We hope that when you read that email subject line you sang the song in your head and maybe bounced in your chair a little bit. It is a great little song and always brings to mind happy kids smiling and clapping.
It also happens to be a fantastic conditional statement.
There are two conditions in it actually. The first is being happy, and then there’s the second, knowing it, which is conditional on the first. If both are true, then you should clap your hands. If not, no hand clapping for you.
In real estate, conditions are something we deal with all the time. In part because most headlines take a conditional statement and turn it into an unconditional statement and our clients ask us questions based on the headline.
Here’s an example.
A report comes out that says if mortgage rates rise an additional ½ percent, buyers won’t be able to afford houses and sales will drop, followed by price decreases. The result (lowered sales and dropping prices) is conditional upon a specific event, namely a 50 basis point increase in variable mortgage rates.
The headline that is written removes that condition and makes it unconditional. It reads something like “Increasing mortgage rates make buyers flee and house prices drop” and you’d be forgiven for thinking it’s already happened.
While attention grabbing headlines are one thing, the other area where conditions play a big role in real estate has to do with home sales that are conditional upon one or more aspects of the deal. Whether it is a financing condition, a home inspection condition or something more rare like a sale of exiting home condition, lots of real estate transactions go through a conditional period before either becoming a firm deal or dying.
Let’s get into the most common conditions on real estate deals and to make it interesting, let’s talk about ways in which those conditions can cause a deal to fall through. First off though, a brief review of how the offer process works with conditions.
Clean Vs. Conditional Offer
All real estate transactions begin with an offer from buyer to a seller. There is a standard form used in Ontario called the Agreement of Purchase and Sale, that describes all the particulars. It covers who is involved, what is being sold, the price, the deposit, the closing date and all sorts of other details, including whether the buyer or seller are making the deal conditional upon a certain aspect that needs to be either fulfilled (or waived depending on the type of condition) or the deal is cancelled.
The term that real estate agents use to describe an offer on a property that has no conditions is “clean”, as in, this is a clean offer. It means that if the seller chooses to accept the offer as written, the property will be sold firm. No waiting on a mortgage approval, organizing a home inspection or any other aspects that could derail the deal. Sign it and you have a firm and binding contract for the sale of the home.
We’re often asked by buyer clients if they “have” to submit a clean offer or if they can insert some conditions for their peace of mind. The simple answer to that is that we don’t have to do anything we don’t want to do with an offer. If a seller wants the deal to close in three weeks, for more than we want to pay, and with no conditions on the offer, we can decide to offer a two month closing date, for less money than they’re asking, with a couple of conditions. Will it be accepted? Likely not, but we get to decide what we’re willing to do, as does the seller.
In multiple offer situations, where more than one buyer is submitting an offer, there is often the expectation that the offer will be a clean one with no conditions. This is often the case when sellers ask for a marketing period of a week or more and “hold back” on reviewing offers until a specific date. In theory, a buyer who likes the homes has that time frame to sort out their financing, review the pre-list home inspection the seller did (or arrange for their own, buyer paid home inspection) and get comfortable with offering with no conditions.
All conditions come with a “what” and a “when” so that both sides are clear on how long the conditional period will be for with the deal. If a buyer says I want to make this purchase conditional on financing, they also have to say the timeframe they need. The most typical period is three to five business days for a financing condition but others, such as a condition based on the sale of the current home of the purchaser can be as long as 90 days. This conditional period date is written into the offer and in most cases, if the condition remains unfulfilled or waived by that date, the deal immediately dies.
Finally, a reminder that conditions can be for the benefit of buyers, sellers, or both. We’re most familiar with buyer conditions, such as the buyer securing a mortgage to their satisfaction, but there are dozens of standard conditions we can see in real estate deals and a number of them are in place for the benefit of the seller. For example, a seller could put in a condition where the sale is conditional upon them finding suitable accommodation, or conditional upon their lawyer’s review of the offer, etc.
There are literally dozens of standard conditions that have been written and reviewed by lawyers and industry associations to cover off the most common situations. The conditions include such aspects as access (right of ways and easements), chattels (rental contracts), condominiums (status certificate reviews), development (services, severance), environmental (laws, endangered species, oil tanks), inspection (building, pests, retrofit, fire), legal (lawyer approval), leases (building approval, lawyer approval, credit checks), mortgages (arranging, assuming, discharging) and lots more such as sewer and water supply, shore access, soil condition and so forth.
In addition to this “standard” conditions, buyers and sellers can and do write their own conditions based on the circumstances. If one side of the deal will only be ready to move forward based on a certain condition being met, they can make the deal conditional upon that and the other side needs to agree or no deal is made.
Now that we have reviewed how conditions work, let’s go through the most common conditions and to keep it interesting, the number one reason why these conditions can cause the deal to fall apart.
Financing Condition
A purchase being conditional upon the buyer satisfying themselves as to being able to get a mortgage to their liking in place for the closing is the number one condition we see in real estate offers.
This makes tremendous sense as when you sign a firm contract for the purchase of real estate, you are obligated to fulfill the contract. Courts take a very poor view of people who fail to fulfill contracts and ask any real estate lawyer and they will tell you that a judge may very well not care in the slightest that you are having trouble fulfilling the terms of your Agreement of Purchase and Sale due to financing.
In recent years we’ve seen a rise in the marketing of easy and quick pre-approvals. These are offered by many lenders, including top tier banks, but they are not actually a mortgage pre-approval. Despite being marketed that way, all these quick offerings do is give a prospective buyer an idea of the likely mortgage they would qualify for based on the information they provide. A pre-approval, on the other hand, is a written document from a lender saying we would lend you X amount of money at Y interest rate. This document is provided after the prospective buyer provides proof of all of their financial details, often including job letters, tax returns, bank statements and so forth.
Even then, a pre-approval is, in keeping with the theme of this article, a conditional document. All pre-approvals are conditional upon a review of the property that is being purchased and also likely a further review of the buyer’s finances. It’s worth more than a quick online form, but it is still not a guaranteed funding of any property.
What’s the biggest reason a financing condition ends up killing the deal?
While financing conditions are extremely common, it is relatively rare that a deal dies because the buyer refuses to waive the condition by the conditional period date. Lenders are very aware of the fact that most financing conditions are for three to five days and in most cases, a pre-approval can turn into an approval within that time frame.
The biggest reason that financing ends up killing a deal is when the buyer isn’t actually pre-approved or hasn’t done the work to ensure they can actually get a mortgage. We always ask for information on the buyer’s situation when we represent a seller being asked to sell with a financing condition. If the buyer makes $50K a year, started their job last week and went bankrupt last year, the odds of them being able to get a mortgage for the million dollar house we’re selling are extremely slim. A financing condition is a prudent action to make sure you don’t commit to something you can’t actually do, but it should be a final failsafe, not the first attempt to see if getting a mortgage is actually possible.
Home Inspection Condition
For freehold (i.e. non-condos) properties, the second most common condition on offers is a home inspection condition. This makes a lot of sense as while being sure you can actually close on the property is the reason for the financing condition, a home inspection condition is about making sure you’re not buying a lemon.
While buyers can (and sometimes do) have home inspections done on condo units, it is far less common. Most of the major issues with a condo unit (windows, structural, mechanicals) are typically the responsibility of the condo corporation rather than the individual unit owner, so most buyers of condo units find it less necessary.
The cost of a home inspection ranges ($400 on the low end, up to $800 or more depending on the add-ons) but it is a small cost to avoid purchasing a home that turns out to be a money pit. Home inspectors look for current or potential problems with a home and often provide very useful information on things such as the mechanicals (make and age of furnace, AC, etc.), structure (roof material and age, foundation type) and lots more.
A home inspection isn’t a guarantee but it is additional information and allows a buyer to make sure they are comfortable paying the price they offered given the state of the home.
What’s the biggest reason a home inspection condition ends up killing the deal?
Home inspection conditions definitely sometimes result in the buyer deciding against continuing with the deal, but in most of those cases it’s because the home inspection revealed a significant issue that wasn’t previously known.
We’ve seen buyers walk away from deals when the home inspection revealed issues that are either expensive to remedy (such as a foundation problem no one discussed) or that cause significant concern in the buyer’s mind (such as a mould issue that could negatively impact the health of the new homeowner and their family).
To a much lesser extent, we’ve seen buyers use the home inspection condition to kill a deal when the inspection revealed only minor issues. Some unscrupulous buyers (and buyer agents) try to treat this condition as a get out of jail free card, where they cancel the deal due to a reason unrelated to the home inspection. While this is hard to prove, some home inspection conditions are worded specifically to say that the buyer must provide the reason and it be significant before they unilaterally kill the deal. We always advise our buyer clients that a home inspection condition is only for significant issues raised by the inspection and if they are otherwise uncertain about the home or their ability to close on the deal, this condition shouldn’t be used for those purposes.
Status Certificate Review Condition
On the condo unit side of the market, a status certificate review condition is far and away the most common condition.
A status certificate package is a collection of documents related to the unit and the building in question and includes information on the current status of the reserve fund (money set aside for upcoming repairs and maintenance), any law suits against the condo corporation, the by-laws and declaration for the building and the rules and regulations that unit owners must abide by in the building.
It is very prudent to have a review of the status certificate package as a condition on the purchase of a condo unit as without it, a buyer may end up buying the condo equivalent of a lemon. Without this condition, a buyer may discover there is a special assessment coming due for all unit holds (which can be tens of thousands of dollars), or that the maintenance fees are increasing at a tremendous rate over the next number of years to make up for a shortfall in the reserve fund, or even that the condo corporation is being sued for a number of alarming reasons.
What’s the biggest reason a status certificate review condition ends up killing the deal?
It is quite rare for this condition to end up being the reason a buyer doesn’t move forward with a deal. In most cases, unless it is an extremely small condo building or complex, there have been a number of recent sales of condo units where other buyers and their lawyers reviewed the status certificate package and didn’t see a problem with proceeding.
If there has been a new development, such as an announcement of a special assessment that the new owner would be responsible to pay, and that wasn’t disclosed to the buyer and factored into the sale price, then a buyer may reconsider. In the absence of that, if we’ve seen two or three deals in the past couple of weeks, it is very unlikely that the status certificate review will become an issue.
While financing, home inspection and status certificate review conditions are by far the most common conditions we see on offers, there are dozens of other conditions that can be included for the benefit of a buyer or seller. If you’re thinking about buying or selling, we’d love to help advise you on what is necessary and what just gets in the way. Reach out to us to talk more!
