This morning a Calgary based client wrote me to say he is drafting an offer on a house purchase. They’re not reading offers for a few days, so he has a little time. If there are multiple offers, he wants to win, and he had a few questions for me.
I plan on getting a home inspection; how many days will I need to secure financing? Does the house need to be appraised and/ or does the appraisal value need to exceed the purchase price? Do you have any other conditions or advice I should consider?
To win in a competitive situation (which is what the listing agent is trying to achieve by having a set date to receive offers), you need a very clean offer with as few conditions as possible. Here’s what I generally do in competitive situations:
If you can complete your own inspection before the offer date, it means you can avoid having an inspection clause in your offer. This may make your offer stand out from others. It helps your offer look cleaner and also allows you to bid with certainty for you and the seller.
An inspector can always find something to get you “worried.” Unless it is a very old or poorly built or neglected property, I always assume I will want to do stuff after I move in. You need to be open minded and practical when reading the inspection report. Don’t sweat the small stuff.
I try to glean what the seller’s optimum closing date is, and if possible make an offer that accommodates that date or as close as I can. Assuming you are renting now, if you really want a hot property, that means you should be prepared to eat some of your already committed rent.
Include a large deposit with your offer. The realtors will appreciate that. I would go at least five percent of the offer price. The bigger the better.
Regardless of hot property or not, the vast majority of offers have a condition of financing clause – even if the buyer is secure in his financing requirements (as you will most likely be) it gives people an out – they can invoke that clause – it is never challenged, and the truth is they can back out even if it’s for another reason (cold feet, whatever)
In some multi-offer situations, in Toronto and Vancouver and other hot markets, realtors sometimes pressure their buyers not to include this clause – to ensure the cleanest possible offer.
I get why, and I admit it is sometimes necessary if the buyer truly wants to win the bid, but you are a first time buyer and I for one don’t want to put you in harm’s way.
In determining whether or not to exclude that condition from the offer, there are many considerations – better discussed on the phone, and in collaboration with your realtor.
For mortgage purposes the house being purchased will always need to be appraised. For some people, an appraisal lower than the intended offer price might be a deal breaker – they may feel they are over paying. For others it may kill the deal because their financing strategy does not allow them any wiggle room.
But a lower appraisal does not automatically kill a mortgage approval . The buyer may wish to restructure his finances, or he may want to renegotiate the purchase price.
We will talk more to gauge what is right in this particular situation, but leaving one solitary condition like “subject to appraisal” might be the right way to go for you here. It tells the seller you are not worried about financing (getting a mortgage) which coupled with your husky deposit, agreeable closing date and (maybe, see above) your no inspection clause, it is a pretty darn clean offer. It also gives you an out – since withdrawing an offer following an appraisal is not going to cause you a problem in my opinion.
Notwithstanding the “no offers till a set date” clause, buyers sometimes ignore that and try to present an offer ahead of the date. The terms of your offer have to be compelling – occasionally the listing realtor will listen and accept your offer for consideration, others will stick to their guns. If this approach appeals, discuss it with your realtor.
Being approved for a mortgage has two main components
(1) You the borrower being approved – that the lender is fine lending you the amount you have requested on the terms you have asked for
(2) The underlying property is acceptable and mortgage worthy
In your case, we already know you are good to go as we have a pre-approval in hand. But we do not know if the lender will be comfortable with the property itself. (And if it is a high-ratio mortgage buyers are looking for, the mortgage insurer needs to be onside too) That is why an inspection and appraisal will give everyone the comfort they need to move forward.
And if your realtor and mortgage agent are consulting one another, you can be confident your interests are being well served.
Related article: When the appraisal changed the terms of his mortgage
Related article: Fulfill your mortgage conditions as soon as possible
If the bank doesn’t want to speak with you… if alternate lenders are not interested… if all seems hopeless but selling your home isn’t an option… a private mortgage may be your only hope