THE CONDITIONAL OFFER
With the recent shift in the real estate market, we’ve seen a return to more balanced conditions, which means sellers no longer have the upper hand in negotiations.
This has come as a relief to buyers, who have been at the mercy of sellers for the past two to three years.
Up until about March or April of this year, it was common for buyers to find themselves competing against several other would-be homeowners for a property. For an offer to be considered for acceptance, it usually had to be well above the asking price, accompanied by a solid pre-approval letter, and contingent on as few conditions as possible. It wasn’t unusual for buyers to waive their building inspection condition, or to purchase a home without legal warranty, just to stand a chance of getting their offer accepted.
My, how quickly things can change!
Over the past six months, we have experienced a remarkable shift from a seller’s market to a buyer’s market, something we haven’t seen in well over three years. With this shift, a particular type of offer has started to make a comeback. Behold the “conditional offer.” This is when an offer to purchase is conditional upon the sale of the buyer’s existing home, something that was practically unheard of in recent history. In a seller’s market, many buyers had to sell their homes first before shopping for a new home. Today, however, after a home has been listed for several months with no offers in sight, many sellers will consider any offer they can get, conditional or not.
The challenge is that during a slow market, the chances of the buyer selling their existing home quickly are also much slimmer, so the probability of these offers resulting in a sale are lower.
Sometimes however, they work. And when they do, the outcome can be exciting for all parties involved.
What many people fail to understand is the sheer complexity of these offers, the variables that can come into play, and the many possible scenarios that can unfold in the process. This is why having an experienced broker to guide you is essential.
One such variable is something known as the “72-hour clause,” which we’ll explore in more detail further on.
So let’s describe a hypothetical situation that involves a conditional offer, and how it could potentially play out:
A buyer makes a conditional offer, and the seller accepts it, giving that buyer 60 days to sell their home. We’ll refer to this buyer as BUYER 1, and the accepted offer as OFFER 1.
When accepting OFFER 1, the seller invokes the 72-hour clause, which stipulates that the seller, after accepting a conditional offer, can continue to market their property for sale and may accept other offers. As soon as OFFER 1 is accepted, BUYER 1 must proceed immediately to fulfil all conditions attached to their offer. These would normally include doing a building inspection, providing a mortgage approval letter conditional on the sale of their home, and then of course, selling their home. The first two conditions would normally take about two weeks.
After 12 days, BUYER 1 has had the home inspected and is satisfied with the results and therefore waives this condition. They have also obtained a mortgage approval letter conditional on the sale of their home.
A few days later, another buyer visits the property and wants to make an offer. We’ll refer to them as BUYER 2. They are informed that the seller has already accepted another offer, but that it is conditional on the sale of the buyer’s home with a 72-hour clause. They agree to make an offer in second position, conditional on OFFER 1 becoming null and void. We’ll refer to this as OFFER 2.
OFFER 2 is accepted and BUYER 2 must now proceed with the fulfillment of their conditions. Their only conditions are a building inspection and mortgage approval. According to the conditions of the 72-hour clause, BUYER 1 does not receive notice that a second offer has been accepted until all the conditions of OFFER 2 have been fulfilled. BUYER 2 has 14 days to fulfil their conditions.
Because BUYER 2 is aware that they are competing against another offer, they have a slight advantage, and therefore take every opportunity to maximize their chances of success. They book their building inspection quickly and are sure to submit all of their documents to their lender as fast as possible, putting pressure on their mortgage specialist to rush the approval. BUYER 2 is also satisfied with their inspection and waives that condition after only six days. On Day 9, they receive their mortgage approval letter from the bank and submit it to the seller, fulfilling all their conditions. Now the fun begins!
The 72-hour clause comes into effect as soon as BUYER 2 has fulfilled all their conditions. At this point, BUYER 1 receives a written notice that another offer has been accepted, free of all conditions, and BUYER 1 now has 72 hours to either:
-Waive the condition of the sale of their home by demonstrating that they have the necessary funds to cover the purchase price (firm mortgage approval letter with no conditions);
-Declare their offer null and void.
BUYER 1 may have always had the financial capacity to purchase this new home without having to sell their existing home but decided to make a conditional offer in order to reduce the risk of perhaps having to carry the financial burden of owning two homes simultaneously. In this case, when BUYER 1 is issued the 72-hour clause, it is their choice if they want to waive the condition and assume the additional risk, if they haven’t yet sold their home.
In some cases, when the 72-hour notice is given, BUYER 1 might already have an accepted offer on their existing home, but if the prospective buyer has not yet fulfilled their conditions, the sale can't be finalized and the condition of the sale of their house can’t be waived unless BUYER 1 has the financial capacity, as mentioned above.
If BUYER 1 were not careful, and they accepted an offer on their existing home without including a condition protecting them from having a firm sale offer on their house while potentially losing the one they have a conditional offer on… they could very well find themselves homeless. This is why having an experienced broker to guide you is essential.
If BUYER 1 fails to demonstrate they have the necessary funds to cover the purchase within the 72-hour period, then OFFER 1 is declared null and void, and OFFER 2 becomes immediately firm and binding. However, when the planets align, as we saw recently in a transaction we brokered in Kirkland, BUYER 1 managed to firm up their sale in the nick of time, and they were able to waive their condition and provide their final proof of financing just hours before the deadline expired!
Any way you slice it, a conditional offer with a 72-hour clause can be an extremely complex process with multiple moving parts, and a veritable roller-coaster ride for all parties. Best to be sure to have an experienced broker in your corner to help you navigate one of these scenarios!
If you or anyone you know is looking to buy or sell a home or could use some advice or real estate guidance, please don’t hesitate to reach out to Team Broady at 514-613-2988 or at email@example.com