writing at a higher price
- Suggesting a quick closing date
- Presenting a subject-free firm offer
- Being flexible on the completion date to suit the seller’s situation
What could possibly go wrong?
- Your lender requires an appraisal, and the appraisal comes in low
- The sale of your current home collapses unexpectedly
- The strata hasn’t been well-managed, so lenders won’t touch the complex you bought in
- Something has changed with your financial situation that changes the amount you are approved for
- There are issues with the home — i.e.: knob and tube wiring, asbestos, outdated plumbing, etc.
- Lenders don’t like the location of the property
- The property was a former grow-op
What if something does go sideways? What if you write a subject-free offer, then your lender does not approve the purchase?
Depending on why a lender declines a file, there may be other options. Maybe there are other lenders who are fine with your application.
Lenders have their own policies and procedures, so it may be a matter of finding a lender where your file is a better fit.
However, if the issue is a low appraisal and you only have funds for the minimum down payment, you may find yourself in a bit of a pickle.
Lenders will finance to a percentage of the lower of the purchase price or the appraised value. If the appraisal comes in low, you may need to increase your down payment by the difference.
I am seeing a trend of more sellers listing their homes and specifying that they will be reviewing offers on a certain day. While this is advantageous to the sellers, it is challenging for potential purchasers.
I have been working with a young couple that are desperate to find a home. They have been trying for more than a year to find an appropriate home in their price range.
About two weeks ago, they found a home that ticked all the boxes. The sellers were reviewing offers the following Sunday. We had a long conversation, reviewed their application line by line to make sure nothing had changed with their situation.
They wanted to write an offer for $40,000 over the list price of the home. They ordered an appraisal up front to determine whether this was an appropriate value.
Ordering an appraisal for every home you are thinking of writing an offer on is obviously not an affordable option.
I’m seeing clients writing on three or four (or more) homes before they are finally chosen as the successful purchasers, so spending several hundred dollars for each potential home would get expensive quickly.
In this case, my clients were comfortable writing at a higher price and closing very quickly. They wrote their offer with one subject, which was a home inspection.
They were overjoyed to learn they were finally getting a home. I had a sleepless night waiting for their approval to come back.
There are checks and balances built into the home-buying process for a reason. Writing subjects such as financing and inspection into your offer are designed to protect you, the buyer, in the event that the value of the home comes in low or if the Property Disclosure Statement shows that the home has issues of concern for lenders.
If you write a subject-free offer and then are unable to find suitable financing, you could find yourself in a very uncomfortable spot. You might:
- End up in a mortgage with a private or alternative lender at a higher rate
- Have to scramble and find a co-signor
- Lose your deposit
- Risk being sued
- Lose a lot of sleep until you know you have financing in place
If you ask me about writing a subject-free offer, my advice is not to do it. Maybe I’m too conservative, but the last thing I ever want to see is my clients on the hook for not having an emergency out if there is something wrong with the property.
I made one realtor choke yesterday when he told me his clients were writing an offer. I’m not sure that “May the odds be ever in your favour” was the most appropriate way to sign off the call, but that’s how many are feeling these days.
If you are a seller in today’s market, these dynamics are fantastic for you. However, the trick is that most sellers are buying a new property themselves.
This is a vicious circle, and I have to say I for one will be much happier when the market shifts to a more balanced situation.
This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.