In places like the Greater Vancouver and Toronto Areas, Kingston, or Halifax, purchasing a home can feel like a frenzy. You’re competing blindly against an unknown number of buyers, all desperate to get their hands on the same thing you want. It often feels like you immediately need to whip out your wallet, bid way over the asking price, and forget there’s any risk associated with making the biggest purchase of your life.
In these hot Canadian real estate markets, the intense competition can leave many buyers wondering “why do my offers keep getting rejected?”
The sense of urgency is always there, not letting you breathe, not letting you make calm, prudent, informed decisions. You feel rushed into paying more, risking more, and asking less.
Veleyny Saavedra and her family recently dealt with this anxiety as they tried to buy a home in the GTA. Putting in an offer was stressful, especially because their realtor made one thing clear: “If we put in subject clauses, our offer would not get accepted.”
What are subject clauses?
Subject clauses are legal conditions, or “what if’s,” meant to protect the buyer as they submit an offer for a home. For example, a ‘subject to finance’ clause would let the buyer off the hook and cancel the deal, if their bank or lender doesn’t approve sufficient financing.
All real estate clauses (or subjects) give the buyers a legal ‘out’ that collapses the sale if the subject isn’t satisfactorily addressed.
But they also represent a considerable risk for the seller. For example, ‘subject to inspection’ clauses are particularly worrisome for sellers of older houses because if the buyer is dissatisfied with the conditions of the home, the sale could be compromised or fall through.
That’s why in hot markets, with an abundance of offers and competition, it’s becoming increasingly common for sellers to automatically reject any offers that include subjects.
Saavedra says that their realtor guaranteed them that if they put conditions on their offer, it would not be accepted: “In this market, no way!”
The sellers’ market
Jay is a Reddit user who recently sold his house in British Columbia.
It wasn’t in one of those super-hot housing markets, but he still received multiple offers. All of them were at least 20% over the asking price. He says the highest offer included subjects. The lower ones did not.
“The difference between the offers would’ve had to be pretty substantial to make me take an offer with conditions over one without,” he says. “The no conditions offer made for a faster close with no potential for problems, and it’s hard to put a price on that.”
Jay’s decision is not uncommon. Within three days, Jay sold his house to someone who offered him less money, but presented no risk.
How can you protect yourself in a subject-free market?
Jay admits that if he was the buyer, he would never consider making a subject-free offer.
“With the prices being so high, people are already stretched to the limit. A major repair like foundation work or replacing wiring could ruin someone if they bought a house without knowing about it,” he says.
But just because you are making a subject-free (or condition-free) offer, it doesn’t mean you can’t take steps to protect yourself.
“Subject-free, or removing subjects before writing the offer doesn’t mean you don’t do the due diligence,” says Mariko Baerg, from Bridgewell Real Estate Group. “It just means you do your due diligence before you even know whether the offer gets accepted.”
It’s a lot of work – especially if your offer gets rejected. But that due diligence, Baerg says, is an important part of the work that realtors do to make sure that their clients feel comfortable and are fully educated when purchasing a home.
In the Vancouver area, houses usually go up for sale on a Monday. The rest of the week is open for viewing, and the offer presentation day is set for the following Monday or Tuesday. This allows the seller to maximize the number of offers they will receive and at the same time, it allows prospective buyers to do their due diligence before making their offer.
“If you know you really like a property, ideally you want to get in and see it in person earlier in the week rather than later, and then you still have time to tackle the due diligence. It’s much harder if you go to an open house on Sunday and the property is taking offers on Monday. It doesn’t give you as much time to get things together,” says Baerg.
What kind of due diligence can you do before making a subject-free offer?
You can ask for a lot of documents that will help ease some pre-offer anxiety as soon as a home goes up for sale. Your realtor can help you acquire things like the title, property disclosure statements, strata documents, and insurance documentation.
“I would say those are the easiest subjects to remove in advance. An inspection is obviously one of the main things that cost money, so you’re investing in a property without knowing if you’ve even got it. That can be a difficult thing for people to want to commit to, but pre-inspections were really common when the market was really hot,” Baerg says.
For some people, waiving the home inspection or paying for a pre-inspection is a matter of calculating risk.
“It seemed silly to pay for a pricey pre-inspection on a house that we didn’t know if we were gonna get,” says Saavedra, “For us, the worst-case scenario was having to spend like $50,000 on something we wouldn’t be able to see on an inspection anyway, like the foundation. We just took it into consideration when deciding how much to offer.”
What about financing?
According to Baerg, getting rid of that pesky ‘subject to financing’ clause is one of the most difficult things for some people to remove. But, there are things you can do to make the removal less stressful.
For example, you can send the home’s feature sheet to your mortgage broker in advance, and get pre-approval. However, Baerg says that often people make the mistake of getting pre-approval for the listing price, as opposed to the amount they will be offering.
“They need to ask their lender, ‘Okay, this is realistically what it’s going to go for and this is what I’m willing to offer. So even at that price point, do you think it’s going to be okay?’”
To know what a home will realistically sell for, it’s important to look at comps — other homes that have been recently sold in the same area. “This will help you better gauge whether it fits your budget,” says Dajan Kumarasamy, a real estate broker with RE/MAX Realtron AD Team Realty Brokerage.
He says to avoid disappointment, it’s best to work with a realtor who knows the area well and what the market is doing.
For many clients, that makes a huge difference in whether they feel comfortable removing the ‘subject to financing’ clause.
At the end of the day, no one wants to get stuck with a financial mess or a home they can’t actually afford.
What if after all that, you still don’t feel comfortable making a subject-free offer?
“It’s not that a seller will never accept any subjects,” says Baerg, “but if the overall expectation or reality of the market is ‘subject-free,’ the buyer has to understand that there’s going to be a significant financial cost to having those subjects.”
That financial cost is really up to the current owner. From their point of view, a subject is a risk, so the buyer is going to have to pay whatever that risk is worth to the seller.
“I’ve seen some sellers take subject-free offers for 50 thousand dollars less than something with a subject,” says Baerg. “But you need to think, which one is more uncomfortable for you? Paying more money or being at risk?”
Baerg says that at least risks can be managed with thorough due diligence and clear communication.
A return to a buyer’s market?
If you don’t feel comfortable with making an offer without conditions, and you can’t pay the ‘premium’ on risk, you might need to ask yourself, ‘is this really the right market for me?”
If you do want to stay in the market, then you have one other alternative. Wait for the markets to cool down.
And a return to a buyer’s market might not be too far off. With interest rates going up, the cost of borrowing is rising and some markets are already starting to cool off.
“I am already seeing a larger number of offers coming in with financing conditions compared to earlier this year,” says Kumarasamy. “Many people are being called back into the office and they’re realizing the commute is not possible for them. So downtown condo prices are now on the rise again, while single family home prices have sharply declined.”
With that in mind, Kumarasamy says the best advice is simple: “Have your pre-approval ready and be realistic about your goals. Look for a home within your budget, but also in an area that fits your budget.”