In some cases, such as a seller warranting to have no knowledge of a ‘special assessment’ on a condominium, such a warranty could include the Seller’s commitment to pay for any such special assessment. This is an example where there is a pre-defined recourse that protects the buyer without the inconvenience of having to void the whole deal and start over, as one would have to do if the agreement was ‘conditional on no special assessments’.
Wherever practical , warranties should be written in a manner whereby the injured party’s recourse is pre-defined. In addition to eliminating the burden of proving costs and mitigation the other party is less likely to fail to fulfill if the penalty for doing so is clearly defined.
In most situations the buyer initiates the offer and most of the conditions included in the initial offer are there to protect his interests. Nevertheless in preparing an offer on behalf of a buyer an experienced Buyer Agent will generally minimize the number of buyer conditions, anticipate any that are likely to be required by the Seller and include these from the outset.
By doing this the offer will become more attractive to the seller and the buyer will have the best opportunity of concluding a deal at the best price. This is especially true in a competitive environment where other offers are in play or expected or where the seller is not particularly motivated, but in all cases the simpler the offer the easier it is for the seller to accept or to ‘sign back’ with the least number of revisions.
A complicated offer, even if not rejected outright, is more likely to be first referred to the seller’s lawyer which poses two problems for the buyer.
First, the longer the delay the greater the opportunity for competitive offers to be received. As the parties registering new offers must be advised that an existing offer is in play they will come with their best price and firmest offer right away which will leave your conditional offer out in the cold.
Second, the seller’s lawyer is less interested in getting the deal done than in providing iron-clad protection for the seller. His job is not to negotiate a fair deal as he does not have to persuade the buyer to accept it. His primary task, and quite rightly, is to prevent anything that might remotely turn into a problem for the seller even if the alternative is no deal at all. If your offer passes through the hands of the seller’s lawyer, it is likely to come back with terms that are detrimental to your interests as a buyer. Remember that your Realtor should never, ever discourage YOU from taking legal advice but should take reasonable steps to minimize the likelihood of the other party’s lawyer getting involved before it is necessary and allowing an adversarial situation to develop.
The key to minimizing your number of conditions as a buyer is to first assign each into one of three categories.
First, eliminate the items which should be dealt with as warranties by having them written as warranties i.e as items which don’t break the deal but will give you suitable pre-defined compensation if not fulfilled.
Second, take the items which are outside of the seller’s control and deal with them before the offer is presented.
The conditions which most commonly cause a competitive offer to lose out are “Conditional upon Financing” and “Conditional upon Solicitor’s Approval”. For conventional financing you can get pre-approval within 24 hours so why not get pre-approved for your maximum amount before making an offer or even looking at properties?
For high-ratio financing 3 business days may be required to obtain a CMHC appraisal of the specific property so as a worst case you can attach a copy of your pre-approval to the offer showing that you will get the financing so long as the property appraises satisfactorily.
Similarly with Solicitor Approval. Simply having your lawyer look at the offer before it is ever presented and working out any issues between your lawyer and Realtor in advance will eliminate the need for this condition. If the initial offer results in the seller ‘signing-back’ a counter offer and including terms which you feel should be reviewed by your lawyer, have him look at them at that time.
The third group may now contain nothing so that you have a totally firm, unconditional offer, which gives you the strongest competitive position and will get you the best available price.
At worst it will contain only those items without which you simply cannot or will not do the deal. For commercial properties this may be a zoning approval; for a residence it may be a satisfactory home inspection or possibly the sale of your current home. Frankly, if a competitive offer does not include any such conditions then providing their price is in the ball park you will lose out.
However, you can still put your best foot forward by a/ making the timeframe for fulfillment as short as possible and b/ where the condition is on ‘sale of buyers property’ including an escape clause whereby if the seller receives another acceptable firm offer you have 48 hours to either firm-up your own offer or void the deal.
Remember the seller’s basic objection to conditional offers. By accepting or signing back an offer that contains conditions which are beyond his control he has revealed what price and terms he will really accept. If the conditions are not fulfilled he has lost some valuable time and marketing opportunity and weakened his position for the next negotiation by revealing his bottom line.
Why include conditions in favor of the Seller?
Examples would be where the property is currently tenanted and the seller needs the tenant’s agreement to vacate before closing, or where your Realtor knows that the seller has not yet bought and may need a condition on finding a suitable new home within a reasonable period. If it is obvious that the seller is going to need certain conditions it is better that your Realtor includes them. This will ensure language that everyone can live with, minimize delays, improve your competitive position, position you as reasonable, and most importantly avoid the possibility of the seller signing a deal that he ultimately cannot fulfill with the costs, inconvenience and legal complexity which that would entail
A Seller’s viewpoint
It is generally accepted that, all other things being equal, a ‘firm’ offer is more attractive to a seller than a conditional offer. When there are equivalent competitive offers at the same time I support this view, subject to four important considerations.
First, is time on your side or against you? The answer depends on your real needs or preferences in terms of a completion date and upon what is happening and likely to happen to supply and demand and therefore to selling prices in the short-term marketplace. If time is against you due to seasonality or softening demand or you need a closing date that is too close to the time required for fulfillment of conditions it will be safer to deal with the ‘firm’ offer. However, if time is on your side, it may be that the firm offer is a little less negotiable, whereas the conditional offer can be squeezed a little harder because they are more likely to pay a premium in order to secure acceptance of conditions that they really need. If prices are rising and you are not pressed for time, then even if the conditions fall through you are likely to receive subsequent offers that are as good or better.
Second, is each offer sufficiently close to requirements for Terms, Inclusions, Closing Date and Price that both are likely to be negotiated to your satisfaction? If neither offer is clearly within striking distance of the target it is often better to thank both parties for their efforts but advise that with competitive offers in play neither will be receiving a sign-back and to invite each to come back with something better. This will generally cause the party making the firm offer to come back with a price that is close to their limit and will also cause the party making the conditional offer to re-think whether any of their conditions can be foregone and, if not, to bring back what they think is their very best price.
Third, can any of the conditions be signed back as warranties so that one retains control of the deal while satisfying the buyer’s legitimate concerns?
Fourth, whether or not competitive offers are in play, are the conditions reasonable; are the timeframes for fulfillment acceptable and what is the likelihood of them being fulfilled?
If there is a condition on financing, it is both prudent and reasonable to inquire whether the buyer has been pre-qualified for the required amount and to request proof of this; whether they will need a high-ratio mortgage and what their total down payment will be. Unless their Realtor has struck out the pre-print clause # 23, by signing the offer the buyer has already consented to investigation of their credit information and their Realtor should know the answer to these questions before presenting the offer.
If there is a condition on ‘satisfactory home inspection’ you and your listing Broker should already know if there are any potential areas of concern and you can take control of the situation by re-writing the condition to allow you the option of remedying any latent defects rather than permitting the buyer to arbitrarily bail out.
If there is a condition on ‘sale of buyer’s property’ the buyer’s Realtor should bring the MLS listing and comparable sales information so that your listing Broker can counsel you on the likelihood of the property being sold at the required price within the specified time. If this appears satisfactory there should always be an ‘escape clause’ in your favor whereby you may continue to market your property and the buyer must ‘firm up’ or void the agreement if you receive another satisfactory offer. Be aware, however, that many Realtors prefer not to show and many potential buyers don’t want to see properties that are already conditionally sold. You must expect a marked decrease in showings after accepting such an offer and should understand that if it does not firm up you may be facing different market conditions when you come back on stream.
Generally, providing that you have a strong comfort level regarding the likely fulfillment of a finance or home inspection condition you can expect the offer to ‘firm up’ within a week and should consider it accordingly whereas a condition on ‘sale of buyer’s property’ should only be accepted if there is strong support for the view that the property will sell on time and that the buyer will net sufficient funds to complete their agreement with you. If in any doubt, tell them to come back when they have a letter from their bank confirming that ‘bridge financing’ will be available if their property sells on time but with a closing date later than the closing date of their purchase from you. Meanwhile, your Broker can inspect their house and more thoroughly confirm its value and salability. If you are under any type of time pressure to close this condition should be avoided and under no circumstances should you assume that everything will be fine for purposes of buying your own next home with the proceeds.
Another condition that should be treated with great caution, especially by a residential seller, is a condition on ‘taking back’ a mortgage. Certainly there are circumstances where it may be beneficial but if you really want to be in the mortgage loan business there are ways of doing it without the personal aggravation that will result if the borrower defaults.
Paul Graham is the owner and Broker of Record for BUYERS REALTY INC. Please direct your questions to paul@buyerscall.com or to his direct line, 905-607-4400
