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Financing Clauses Are Not Bad

Both parties share in the risk.
Posted: March 01, 2021 by Stephen Oliver

Ok let’s set the record straight.  Offers without a financing condition does not mean that they buyer is paying cash.  I would argue that they rarely are.  Yes there are always exceptions to this, however most home purchases are still being financed in some manner.  In most cases financing comes from traditional mortgages, secured line of credits or private mortgages.  

In a over heated real estate market, such as the one the Niagara is currently in, most offers are being presented to Sellers without a contingency (condition) period.  This begs the question why are buyers willing to take such a massive risk?  It also leads to the next question, why are Sellers willing to share in that risk?  

Let’s look at the situation of a Sellers market. As of today competition is fierce.  Multiple offer situations are the norm and buyers in many cases have to put their best foot forward or “improve” their offers to entice Sellers to accept.  There are really three ways to make an offer as a buyer stand out. Money, terms and conditions. 

In essence as with many things in life, unfortunately, if you throw enough money at something it may cure the problem.  That solution has been a contributory factor in the rising market prices we are seeing now.  At the end of the day, this is a product of supply and demand.  Terms can also be enticing to a seller.  Closing date, deposit amount and chattels etc can all help an offer be more appealing to a seller.  But ultimately, an offer that is condition free (in real estate terms, firm) has become the most appealing.  Submitting an offer that is free of a financing condition or inspection condition not uncommon.   It is also fraught with risk, for both the buyer and seller.  

The risk to the buyer is fairly self evident. If you submit an offer that says you don’t require a financing condition and your funding doesn’t come through you put yourself precarious position. As a buyer you may have to look at alternate financing sources or risk not closing on the property and be in jeopardy of being sued.  This is never a good position to be in.  Ultimately, buyers do it all the time and they themselves are the ones who are taking the risk and hopefully they have mitigated that risk with a solid pre-approval with a reputable lender. 

Unfortunately in those situations the buyer isn’t the only one at risk.  In bidding wars, emotions can overwhelm common sense or sound decision making and put all parties at risk.  Sellers bear as much risk as the Buyers in many sales.  This is especially true if those same sellers are using the funds from their sale to go and buy their next home.  Take the following  scenario.

A seller has 10 offers on the table. Seven of those offers do not have conditions for financing. All of those offers are over list price varying from $5,000 over to $55,000 over.  3 of the offers have financing conditions are are between $15,000 and $45,000 over list.  In many cases, Sellers want to jump to the highest price and not worry about conditions.  Yes the price is enticing, and taking into consideration that it is significantly more may make all the difference in the world on the seller.  However, jumping to the highest price and not following the process may mean problems down the road. Without a financing condition the following may not have happened before offer:  credit checks, appraisal, income verification, mortgage insurance approval, debt servicing verification and a whole host of other items.  In essence the the seller is trusting that the buyers have been done their due diligence before offer presentation.

Now in most cases this is accurate.  The realtor and the client have gone through the pre-approval process and the steps have been taken.  What what happens if they haven't?  That's when problems arise.  

If a seller accepts an offer with no conditions, they are essentially going to be keeping their fingers crossed almost right up to closing that the financing is in place. They will wait for the funds to transferred to their lawyer and the deed to be transferred.  In essence, they are are hoping for a good outcome.  Why not take a few days and follow the process?  Knowing that all things being equal, the likelihood of closing is more certain and the risk has been mitigated.  

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