With Vancouver’s housing market racing off the charts, I found this interesting article by mortgage broker Atrina Kouroshnia who explains the risks involved in presenting an offer without subjects.
In competitive housing markets like Vancouver, buyers feel the pressure to move quickly and make seller-friendly offers, often with no subjects such as financing or inspections. In fact, the Vancouver Sun reported a few months ago that some houses and condos in the area sold within a week or two (one house sold with no subjects and for $50,000 above asking price). With low housing inventory and high demand, realtors don’t expect that competitive landscape to change any time soon.
While an offer with no subjects could certainly be more attractive to the seller, I do not advise my mortgage clients to go in without subjects due to the potential risks involved.
The only time I would say to go in without any subjects would be if you’re looking at making a cash offer and you’re paying for the value of the land so you don’t care about the inspections and don’t need time to line up financing. Here, I would also emphasize the importance of having your own representation. Some buyers think that not having their own agent puts them in a more advantageous situation, but the truth is that the sellers’ agent is contracted to represent their sellers and in some situations they can even be encouraging a bidding war and discouraging subjects.
For those who need a mortgage, having at least one subject would allow the buyers to exit the deal if they need to. For instance, if your offer was subject to a home inspection, that could buy you time to get the mortgage financing in place. The vast majority of my clients review strata documents, conduct a home inspection and secure financing before removing subjects.
When you make an offer, you usually have a grace period where you can work through removing the subjects such as reading the strata minutes, booking a home inspection and arranging for your financing. By the end of the grace period, you have to either remove subjects and move forward with the deal or you don’t remove subjects and basically the accepted offer becomes void.
Remember, a pre-approval doesn’t mean you’re 100 per cent approved for whatever home you decide to buy. For instance, if you suspect there’ll be multiple bids on a property and you make a bid that’s higher than the asking price, the home’s appraised value may fall short of your offer.
Another scenario where you might run into financing problems would be if the life expectancy of the house does not support the amortization of the loan. If the value of the property is in the land, most lenders will not finance a tear-down. Instead, they might finance a lower amount (say, 50 per cent of the land) on the property.
With competitive situations, it’s easy to get caught up in bidding wars and succumb to pressure to make offers without subjects, but I think the key is to treat it like a business transaction and maintain a clear head. Have a maximum budget you’re willing to spend and do not go above that amount.
If you try to be more competitive by offering a higher price or not placing any subjects, you could be playing with fire and wind up getting burned. Only you can determine how much risk you’re willing to take on.