In a competitive real estate market, where there are more buyers than sellers, you will have to find ways to make your offer more attractive to the seller. One way to is to make your offer “subject free.”
If you are considering this, make sure you talk with your real estate professional to understand all the potential pitfalls.
With everything I’ve seen as a mortgage professional, I can never advise you to go completely subject-free. But if you do, realize that it is purely a personal decision, and you will be assuming all the risks associated with it.
So what are the risks?
1. When the seller accepts your offer, the negotiations stop. The contract is legally binding at that stage. If you find issues with the property later on, you will not have any recourse. This includes any issues that would prevent the property from being financed, such as major structural flaws. In addition, if your personal situation changes prior to completion and you cannot buy the home, you will be legally obligated to honor the contract.
2. Even if you have been pre-approved, it does not guarantee financing. Any material changes to your income, employment, credit, debt load, etc. can all cancel your pre-approval. Even if your finances are perfect, the lender may not like the property. For example, if the appraiser finds a crack in the foundation, the lender can refuse to finance it. It doesn’t even have to be that severe. A number of other reasons could include: wiring, oil tanks, zoning, work completed without permits, remaining economic life, condition of parts of the home, mould, etc. If you are buying a strata property and the lender doesn’t like what the strata minutes have to say, they can refuse to finance the property. You are only one half of the approval. The property is the other half.
3. Going in without subjects means that you must have the ability to pay cash for the home. Barring that, you must have at least 25% down payment and be prepared to seek alternative financing. I will arrange this for you. However, you will incur thousands of dollars in extra fees and the rates will be much higher, likely double or triple the going rates.
If you understand these risks, and can mitigate or live with the consequences, then it is your personal choice to make that subject-free offer.
Written by Mortgage specialist Vy Tri Truong