Q & A Series – Part 7
Q: Is it detrimental to put financing or home inspection conditions in an offer to purchase?
– Candace F.
A: Hey Candace,
First things first, if you find yourself in a bidding war please resist the temptation to act like Mr. Blatter and bribe everyone involved. It definitely won’t end well!
Now onto more serious matters…
If you are in a bidding war it certainly does hurt your chances to win. However, if you are not in competition with anyone else then you most definitely want to keep these conditions in the offer.
Let’s have a look at each condition separately:
The Financing Condition
First, what exactly does the financing condition do? Well, it allows the buyer’s lender to review the agreed upon Agreement of Purchase and Sale and give their approval (note that full mortgage approval is still not completed until just before closing) of the purchase. The deal cannot “firm up” until this condition has been fulfilled and waived by the buyer.
So, if for example, an issue comes to light whereby the purchase cannot be approved, the buyer is able to pull out of the deal and have their deposit returned by ways of a mutual release. A common occurrence for non-approval would be an issue coming to light about the buyer’s credit or the lender feels the appraisal is much lower than the purchase price and will not approve a mortgage of that amount on that property. This commonly happens during bidding war scenarios where buyers have paid far more than asking in order to win the bid.
The Home Inspection Condition
This one is a bit more straight forward. Once you agree to a deal, you want to have a home inspection so you can uncover any potential issues with the home. Generally, most educated buyers will do a full preapproval and, after speaking with their broker before getting into an offer, will often feel comfortable waiving the financing condition. However, a home inspection clause is usually a bit harder to forego. As an example, I had a client that purchased a home in Toronto that was over 100 years old. During the home inspection we found old knob and tube wiring and we discovered the foundation was basically wading in its own swimming pool. The costs estimated to rectify the major issues were going to be $25,000 at the very minimum. Needless to say, we decided to not waive the condition, the deposit was returned and we found another home with FAR less issues.
The Bidding War Scenario
Currently, we’re in a hot seller’s market with lots of bidding wars. Many people are removing some or often ALL conditions in order to help their chances of winning the bid.
So, how does a buyer protect themselves if they are in competition for a home?
First, make sure you are pre-approved and look for homes under that budget. If you’ve done your pre-approval and work closely with your mortgage broker, you can send them the listing ahead of time along with the range you plan to offer over listing. They should be able to confidently tell you if you can waive your financing condition.
The financing is the easy part. What do we do about the inspection?
Many agents are coaching their seller clients to do a “pre-inspection”. This means that a home inspector is hired by the seller to do a home inspection and the agent gives that report to all potential buyers. This is done in order to get buyers to remove their home inspection condition since they can feel confident that they know what issues exist on the home.
Sounds perfect, right?
Well, unfortunately not all home inspection are equal. Often times the reports are vague or incomplete. It really makes it difficult for a buyer to trust this report. So, what can they do if they know they will lose the offer if they have a home inspection condition in the offer?
Many people, if they’re completely enamoured with the home, will do their own inspection before the offer date. This allows them the ability to do an unbiased inspection and see for themselves if there are any issues that were missed. Then come offer time they can more confidently submit an offer with no conditions. This gives them a much better chance to win the bid.
The downside to this?
Essentially just the price of the inspection ($400-$500) if you don’t win the offer! However, it is well worth the price if you uncover a major issue you otherwise would have been saddled with if you won the bid.
There are many more factors at play with bidding wars but I hope this gave you a little bit of insight into the madness. Please comment below or contact me if you have more specific questions!