New Trend For 2017: No More Status Certificate Conditions

Do you want to buy a condo in this red-hot 2017 market?

If you do, well, there are already enough obstacles, and much is expected of you already too.

But the 2017 real estate market is adding one more piece to the puzzle: offers in competition are now unconditional.

Let me explain why this has changed, what the process used to be, and we’ll explore the pros and cons…

DocumentsPile

Before we dive right into this, perhaps a refresher is necessary, or even an into for those who are new to real estate.

When you purchase a house, you usually conduct or rely upon a home inspection that’s provided by the seller, that examines the entire structure, the systems, and the mechanicals, and base your decision on whether or not to offer, and/or how much to offer, on the contents of the inspection.

When you purchase a condo, there’s really nothing physical to “inspect.”  Sure, once in a while, a buyer does a “home inspection” for a condo.  But I’ve sold hundreds of condos, and only ever had two buyers do home inspections.

So what do you inspect, examine, review, or scrutinize with a condo?

The “Status Certificate.”

That’s the equivalent of a home inspection, for a freehold.

With a house, you’re looking at the foundation, the roof, the furnace, the plumbing, the electrical, etc.  With a condo, that all belongs to the “Condominium Corporation,” and what you actually own is really limited to what you can see, outside the walls.

Sure, you do want to know if these items are problematic, but you don’t inspect them.  Instead, you have a lawyer review the Status Certificate, which contains, among other things, notation on the systems that you might find in a house.

The Status Certificate contains the Condominium Corporation’s “Declaration,” which is like it’s articles of incorporation, the By-Laws, Rules (those three are all different) the Reserve Fund Study, Operating Budget, Certificate of Insurance, and Audited Financial Statements.

But within all of this, there are a few items that most buyers are concerned with, not limited to:

1) Maintenance Fees.  Are they scheduled to increase?  If so, by how much?  What is the history of fee increases like?

2) Special Assessments.  Are there any payments scheduled to the Condominium Corporation, from the owners?

3) Reserve Fund.  How much is in the fund, and is it adequate?  Will fees need to be increased, will a special assessment be needed?

4) Ongoing Issues.  The newest problem in downtown condos is “Kitec Plumbing,” which has the ability to complicate financing and insurance.

5) Lawsuits.  Is the condo suing somebody?  Are they being sued?

6) TARION & ONHWP.  Are there any claims for payment under the Ontario New Home Warranty Plan?  Is the Condominium Corporation suing the developer?

7) ALTERATIONS.  Are there any changes to the unit, made by the owner, that the Condominium Corporation has not approved?

The list goes on, but these are the bullet points.

And within the overall “Status Certificate” package, which is usually around 300 pages, there are other documents to examine, and other issues that can arise.

In my thirteen years, I have had only three conditional sales fall through on the lawyer’s review of the Status Certificate, and two had nothing to do with the actual lawyer’s review (I wrote about both on my blog at some point, I’m sure).

A cynic might suggest that maybe I don’t care, and I want all the deals to close.

But it’s not me that reviews the Status – it’s the buyer’s lawyer.

For the most part, these reviews have always been formalities.  I would probably guess than less than 1% of all agreements, conditional on a review of the Status Certificate, fall through.

But to a buyer of $300,000, or $800,000, or $2,500,000 asset, maybe that 1% chance represents a true “risk,” given the stakes.

Either way, you decide.

You might think it’s absolutely absurd to purchase a house, with no conditions, relying on the home inspection that’s sitting on the dining room table, paid for by the listing agent.  But that’s how every freehold property in the central core is being sold these days.

Sidebar, for one second – I saw something in the comments section last week, or the week before, where a reader suggested that a buyer should just “include a condition in every offer.”  I can’t recall the context, but this raises an interesting point, since a buyer of a freehold property, in competition, has a 0.00% chance of winning in 2017 (or at any point in the past 3-years), with a conditional offer.  Perhaps this is a blog post topic…

In any event, freehold houses are selling, and have sold for the past decade, with no conditions when there is an “offer night,” or any competition, and the next step in the evolution of Toronto’s real estate market, is for condos to follow suit.

Now don’t shoot the messenger here.

I didn’t come up with this idea, and single-handidly change the industry.

It’s been a gradual change as the market has become more competitive.

You might think that “bringing a certified deposit cheque” to present your offer is a given, but that’s something that’s happened gradually over time too.

Go back 20 years, and you might think it was unnecessary to bring a deposit cheque.  But as the market got more competitive, buyers looked for things to give them an edge, and eventually, it just became expected.

I would never advise my seller to accept an offer, in competition, without a certified deposit cheque.  If the buyer changes his or her mind overnight, you’re S.O.L.  Yes, legally they are contractually obligated, but without a cheque, you’d have to sue them, and that takes time and money.

So back to the topic of the day – it seems like this was an eventuality, does it not?  That buyers would eventually start making their offers unconditional for condos, as is the case with houses?

Up until 2017, it wasn’t necessary.  It was a given that the condition on a lawyer’s review of the Status Certificate was acceptable, and this was the case, even in competition with multiple offers!

And because so few deals fell through on the review, it barely gave a buyer a leg-up to come in unconditional.

For example, if a seller had five offers, and the highest was $525,000, and the second-highest was $515,000, but it was unconditional, I’d say 9/10 times, the seller accepts the conditional offer at $525,000, waits the two business days, and firms the deal up.

Once in a while, you’d see a buyer come to the table with no conditions.

If I had a buyer who was making an offer on a condo in a building where I had just sold, and where my previous client had his or her lawyer review the Status, I might suggest that “there’s nothing wrong here,” and to make the offer unconditional would give them an advantage.

But save for that, or the case of buying in the building where I live (I know the building and its finances inside and out), offers for condos always had conditions on Status.

So when did this all change?

Well, in the summer of 2016, I predicted on my blog that “offer dates” for condos were going to start appearing in the fall market, which they did.  This was out of necessity, since the condo market had become so hot, that sellers would be irresponsible not to have an offer date, and see how many buyers come to the table, and what price they could get.

As the competition grew more and more fierce in the fall, buyers again looked for an edge.  Some buyers started submitting unconditional offers, either because they had obtained a copy of the Status Certificate in advance, and had their lawyer review it, or (gulp!) because they just took a shot in the dark, and left it up to chance.

I can say in all honesty that I did not advise my clients to enact the latter strategy last fall.

But as things began to evolve in 2017, I certainly adapted my approach.

When the 2017 market got underway, it took all of 7-10 days for us to notice that something felt “different.”

As you know from reading this blog, or any online source, our market is in overdrive.  Listings have been cut in half, and prices are up 27%, year-over-year.

In the condo market, whereas 4-5 years ago, only the “hot” properties got multiple offers, now every property gets multiple offers.

1-bed, 1-bath in CityPlace?  Bet on 4-5 offers.  Seriously.  No exaggeration here, folks.

So in order to compete in this market, starting in January, buyers once again looked for that edge.

And that edge that buyers sought – making the offer unconditional, caught on really quick.

In fact, with condos selling “firm” on offer nights, it was made very clear to the buyer pool that just as is the case with freehold houses and conditions on financing or inspection, the market would no longer be willing to accept offers with conditions on the status certificate for condos.

What do I mean by “the market?”

I mean it’s not the seller’s fault.

It’s not the listing agent’s fault.

It’s a function of the market.

The cynics, the bears, and the eternally-frustrated are going to suggest that this isn’t fair, it’s unnecessary, it’s risky, or it’s misguided.

I would simply suggest that it’s what the market has provided for.

No one person decided this was the way it would be, but rather the evolution happened on its own, as the market continued to get more competitive.

Listing agents did catch on though, and the good ones started to order the Status Certificate weeks in advance of the listing, and provide a copy at the property, and via email for any buyer agents that wanted it.

I’ve been doing this for years, but it was moreso to speed up the process (it can take 10 business days for the property manager to provide the Status, so if your deal is conditional on Status, and the listing agent orders the Status after the deal is done, you can be conditional for 2-3 weeks).

Nowadays, we do it to give buyers the opportunity to review the Status in advance, and submit unconditional offers.

I have listed and sold nine condominiums in 2017, and all nine were sold in multiple offers, unconditionally.

I never asked for unconditional offers, let alone demanded them.

The market just made it so.

Buyer agents read the tea leaves really early on in 2017, and the buyers caught on.

I received 22 offers on a listing of mine on Monday night, and all twenty-two were unconditional.  Not one, not even the guy who offered $5,000 over list, competing against 21 other bidders, included a condition.

Simply put: you just can’t “win” with a condition in your offer, in competition, in 2017.

It’s the evolution of the market, and I’m not in any way suggesting this is a good thing for buyers.

But like the unconditional offers on freehold houses, and the deposit cheques accompanying the offers, this is a trend that is here to stay…

 

21 Comments

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  1. Jeff Johnson says:

    Great! I want to buy a condo in Toronto. So, all tips are most useful for me. thanks for sharing these, hope you will share more info!

  2. CondoSolutions says:

    Buying a condo without a status certificate package is not a very smart move. You could end up with a $30,000 special assessment for your unit alone which you just bought into. Just because a building may appear to be well managed does not mean that it is.

  3. tdot says:

    So what will be the next trend to get that edge ….?

    1. Condodweller says:

      See my comment from Monday. Phantom offers…..

    2. Ralph Cramdown says:

      The two obvious ones are 1. The full Latin America — the full purchase price in cash on the spot, in a valise of bundles of US$100 dollar bills. 2. The property changes hands offshore or in in a Canadian lawyer’s office, because it is held by a numbered company with nominee directors or in a blind trust. As the property itself doesn’t change hands, only the entity that owns it, the annoying fees and fingerprints in the public records are much reduced. Welcome to becoming one of ‘those’ asset destinations.

      1. Condodweller says:

        Yup, I was going to mention the suitcase full of cash on the spot. I like #2 but wouldn’t 1 and 2 have to go together? Are you able to get financing for a property held by a holdco or a blind trust? A holdco by definition has no income and the whole idea behind a blind trust is that you can’t identify the beneficial owner, therefore a bank wouldn’t be able to confirm income.

  4. H. Marshall says:

    These deals appear to be for units in relatively new condos in the downtown area. If the buyer’s agent can vouch for the building and if the buyer is super-anxious and willing to take a chance, well they can take a chance.

    Buying without spending at least three hours reviewing the status certificate is like buying a used car after taking look at it and kicking the tires without taking a test drive.

    A status certificate tells you:
    • if the owner is paid up with the monthly fees.
    • If there are back charges against the unit.
    • Pet & parking restrictions.
    • Are short-term rentals allowed.
    • How many units are leased.
    • Lawsuits.
    • The attached audited financial statements need to be carefully examined for operating deficits and under funded Reserves.

    This is not a good time to buy a condo under this kind of pressure.

    1. Geoff says:

      I don’t think that David is suggesting that buying a condo without a status certificate is wise. Just that realistically, in some markets for some buildings, if you want to play than these are the new rules. You can play or not play, but you can’t play by your own rules is probably what it boils down to.

  5. Ralph Cramdown says:

    It’s “the market”? Let’s think about this.

    Submitting unconditional condo offers isn’t an idea that sprang fully formed from the head of Zeus, attributable to no mortal. Either a few dumb buyers thought it might be a good idea, and their agents didn’t counsel them against it strongly enough (unlikely, I think), or some listing or buyer agents thought it might be a good idea, and started suggesting it to buyers.

    If only 1% of condo deals fall through because of the certificate (your estimate). then an unconditional offer isn’t of much extra value to sellers, especially if they’re move-ups and aren’t waiting for their sale to go firm before buying, which is typical in this market. Given these facts, and that condo prices seem to be rising at 1% a month, would you really advise a seller client to turn down an extra $10k if the highest offer was conditional on certificate? Seems like throwing away the near certainty of free money.

    I can think of one group for whom selling firm on offer night WOULD be a big deal, though. Unsuccessful agents who need cash advances on their commissions, at credit card interest rates, between the time the deal goes firm and the time it closes. Yes, there are a few lenders catering to this market, but they only lend against firm deals. Sadly, those agents would appear to get much more benefit than either buyers or sellers (or anyone else — and think of the poor lawyers!) as “the market” transitioned from a standard of due diligence to a lack thereof.

    1. McBloggert says:

      No horse in this race. But if I were selling a condo and I had 10 offers all without a condition and one had a cert. inspection condition and was say $5K more – I would take the firm offer without conditions – I wouldn’t care about the $5K.

      The status cert. review can also be used as a cooling off period – a person could literally pick anything and say it didn’t meet their expectations. What if the buyer bid on three condos that night – won two of them and then gets to decide which one they want – using the status cert. as the mechanism to let them off the hook for the deal?

      Is it likely to happen? I guess not – but at the end of the day sleep better knowing I have an iron clad purchase agreement. Again this is from the perspective of a home owner – not an agent.

      1. jeff316 says:

        Agreed. The status certificate review condition provides an easy out for those with cold feet. Assuming a limited price differential, I’d choose unconditional.

      2. Condodweller says:

        I find it interesting that when discussing real estate value of money seems to be distorted. It’s like we stepped into the twilight zone. I mean we are contemplating casually throwing away $5,000 just because one offers seems a bit more certain. Am I the only one who stops to think and say $5,000 would pay for a nice family vacation for a family in the Carribean? Or that one would have to have almost a $100,000/year income to clear $5,000 in a month?

        I would have to evaluate each situation and use my gut to evaluate the likeliness of a top offer pulling out but I can’t see myself giving away $5,000 or even more for a comfort level. I’d have a hard time giving away even $1,000.

        1. Libertarian says:

          I’m with you and Ralph. If I’m selling my place and there are numerous bids, I want top dollar and the status certificate is not a condition that would worry me. Some other condition, maybe. But not the status certificate.

          As Ralph wrote, markets are going up 1%/month. It was even happening the last few years, according to David’s own postings. He has told numerous stories where he put in a reasonable offer on a condo that had been on the market for a while. He got declined. They de-listed it, brought it back a few weeks later at a higher price and ended up having a bidding war, selling for an even higher price.

          For every condo seller – take the most money!

          1. Geoff says:

            I’m inclined to agree with those who want the extra $5K – if the scenario is I have 10 unconditional offers, and I have 1 offer that’s conditional only on status certificate, I want that extra $5K and will risk the deal not working out as I do have that 10 unconditional offer pool to fall back on.

            On the other hand, the question becomes more of a problem if I have ONE unconditional offer and ONE conditional offer at $5K more. That’s a tougher question. And for those who say ‘just risk it’ – Selling a condo or a house is STRESSFUL. You have to clean everyday. You have showings at all hours. You are without half your stuff as you’ve decluttered the hell out of things. You need to wipe down the kitchen before you leave. Need to board your dog / cat. Taking a conditional sale, and then having it crap out, is not a minor inconvenience. Oh, and you’ve likely commited to buying a new house or moving into a new place, so the clock is ticking.

        2. Daniel says:

          it’s not the $5000 you’re throwing away, it’s what happens if the buyer sees another unit they like more the next day then uses any pretense in the certificate to drop your property. Will you still have 20 offers the second time you sell it?

          1. Ralph Cramdown says:

            You mean if the buyer finds another unit he prefers so much more that he’s willing to go into another multiple offer situation to get it, and by then all of your other bidders have already won their own other units in multiples, and the bottom suddenly falls out of the market so the vast marauding horde of other buyers out there somehow evaporates overnight? Well then, you’ll have the most interesting real estate story in the world at parties…

          2. Condodweller says:

            I know someone who sold their place in 89 literally just before the bottom fell out of the market. So much so that their buyer tried to back out but by then they had a firm deal. They cashed in right at the top. It would be interesting to hear the story from an agent who was around then how it went down. The autopsy of the crash if you will. I suspect the buyer pool evaporated in a very short time.

            I’m not saying the market is going to crash but we must be inching toward a top. It will be interesting to see what happens now with interest rates rising in the US and tree more forecast for this year alone. That’s 1% in one year.

          3. jeff316 says:

            The idea that all nine of your other bids fall through is certainly unrealistic, but on the flip side it’s not just as easy as calling up the next in line and getting them to resubmit.

            What’s less unrealistic is the lower negotiating power you will have when you re-approach the remaining nine lower bidders a week or two later. Some will have moved on/changed their minds/bought something else, while those remaining have much more negotiating power.

            If I were outbid on a condo, and then got reapproached a week or two later to bid again on it, I certainly wouldn’t be increasing my offer. If anything I might decrease it.

          4. Ralph Cramdown says:

            jeff316, interesting that you mention negotiating power.

            Because that’s what’s missing in David’s original post, and in the discussion here. Nobody suggests going to the high but conditional offer — while the other offers are still live — and saying “my seller would love to accept, but you’ve got to drop the condition, because there’s these other offers only a little below you which are unconditional.” Or going to the three highest unconditional offers and saying “We’ve got a higher offer with a condition we’re not thrilled with, so we’re giving you each a chance to improve, with the caveat that if there’s still too much of a spread, we’ll go with the conditional.”

            THAT’S negotiating. And if anybody thinks “well that sort of thing is just not done in Toronto in 2017,” the subject was something that wasn’t done six months ago, and times change.

            I mean, if your real estate agent holds herself out as a great negotiator, but then, come offer night, says “well, these offers come with conditions, so we can ignore them” [and majestically sweeps them into the trash can], and picks the top unconditional offer out of the pile and suggests you take it, who did she actually negotiate with in this deal? [hint: you — ed.]

          5. jeff316 says:

            That’s a great point.

            I know that the deals I’ve been involved, and it’s a small sample, the conditions have always been a negotiating point. Once we were asked to amend our conditions, and we blinked and did. (Agent 1 Jeff 0)

            Another time we were asked to improve our unconditional offer to match a higher, conditional one with the threat that they’d pick the one with conditions. We declined to do increase and subsequently won. (Agent 1 Jeff 1)

            In my scenario above I had (maybe falsely) assumed that already occurred – I mean, what agent doesn’t go back and ask for the condition removal? What’s there to lose? – but maybe it doesn’t occur all that often? You may be right, that might not be the norm.

          6. jeff316 says:

            Thinking about Ralph’s post on negotiating power at the bottom, David may have already covered it, but it would be interesting to see an analysis of common conditions – which are the most beneficial and most problematic from a seller’s and buyer’s point of view. And long closing periods or sale conditional on the buyer selling their house or on appraisal – do these even happen any more?

            I know that one of the agents I worked with felt that a sale conditional on status certificate review was effectively a cold feet clause, whereas in his opinion a sale conditional on home inspection was a bit tougher to get out of and was more about having a tool to facilitate additional negotiating between offer acceptance and deal closing. If so, effective use of these conditions could really be a great tool for buyers to win houses and knock the price down post bidding.

            Also interesting would be some insight into often deals that fall through end up in court. I’ve always wondered if sales with tiny deposits have higher failure rates – where a buyer gets a better place or just decides to lose five grand due to cold feet – and when do sellers try to get out of deals they have already agreed to (this may have been covered in the gazumping article.)

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