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…
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…