Conditional Offers

What does it mean to have a “firm deal”?

If both parties agree to the contract, isn’t it as good as done?

In a market where sellers usually have the advantage it IS possible for the buyer to hold all the cards…

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Majority of offers on condominiums in Toronto are conditional offers.

A much smaller percentage of offers on houses are conditional.

Why is this?

Well for starters, there is the condominium corporationto consider; a feature that isn’t present with a freehold property such as a detached house.  Every condominium is run differently, and every condominium has a board of directors to make decisions on behalf of the condominium residents.

Every condominium corporation has a reserve fundwhich is where your monthly maintenance fees are paid into.  This fund is used for regular expenses such as paying condominium employees, garbage collection, utilities, etc.  But the fund is also in place to pay for unforeseen expenses such as maintenance & repairs (ie. the roof caves in), painting, replacing carpets, doing upgrades, etc.

Majority of the Agreement of Purchase and Sale contracts submitted on condominiums in Toronto come with a condition on satisfactory review of the condominium’s Status Certificate, which consists of the condominium corporation’s articles of incorporation, declaration, rules & regulations, by-laws, and a detailed study of the reserve fund.

Most conditional offers on condominiums are conditional for a period of five business days, during which the buyer gets his or her lawyer to review the status certificate.  If everything checks out, the buyer would waive his or her condition.

If, however, there was some “fine print” in the documents stating that perhaps there was going to be a special assessmentto each unitholder on January 1st, 2008 in the amount of $9,500, then the buyer might want to back out of the deal.  And since the deal is conditional on the satisfactory review of the status certificate, the buyer can do whatever he or she wants to.

It is also quite common for offers to be conditional on financing, whereby the buyer has five business days to get satisfactory financing from a lending institution.  Simply put, the buyer has five days to obtain a mortgage.  I always have my clients do this in advance, but whether you get a pre-approval or not, an offer conditional on financing gives the buyer another opportunity to back out of the deal.  This clause is common with both condominiums and houses.

More common with houses, is a condition on home inspection, whereby the buyer retains a qualified home inspector to thoroughly inspect the property inside and out in search of deficiencies.  The cost is usually borne by the buyer, and is well worth the $400 in the event that a significant deficiency is found.  Perhaps there is old knob-and-tube wiring that could cost $15,000 to replace.  Isn’t it nice to have the option of backing out of the deal?

A condition that used to be popular, but not so much in this hot market, is conditional on sale of buyer’s property.  Can you imagine selling your house conditionally and having to wait around for the buyer’s property to sell?  You could tie up your property for 60 days and then have the buyers back out if their house isn’t sold!  I have never dealt with this condition before.

In multiple offer scenario’s, conditional offers are quite uncommon.  Well, I should say that they may be present, but usually the accepted or “winning” offer isn’t one that contains a condition.  Simply put, if you list your house at $399,000 and receive six offers, and the the highest offer is $452,000 but is conditional, you might want to consider accepting the second highest offer of $443,500, which is unconditional, and therefore sell your property “firm” without any conditions.  There is no guarantee that the buyer with the higher, conditional offer is going to waive his or her condition, and at the end of the five business days, you could be sitting on an unsold property.

I would never advise my buyer client to enter a multiple offer scenario with a conditional offer.  Likewise, I would never advise my seller client to accept a conditional offer in a multiple offer scenario unless it was substantially higher than the next best offer.

Ultimately, it is the buyer who holds the advantage by using a conditional offer in the most common situation, whereby his is the only offer.  He can tie up the property for a week, and then simply let the conditional time period lapse rendering the agreement null and void.

If you like a property, but don’t love it, perhaps a conditional offer is the way to go.  It will give you a week to make up your mind, and see what else is out there, and give you a chance to get out of the deal…

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  1. Bill W. says:

    David,
    In a multiple offer scenario, how much is your client disadvantaged if he/she has a conditional offer? What would the price differential have to be for it to not be a deterrant to the seller?
    Thanks,
    Bill

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