Conditions, Conditions, Condi…What!?

I was reading the following article – http://goo.gl/W9Lu97 – “Brokers concerned about real estate offers made with no conditions” published in the Globe and Mail on Monday April 11, 2016. Although this article relates to the ultra-fast paced real estate market of Vancouver BC, The Deutschmann Team has been experiencing a frenzied Kitchener-Waterloo market so far in 2016. The charts below, provided by the Canadian Real Estate Association, show that residential sales activity is up compared to this time in 2015 and that the number of active listings and months of inventory have dropped steeply.

It is not uncommon for buyers’ to let their emotions get the best of them and forego some important clauses in their Agreement of Purchase and Sale in situations of multiple offers, limited inventory, and steadily increasing upward pressure on prices (see my March Market Report where I discuss the pricing trends in KW). As the article in the Globe and Mail points out, potential exists for serious repercussions if a buyer submits an offer with no provisions for the purchase to be subject to financing or home inspection.

So, what exactly are conditions? What are they meant to do? Do you (as a Buyer or Seller) need them? And are conditions ever a bad thing? Let’s find out

What exactly are conditions?

Conditions are clauses in an Agreement of Purchase and Sale that must be addressed and satisfied by the Buyer and/or the Seller in order for the transaction to proceed. You can make an offer conditional on just about anything as long as the other party is willing to entertain you or wait for you to satisfy the condition.

What are conditions meant to do?

Conditions are meant to protect against the unknown; they provide an opportunity for the interested party to satisfy themselves with a specific aspect of the transaction. For example:

• The Buyer being satisfied that they can borrow enough money to buy the house,
• The Buyer being satisfied that the home has no major flaws (i.e. a conduct a home inspection),
• The Seller being satisfied that they have a new home to move into prior to the closing date (this is particularly relevant when moving into a house currently under construction or yet to be built).

When the unknown becomes known and the interested party is satisfied, the condition can be waived (i.e. removed from the agreement).

Do you need conditions as a Buyer or as Seller?

For most of us, a real estate transaction is a huge decision with a variety of considerations and potentially negative consequences. It is imperative that your real estate decision be prudent and well considered, not based solely on emotion. Due diligence is key to getting exactly what you are paying for – a defect free home that suits your needs.

Clauses in the Agreement of Purchase and Sale ensure you get what you want. If you have any doubt then you need a condition. Why risk it? One bad real estate decision can impact your life for years, or even decades. Imagine buying a home ‎that has asbestos and requiring $10,000, $20,000 or even $50,000 in abatement costs! A professional home inspection would have caught this. Or consider, as a Seller, closing on a deal prior to having secured a new residence and being forced to make a hasty decision on a property; possibly overpaying, being forced to place your children in an undesirable school district, or being separated from extended family or friends.

Are conditions ever a bad thing?

I have seen my share of poorly written conditions. Some so bad that I had to correct them for the other agent because ‎the risk to their client was blatantly obvious. Conditions must be written in a way that you have absolute certainty that you can get out of the transaction at your convenience with little, or no, financial impact. (It is reasonable to expect to pay for the cost of a professional home inspection, other professional advice, or documentation costs to verify a specific item of concern).

‎So, can conditions be bad – definitely. If they are written incorrectly they can be used by the other agent to trap you or force you to waive (satisfy) the condition even if you are not 100% confident or comfortable.

Here’s an example of a poor condition related to a Home Inspection (the problematic wording is emphasized):

This offer is conditional upon the Buyer, at his own expense, obtaining an inspection by a registered home inspector by 6:00pm on July 11, 2015. If the Buyer, acting reasonably, is not satisfied with the contents of the inspection report, he shall provide written notice (the “Notice”) to the Seller on or before the above noted date and time indicating the matters disclosed in the report that are not acceptable to the Buyer. Unless the Seller agrees in writing to remedy the matters set out in the Notice within 3 days following the Seller’s receipt of the Notice, this agreement will be deemed at an end and the deposit shall be returned to the Buyer without interest or deduction. Failing which this offer is null and void and deposit returned to the Buyer without deduction.

In this example, the wording “acting reasonably” is a point of contention; what is reasonable? Even worse though, is that there is no way for the Buyer to get out of this deal as long as “the Seller agrees … to remedy the matters …” There is also no definition of the course of action for the remedial measure. That means the Seller and his Uncle Joe can grab some tools (or maybe just some duct tape) and “fix” it. This is not likely to result in the Buyer purchasing a defect free home.

As a Buyer or a Seller, do you want to make sure your personal interests are protected? If so, let The Deutschmann Team work with on your real estate transaction.