Are Unconditional Offers “Risky?”

Business | June 2, 2021


If only the world was perfect, right?

If it was, I would have said “were perfect,” but I didn’t, because it’s not, and neither am I…

Ask a hundred people to describe a “perfect world” and I’m sure you’ll receive a hundred different answers.  What people may choose to focus on will differ, whether it’s health, equality, safety and security, or the Leafs being able to win a game-seven.

The world isn’t perfect.  It’s never going to be.

No product, service, business, or industry is perfect either.

Whatever industry you work in has its pros and cons, and you know this.  You probably discuss it with your colleagues or maybe your friends as well.

Real estate is far, far from perfect.  We’ve seen no shortage of media coverage on this topic in the past year, and in many cases, for good reason.  I’ve always strived to bring truth and transparency to Toronto Realty Blog, and while the readers and the general public have appreciated it for fourteen years, don’t ever underestimate the flak I take behind the scenes.  I have a RECO complaining pending for a blog I wrote last month about transparency in the market, which I find highly ironic, since the mere notion that somebody is complaining about my transparency demonstrates how the old-guard of real estate is trying to keep everything in this industry hush-hush.

Much of the inner-workings in our industry come under fire because outsiders lack information and/or understanding.  Our market is extremely complex, fast-paced, and while some people like to think that the job is easy, or that “houses sell themselves,” they have absolutely no idea what they’re talking about.

I recently read that “In a perfect world, every offer made on a property would be conditional.

I agree.

Wholeheartedly, in fact.

But we do not live in a perfect world.  It’s why some people die young.  It’s why hate can exist.  It’s why some people and places always seem to have it worse than others, no matter the day, or year, or century.

The mere notion of perfection as it pertains to any aspect of real estate, specifically in our market, is a pipe-dream.

Not in our market.  Not at this time.  And quite likely, based on the future of this city the way I see it, probably not ever.

In a “perfect world,” all offers would be conditional.  They would be conditional on a lawyer’s review, a home inspection commissioned by the buyer (but paid for by the government…), satisfactory and guaranteed mortgage financing, a catch-all for unfettered “due diligence,” and a mandated ten-day cooling-off period where the buyer can change his or her mind for any reason.

Ah yes, a perfect world.

But we live in reality, and I while I’m an imaginative individual, I’ve always felt like daydreaming in perpetuity is unproductive.

I often find myself telling people, “I work in market reality.”  When my buyers talk about the scenario in which they might have the only offer on that hot, under-priced property on the scheduled offer night, or where that comparable sale from 13 months ago is applicable to the house they’re considering today, I sympathize, I empathize, but I’m always going to be honest and tell them, “Guys, I work in a market reality, and while I wish we found ourselves in the situation you’re describing, we just won’t.”

As I write this, there are five offers on a Yonge & St. Clair townhouse, one of which belongs to my buyer-client, and I’ve already told her that we don’t have a chance.  She’s not exactly thrilled with my attitude, but I told her, “There are four people bidding against you, our offer isn’t high enough.  We knew this place could sell for $200,000 over list, and we figured maybe the market ignores it and there’s an outside shot that we’re competing against one buyer, but we’re not.  This is our reality.”

It’s only a matter of time before we’re told by the listing agent, “Thank you for your offer, but we’re going ahead with an another buyer.”

That’s reality.

I don’t expect to win every bid I submit because I’m realistic.

So yes, this is a round-about and verbose way of saying that I find the suggestion that “all offers should be conditional” to be completely unrealistic.

And why?

Well, supply and demand, for starters.

But there’s also the element of risk at play.  Simply put: you may have to take a chance in order to be successful.

The idea that “offers should be conditional,” I believe, is rooted more in the idea that the buyers should be able to change their minds or have an “out,” than the idea that the buyers need to perform due diligence.

Because if the former were the case, then the argument wouldn’t hold water.

After all, a good buyer agent can help his or her client with all the diligence necessary in order to put together an unconditional offer, and thus I feel that the “risk” is almost entirely eliminated.

When it comes to the purchase of real estate in Toronto, there are three conditions we’re accustomed to seeing:

1) Conditional on financing.
2) Conditional on home inspection.
3) Conditional on review of the condominium’s status certificate.

Obviously, the second condition pertains to houses, and the third condition pertains to condos, although I’ll occasionally see a condition on inspection for a condo.

But can’t all three of these potential conditions be satisfied in advance of making an offer?

Again, I believe that there’s misinformation out there which is confusing the buyer pool, as well as the general public.

Case in point:

“Home Inspectors Say Buyers Are ‘In Trouble’ In Hot Housing Market With Inspections On The Decline”
CBC News
May 31st, 2021

From the article:

Home inspectors in Ontario are sounding the alarm.

Some say that in today’s hot real estate market, more and more buyers are being pressured to make offers on homes without full home inspections.

“It’s like playing Russian Roulette with your finances and your home’s finances and your family’s finances,” said Len Inkster, the executive secretary of the Ontario Association of Certified Home Inspectors, one of a number of groups representing workers in the field.

He said that based on conversations he’s having with inspectors throughout the province, he believes that less than 25 per cent of all home sales are being inspected.

“It’s so out of control,” said Bob Price, a home inspector for Windsor, with 15 years in the industry.

“Home buyers, I think, that they now realize they’re making the biggest purchase of their lives, but they have no protection.”

He explained that in today’s “frenzied market,” buyers have a better chance of getting a house without any conditions, including getting an inspection, adding that the pressure of the market and the rush to make a purchase are forcing people to make poor decisions.

Most of the TRB readers understand how real estate is sold in Toronto.

Almost every property on which I have submitted an offer so far this year has featured a “pre-home inspection.”

I don’t have time today to delve into conspiracy theories about sellers paying Carson Dunlop money to falsify inspections, since the idea is so ridiculous, but there’s always a reader or two who says, “I would never trust an inspection provided by a seller.”  I can tell you that the inspector that I use on behalf of my buyers, is also the inspector I hire for my pre-inspections, and I also see his name on pre-inspections for other listings.  So what’s the problem?

The CBC article above reads that “buyers have a better chance of getting a house without any conditions, including getting an inspection.”

But it draws a conclusion that not having a condition on inspection means not actually getting an inspection.

I’m listing an east-end house on Wednesday.  I have paid the $900 for a pre-inspection, and that inspection will be left on the kitchen island, uploaded to MLS for agents to see, and will be readily available to all buyers who are interested.

So does this qualify as “buyers not getting an inspection,” per the article above?

I can’t speak for other markets, but in Toronto, any reputable listing agent will provide a pre-inspection.

Not only that, if a property is listed on Wednesday, and offers for that property are being reviewed the following Tuesday, that means the buyer has a week to hire their own inspector, if they so choose.

So the idea that “submitting an unconditional offer is risky” simply ignores the reality that buyers are provided with pre-inspections and buyers can do their own inspections if they so choose.

When it comes to financing, in a perfect world, you could buy a property conditionally and then hand the Agreement of Purchase & Sale to your mortgage broker along with the MLS listing, and then you could both spend an anxiety-free five business days working on a firm mortgage commitment from a lender.

But does it even work like that anymore?

Ask a mortgage broker what a “pre-approval” consists of today.  Many times, banks don’t actually want to do them.  They would prefer if you come to them with a firm deal in hand before they open the file.  And many mortgage brokers are doing their “own” pre-approvals where they’re using your income, credit, job history, and down payment to put checks in boxes and determine what you can afford.

The pre-approval from the bank comes with the verbiage, “You are pre-approved subject to the following conditions…”

After you have bought firm, you will satisfy those conditions.

So are you taking a “risk” by submitting an offer that’s not conditional on financing?

Only if you’re not working with a bank or mortgage broker who isn’t looking after you, otherwise, the only difference between the “pre-approval” and the “commitment” is paperwork.

When it comes to reviewing the status certificate for a condominium, again, I would suggest that any reputable listing agent will provide the status certificate to interested buyers and buyer agents during the course of the listing.

The status certificate consists of 100-200 pages of documentation, but there is a very simple 4-6 page summary which answers the important questions:

-Is there a budget surplus or deficit?
-Are there plans to increase the contribution to the reserve fund?
-Are maintenance fees increasing?
-Are there any special assessments?
-How much money is in the reserve fund?
-Are there any outstanding judgments against the corporation?
-Is the corporation a party to any proceeding before a court of law?
-Are there any claims for payment under the Ontario New Home Warranties Plan Act?

If the answer to all of those questions is “no,” and there’s ample money in the reserve fund, then 99% of the job is already one.

Again, tell me I’m being cavalier, and I’ll simply say that I”ve read through a thousand status certificates, and I’m a realist.

There are going to be forty pages of detailed calculations of the share of each unit pertaining to reserve fund contributions, but no lawyer is reading that.  Not a chance.  In fact, I don’t imagine that lawyers are analyzing the financial statements of the condominium corporation, nor are they likely qualified to do so.

Let’s be honest: buying a condominium based on a review of the status certificate is not unlike buying shares of stock based on a review of the financial documents of that company, except that nobody buying shares through their online brokerage is reading financial statements.  Well, maybe blog reader J G, but few others…

So at least when it comes to the status certificate summary, you’ve theoretically satisfied 99% of the necessary diligence with respect to the condominium corporation’s good standing.

A buyer does not have to make an offer conditional on home inspection, financing, and review of the status certificate.

A buyer can do a pre-inspection, satisfy financing well in advance of making an offer, and review the status certificate on his or her own, with his or her agent, or through his or her lawyer.

So do you still think it’s “risky” to make an unconditional offer?

Maybe.

But it’s just as risky to cross the street during rush hour…

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11 Comments

  1. Christopher

    at 6:14 am

    I’m currently in the process of buying/selling and can tell you that most sellers are not providing home inspections for potential buyers. The less than 25 percent number from the article is also my experience.

    1. Andrew

      at 10:47 pm

      What area are you looking in? I think it makes a huge difference.

        1. Christopher

          at 7:19 am

          Read your comment wrong, looking in the 905 Oakville/Mississauga

  2. Steve Gordon

    at 9:12 am

    I agree with the overall thrust in that organizing a home inspection before you make the offer is relatively easily done in most cases, even if there is a pre-inspection for additional comfort you can pay to have that inspector walk you through (not the same cost as a full inspection from scratch. I did find this amusing though:

    “Home buyers, I think, that they now realize they’re making the biggest purchase of their lives, but they have no protection.”

    Let’s be real, if I get an inspection done I have additional piece of mind or at least some more knowledge of what I’m walking into but if the inspector misses something my likelihood of having any actual “protection” is still pretty low in practice.

  3. Condodweller

    at 11:11 am

    I mentioned in the past that I knew someone who had to come up with a significant amount for their down payment because after getting a pre-approval their mortgage would have been denied. This was almost 10 years ago now.

    Regarding, inspections others have commented that you are more the exception than the norm, and also even if I trusted your inspector, I would have some questions and specific requirements to look at to satisfy me.

    The certificate is fair game. Not much is going to change there and any reasonable person should be able to pick out the red flags from the summary.

    I think the process could be mitigated though. I mean if the concern for the seller is that the buyer has an out simply because they changed their mind, then why not change the standard clause to make the purchase firm, and only allow for termination if there is a real reason.

    David, you shot yourself in the foot with that final statement. I can easily walk to the nearest intersection and walk across when the light is green which significantly reduces my risk of dying. What do you do when you wake up with a swimming pool in your basement after the first rain storm when you moved in? Or is that significant enough damage to make it worthwhile to sue?

  4. TokyoTuds

    at 11:23 am

    “Local practices” certainly come into play with Pre-listing Inspections. Although this is a Toronto blog, many people in Toronto are having to buy farther afield. All the best listing agents in Toronto almost always get a quality Pre-listing Home Inspection done.

    My buyer clients can’t afford Toronto and we just landed a home in Cambridge after 3 months of searching and six bidding wars in K-W and Cambridge No listing agents do pre-listing home inspections in the “Try-city” area of K-W/ Guelph/ Cambridge: I asked and asked and did.not.come.across.even.one.

  5. Jordan

    at 11:33 am

    Just went through the process with my parents who sold in Oakville and then bought further west in Hamilton. They sold with a prominent agent who works mid-end Oakville homes usually in the $1-$2 mil range – the agent included staging , a storage locker and a pre home inspection with their commission.

    On the other hand in Hamilton, my parents viewed about 20 homes in the $0.8mil-$1.2 mil range (these would have been $600k to $900k houses just 6 months ago). Maybe 3 or 4 out of the 20 had a pre-home inspection report. Several of them, the selling agent was at least reasonable about allowing double-bookings to get your own inspector in there. The other 10+.. tough luck.

    Only a handful were staged, and about half were clearly rushed with a “vacuum the floors and throw everything in the closet/garage/cabinet” attitude

  6. Marty

    at 4:44 am

    Another great column. I hope everyone appreciates the opening preamble as much as I do.

    Cheers!

  7. Pingback: Are Unconditional Offers “Risky?” – City Estates
  8. ShakyApprovals

    at 12:54 pm

    We bought last year during the pandemic. We were the only offer, so we submitted an offer conditional on home inspection, which we booked for like the next day and waived it fairly quickly. Home inspection was very valuable to us in terms of educating us in what to expect (e.g. ancient but good condition HVAC) but didn’t really change our offer other than to request a few small electrical things be fixed.

    I specifically asked our broker if we needed a condition on financing and was confidently told no. AFTER we bought, the lender asked for updated employment letters to verify our income as it had been a few months since our first ones. It ended up being fine, and given our situation likely a formality, but I was NOT happy to have worry about it at that point.

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