How to Protect Yourself When Making Unconditional Offers

Even with the general slowdown of the Greater Toronto Area (GTA) real estate market from our peak last year many neighbourhoods are still experiencing high levels of demand.

And what do high levels of demand beget?

Multiple offers.

In situations where you are competing with two, three, or even ten other buyers, those familiar with a competitive real estate environment know that sellers give preference to offers with no conditions (also called unconditional or ‘clean’ offers).

What’s a condition? A condition is a clause  inserted into a buyer’s offer which allows a buyer to get out of the deal under certain circumstances. The three most common conditions in our market are financing, home inspection and status certificate review. For example, a clause might say that if the buyer could not obtain financing,  a home inspection comes back unsatisfactory or if a condominium (condo) status review is substandard, the buyer would not have to proceed with the deal.

When you are competing with other offers, one way to make your offer stand out is to remove conditions – such offers are understandably sought after by sellers as being more of ‘sure thing’ as the buyer cannot legally back out of the deal.

There is a safe way to remove conditions which involves completing all of your homework ahead of time such as getting a firm pre-approval, reviewing the seller-provided home inspection or ordering  your own and having your lawyer review a condo status certificate before making an offer.

But what happens when you don’t remove your conditions safely? This is something I have been seeing more of – and something I would never advise my clients to do.

I was recently hosting an offer night for a condo I was representing as the listing (selling) agent, and out of the six offers we received from buyers, all completely unconditional, four were from buyers who had not reviewed the condo status certificate. The status certificate, a snapshot in time of the condo corporation’s financials, is an important document that you should have an experienced lawyer review. It will tell you how much money a condo corporation makes, how much spending is planned, how much money is in the bank and whether there are any lawsuits against the corporation. When you purchase a condo,  it is as if you are purchasing a piece of a business – if the condo corporation runs a deficit or into legal issues, you’re the one on the hook financially. There could be special assessments (a lump sum to be paid by each unit owner to the condo corporation to cover expenses not budgeted for) around the corner, large increases to the monthly condo maintenance fees (for example, due to unexpected repairs for a water leak or parking garage) or even pending litigations against the condo that you as a unit owner would be responsible for.

This is why it blew my mind that even though my seller clients made the status certificate available to all potential buyers upon request, the majority of buyers did not request to see it.

So what can happen in a situation like this?

You could be buying into a money pit. In an up market, buyers don’t typically think about having trouble selling their property in the future, but in all markets, and particularly in a more steady-state one, like our market is predicted to be over the next few years , I tell my clients to buy defensively – this means looking for properties that would be attractive to buyers in any market. If you buy into a condo building that is in complete disarray, this could impact your ability to sell in the future when there is more competition among condos for sale and could prevent your property from appreciating in value the same way that surrounding, well-managed buildings do. We can already see examples of this in the Toronto core  just last week I was at a listing presentation for a property that was valued almost 30% less than everything around it due to mismanagement of condo funds.

Am I saying you should never remove conditions?

No.

But if you are considering it, you should always complete all due diligence ahead of time so you don’t put yourself in poor, binding financial situations.

Nicole Harrington is a Sales Representative with Realosophy in Toronto. She specializes in using data and analytics to help her clients make smarter real estate decisions, concentrating on Toronto and the GTA, and hosts her own website: SheSellsToronto.com.

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