When deciding to purchase a property in Ontario, the buyer or buyers’ real estate agent must put together an offer to the seller. The offer can be firm, meaning with no conditions attached to the offer, or conditional on certain criteria. Once conditions are satisfied or waived by the purchaser, the offer becomes firm. At that point, the buyer cannot change their mind and walk away from the agreement of purchase and sale without incurring financial liability.
The are many conditions that the offer can be subject to. Some of the more frequently used are conditions of financing, home inspection, status certificate review for a condominium type property and lawyer review. The purpose of a conditional offer is to ensure that the purchaser can conduct the necessary due diligence. In this article we will discuss five conditions that typically appear in an offer to purchase a real estate property in Ontario. Furthermore, we will discuss the implications of those conditions for buyers and sellers alike. Lastly, we will discuss whether the condition, if not met, can be used to revoke the offer, and bring the agreement of purchase and sale to an end.
Financing Condition
It is always advisable to get a letter of pre-approval from the bank to establish a budget when shopping for a house or a condominium. However, it is important to note that a letter of pre-approval does not guarantee the purchaser an actual mortgage approval. Pre-approval letters are for budget purposes only. When the buyer goes to the bank, the bank will look at the amount of available down payment, current market rates and qualifying rates. The pre-approval is not attached to a specific property, nor is it reviewed by an underwriter. Furthermore, if there are rate changes the pre-approval received by the bank would have to be recalculated to modify purchasers’ shopping budget.
Whether the purchaser has a letter or pre-approval or not, your offer to purchase should always have a financing condition. Having an agreement of purchase and sale, conditional on financing, allows the purchaser to contact the bank, provide them with all the necessary paperwork and get a mortgage approval for the property that you wish to purchase. Usually financing condition must be satisfied within 5-10 business days. During that time the Bank will review the purchaser’s employment documents, down-payment amount and property details among other criteria that the Bank sees fit to qualify the purchaser for a mortgage. It is important to note that should the purchaser have less than 20% from the purchase price as a down payment amount, the purchaser would have to get an approval from the Bank as well as housing insurance company such as CMHC. This can take more time therefore the purchaser should work diligently to get the mortgage approval as soon as possible.
While conditional offers may not be the most favorable option for the seller, should the agreement be conditional on purchaser obtaining a mortgage, once satisfied, will give the seller a piece of mind that one of the most important parts of the transaction process has been accomplished.
In today’s downturn market, the appraised value of the property plays a vital role. If the Bank appraises the property less than the purchase price noted in the agreement, the buyer would be responsible for bringing the shortfall. While most standard clause financing condition does not consider appraised value of the property, we highly recommend adding another condition that should the bank appraise the property lower than the purchase price noted in the Agreement of Purchase and Sale, the purchaser has the right to walk away from the transaction. This type of condition is very beneficial for the purchaser as it gives a purchase a way out of the agreement should the value of the property not be supported by the Bank. However, the seller may not agree to such a condition, especially if the agreement has a long closing date, because of market volatility. If the market is strong, the seller would not worry about low appraisal amount, but in a slow market having an offer conditional on appraisal may be problematic. Between the time when the agreement was signed and when the bank completed the appraisal, the property value may have changed for the worse and as such, should the offer be conditional upon satisfactory appraisal, the seller would lose out on a closing.
Status Certificate
When buying a common elements property, such as a condominium or a condo townhouse, the buyer should include a status certificate review as one of the conditions in their offer to purchase.
Status Certificate is a document designed to disclose financial information of the condo unit as well as the corporation.
Should the corporation have low reserve funds, not able to meet their financial obligations, and involved in litigation, the buyer may not want to purchase the property as the corporations shortcomings will inevitably translate into higher maintenance fees and special assessments.
Once a lawyer reviews the status certificate, the purchaser can decide whether to proceed with the purchase of the said unit. If the status certificate has problems, the purchasers first step should be going back to negotiating table with the seller. If the seller is refusing to reduce the purchase price based on the issues found in the status certificate, the purchaser may then use status certificate condition to exit the deal. The negotiation and termination of the agreement must be done in good faith. Therefore, the buyer should not be using a conditional offer to exit the deal in case the buyer changed their minds.
The benefit of having an agreement conditional on status certificate allows the buyer to examine financial documents of the condo corporation and review any debts of liability that are attributed to the unit itself. Knowing the liability that the buyer could incur allows the buyer to budget for the additional expenses.
Often the seller of a condominium unit would order a status certificate ahead of time to prepare for conditional or even firm offers. Having a status certificate on hand allows the seller to share the information with potential buyers and limit the number of conditions in the offer. If the status certificate is reviewed ahead of time by a solicitor and the solicitor and the buyer are satisfied with the status of the condo corporation, the buyer then does not need to put status certificates review as one of the conditions in their offer. Thus, reducing the time of a conditional period which is always beneficial for the seller.
Home Inspection
A thorough inspection is a critical step in purchasing a home as it can uncover potentially life-threatening problems such as mold or faulty wiring. The problems that are uncovered during the inspection could also lead to financial hardship for the buyer. Therefore, if the agreement is conditional on inspection the buyer can protect themselves against possible financial losses and retain an ability to terminate the agreement of purchase and sale should the seller be unwilling or unable to repair the issues that were discovered during the inspection.
Should the inspection uncover potential problems, the buyer would share the impaction report with the seller and request that the issues noted in the inspection report be remedied. Therefore, both the seller and the buyer go back to the negotiating table. At the end of the day, it is up to the seller and the buyer to agree on what issues, if any, will be covered and repaired by the seller prior to closing.
If the seller is unwilling to repair major issues noted in the inspection report, the buyer may use the inspection report to terminate the agreement and get their deposit back. If the seller does agree to remedy the issues prior to the closing date, it is vital to put in the agreement that should the items listed not be repaired a certain amount of money should be held back from the proceeds to ensure that the seller complies. While inspection condition is highly beneficial for the buyer, the seller may be opening themselves up to unknown financial burdens to repair, possible price abatement, or termination of the agreement of purchase.
Lawyer Review
In some instances, it is possible that the agreement of purchase and sale is conditional upon lawyer review. Both the seller and the buyer would forward the agreement to their respective lawyer who would read over the agreement and make the necessary changes to protect their clients’ interests and suggest any amendments that are necessary. This condition is for the benefit of both seller and buyer. However, this clause cannot be used by either of the parties to terminate the agreement. If there are clauses in the agreement that are not agreeable to both parties, best efforts should be made to amend the agreement until both parties’ consent. Therefore, the buyer and the seller are working together in good faith to finalize the draft of the agreement and complete the transaction.
The real estate market in Ontario is unpredictable and goes through changes. Conditional offers are always a great idea for the buyers. It allows the buyers to confirm that they have a mortgage lined up, that inspection report and/or status certificate is clear, and their agreement was reviewed and approved by their lawyer. In some instances, the sellers could also benefit from a conditional offer, though the sellers would prefer firm offers as the buyer must complete their obligations under the agreement of purchase and sale as soon as their offer is accepted. It is important to remember that both buyers and sellers must operate on a good faith basis when dealing with conditional offers and waiver/fulfillment of the said conditions.
