In simple words - not a good idea.
You need to be well aware of all the risks that come with going condition free, and make sure you are making an informed
decision. Don't get caught up in the hype. Everyone has varied tolerance of risk, so if you’re not
prepared for the uncertainty that lies ahead with an ‘all-in’ offer,
then subject-free may not be for you.
What is a subject-free offer?
Normally, you offer to buy the house subject to certain conditions being met to your satisfaction, or you will not proceed with purchasing. Things like making sure you can obtain mortgage financing by a certain date, or that you have a professional home inspection to make sure there are no hidden (and expensive) repairs needed in the near future (such as new furnace or roof).
On the other hand, subject-free offers have zero conditions
to be met for the deal to close. These offers are being presented more and more often in the hopes of making an offer more appealing than one with conditions.
It’s no secret that in today’s rapidly moving real estate market,
subjects are seen as dirty little contract provisions that no one wants
to deal with. But it’s still important that your decision reflects your
personal risk tolerance. Remember, with subject-free offers there are no
guarantees.
Think of subjects as being your parachute
Typical
subjects (or conditions) include things like financing, inspection, condo document review, and they are put in place to protect you,
the buyer, should you ultimately determine that it’s not the best
property for you. As a mortgage professional, I can give you a pretty accurate indicator of the likelihood of you being approved, which will ease your mind a bit. But the final decision is up to the one with the money - your lender.
But nothing is 100%. Things can happen.
For example, what if that house you fall in love with turns out to be
a former grow op, or because you had to pay well over the asking price, and the lender wants an appraisal which comes in below the purchase price,
or you find out through there is a huge condo assessment coming on the condo building that the lenders won’t like? Or,
what if an unexpected and sudden life event happens right in the middle
of the offer process (job loss, family tragedy)?
What if you need to sell your current house to buy this property, but
the offer you accepted falls through and you can’t sell it in time to
close on the purchase? This could end up being a tricky (and expensive)
situation if you don’t have the income to qualify for both properties,
and it could force you to start looking at lenders with higher appetite
for risk and with that appetite, high fees and interest rates that are potentially in
the double digits.
Remember that subject-free means you’ve committed to buy that property no matter what
How to minimize your risk with a subject-free offer
There are ways to do subject-free more safely, but even following the steps below won’t eliminate all of the risk.
- Work with an experienced Realtor and mortgage broker (me!!) who are working
as a team with you (This is the most important piece of advice, in my opinion.)
- Get pre-qualified so you know your limit.
- Consider having an inspection done in advance of an offer.
- Get independent legal advice and/or consult with a lawyer in advance of making offer.
- Be prepared for (and comfortable with) all worst-case scenarios.
This can include prepping a parent/family member to be a back-up
co-signer, potentially increasing the down payment, or being prepared to
go with an alternate lender at higher rates and fees.
- Have your insurance broker review the MLS on the property and
confirm you will be able to get house and fire insurance on your property, as part of the condition of
your mortgage closing will be to have fire insurance in place, and if
you can’t get insurance, they won’t provide you with a mortgage. Many insurance companies won't insure older houses with inadequate wiring (an inspection would have caught this)
- Steer clear of subject-free especially if you have less than 20% down. Why?
Because Canadian mortgage law requires the mortgage to be insured by one
of three mortgage default insurers, and if all three say no, (maybe the condo building has been red-flagged) then
you’re out of financing options.
So, what happens if you go subject-free and then can’t make the deal
work? Unfortunately, it probably means saying goodbye to your deposit and
hello to a potential lawsuit if the seller can’t sell the property for
as much as you were willing to buy it for.
I know it’s tempting to press your mortgage broker for a decision before
making a subject-free offer—it’s human nature to want 100% assurance
that everything will be fine. But it wouldn’t be responsible or
professional to give clients assurances without also highlighting the
risks. Afterall, while i will be able to give you a very good answer, I'm not the one loaning you the money so the final decision is up to the mortgage company.
As brokers, we work for you and have a duty to ensure that you understand exactly what kind of airspace you’re jumping into.
That said, we know subject-free offers are very common in the current
market environment, and as mortgage brokers, we are most equipped to
provide you with the best risk-mitigating strategy as you navigate this
market.