Conditional Offers: They’re Back

Many buyer offers today are back to including conditions such as financing, home inspection and the sale of the buyer’s property. It is sound due diligence that should be taken.

But Here is What is Puzzling

A buyer makes an offer on condition that they are approved for mortgage financing. Yet the seller, the seller’s agent or both counter the offer back to the buyer deleting the financing condition. This turns the offer into a cash sale. Yet if the buyer included a financing condition, would that not suggest that the buyer requires approval for a mortgage to close the sale?

What Could be the Consequences?

With a cash sale, the agreement becomes firm and binding and, if unable to close, consequences can follow.

1. The buyer would be in breach of contract and would lose their deposit. As well, if the seller resells to another buyer for less, the buyer could be directed through a court order to pay to the seller the difference between the original purchase price and the subsequent sale price.
2. The seller is left with the property unsold. If they are depending on their sale to close in order to complete the purchase of another home they in turn could be in breach on the home they are buying.

Neither of these outcomes serves anyone. In fact they cause a lot of emotional consternation for all parties.

Financing Approval Drives the Sale

Accepting an offer conditional on the buyer confirming they have the money can avoid the problems. If the buyer does not get approved, the parties release each other, the buyer’s deposit is returned and the seller can continue to actively market his property. There is no waiting till a few days before closing to learn  that the transaction won’t close. With interest rates rising, passing the stress test and the more stringent screening by lenders has become challenging.

What About the Need to Sell the Buyer’s Home

In a competitive situation, though chancy, a buyer can choose to exclude a condition to sell their home. Alternatively the seller might counter offer back to the buyer with the condition stricken out. In either case the buyer risks not selling his home. Consequently the money won’t be there to close the deal. As well, given the current market, the buyer may turn down a lower offer on their sale, though reflective of today’s market conditions and again is left with no sale. The results are the same: not good and penalizing to both parties.

The Seller Can Continue to Sell

With a condition of sale for an agreed number of days, the seller should express in an offer that he can continue to market the property. Should another buyer come along, the first buyer is notified and is typically given 48 hours to remove his conditions or opt out of the sale. This would allow the second buyer to complete the purchase. Outside of a few emotional bruises no one gets hurt financially.

The market has reverted back to this traditional and sound approach to buying and selling. Buyer conditions for the most part are again the norm.

Finally, the risks of excluding a home inspection condition in a buyer’s offer can at times prove to be costly.