When it comes to purchasing a home, most offers include conditions or subjects. These are requirements that need to be completed before the sale can be finalized and the property is transferred. Some of the most common subjects include:

• Financing approval
• Home inspection
• Fire/home insurance protection
• Strata document review if appliable

The purpose of these subjects is to protect the buyer from making a poor investment. It can ensure that there are no hidden surprises when it comes to insurance or the state of the property.

These conditions are written up in the purchase offer with a date of removal. This is agreed to by the seller before the sale is finalized. Assuming the subjects are lifted by the date of removal, the sale can go through. If the subjects are not lifted, the buyer can waive the offer and the purchase becomes void.

However recently, especially in heightened housing markets, there has been an emergence of subject-free (or condition-free) offers. These are purchase offers without any requirements of criteria. Essentially, what you see is what you get.

Listed below are the risks and outcomes of subject-free offers for buyers and sellers:

Pros of Subject-Free Offers

• Buyers: The main benefit of a subject-free offer for a buyer is the ability to “beat the competition” in a heated market. However, it is not without risks.
• Sellers: Typically, a subject-free offer will include a competitive price, willingness to work with the dates the seller prefers, and evidence that the buyer has already done as much research as possible. Due to a purchase of another home or a need to move immediately, subject-free offers expedite the deal.

Cons of Subject-Free Offers

For Sellers: When it comes to the individual selling the property, there is less risk with subject-free offers but not zero. While the benefit is there is no wait to accept the offer, they don’t know if financing will come through.

For Buyers: As a buyer submitting a subject-free offer, you are assuming a great deal of risk in several areas including financing, inspection, and insurance:

Financing

• While buyers may feel that they have a pre-approval and so they don’t require a subject to financing, it is important to recognize that a pre-approval is not a guarantee of financing. The financing is subject to the lender approving the property and the sale; from the price and location to type of property or other variables the lender deems important. By submitting a subject-free offer without a financing guarantee, there is a risk that the deal can fall through. Further, in deals with a deposit, the buyer may lose their deposit if the offer falls through. This amount can vary in the thousands and is typically a percentage of the purchase price or down payment.

Inspection & Insurance

• A buyer assumes massive risk when opting to skip the home inspection and home insurance protection subjects to have the offer accepted. They do not know what they are getting and whether or not the property is up to code for insurance.

Due Diligence

• With subject-free offers, there is no opportunity for due diligence after the offer has been made. This requires the buyer to do all their research before their initial bid. Since it is firm and binding, a buyer who backs out will likely be met with severe legal ramifications. Submitting an offer without subjects is not due diligence and it is at the buyer’s behest.

Financing Around Subject-Free Offers

When submitting a subject-free offer, it is up to the buyer to do their due diligence before submitting. They will need to identify what the lender is looking for to make sure they walk away with a mortgage. Though approval is never certain, prospective buyers placing a subject-free offer should do their very best to secure financing beforehand.

Contractual Obligations

Be mindful when it comes to purchasing offers versus purchase agreements. Purchase offers are written proposals to purchase, while purchase agreements are full contracts between buyer and seller.

The purchase offer acts as a letter of intent, setting the terms you propose to buy the home. If financing falls through, then the contract is breached and this is where the buyer may lose the deposit.

It is also important to be aware of a breach of contract if a seller chooses to take action. For example, if you submit a subject-free offer of $500,000 and cannot secure financing for that offer and the seller turns around and is only able to get a $400,000 deal with another buyer, they could potentially sue the initial buyer for the difference due to breach of contract.

Preparing a Subject-Free Offer

Despite the risks, there are some things you can do to mitigate potential issues, such as:

• Get a Pre-Approval: Again, this is not a guarantee of financing when you make an offer.
• Financing Review: Identify what the lender is looking for to make sure they walk away with a mortgage. Though approval is never certain, prospective buyers placing a subject-free offer should do their very best to secure financing beforehand.
• Do Your Due Diligence: Look into the property and determine if there have been major renovations or a history of damage. This could come in the form of a Property Disclosure Statement. While this statement cannot substitute a proper inspection, it can help identify potential issues or areas of concern. If possible, conduct an inspection before submitting your bid/offer.
• Get Legal Advice: This can help you determine the potential risks and ramifications of the offer.
• Title Review: Be sure to review the title of the property.
• Insurance: Confirm that you can purchase insurance for the home. Although we may require an inspection, it can be substituted by a recent depreciation report.
• Strata Documents (if applicable): Thoroughly review strata meeting minutes and any related documents to determine areas of concern.

Final Thoughts

There are ways to make subject-free offers safer, but it is still risky. Ultimately submitting an offer with subjects gives you the time and ability to gather information on the property.

If you are intent on submitting a subject-free offer, be sure to discuss it with your real estate agent. They can determine if a subject-free offer is necessary, or if a short closing window would work instead. A good realtor will keep you informed of potential interest and other bids during the process as well. Their goal should be to maximize your opportunity and minimize your risk. In addition, before making any offers, be sure to check with Nicole Perri to discuss your financing and mortgage options!

Written By Our Marketing Team.