Free Falling: So What’s the Deal with Going Subject Free?

A question that gets asked a lot in an uber-competitive environment like our current one is, “Can I go subject free?”

The answer to that is, “Sure, you can.”

But there’s a caveat - you can as long as you understand the risks associated with doing so and are making an educated and informed decision.

It’s kind of like asking, “Can I jump out of an airplane at 10,000 feet?”  Again, yes you can, but if you do then you’re deciding to take on some level of calculated risk.

People have different levels of risk tolerance, so if you’re not prepared for the uncertainty that lies ahead with an all-in offer then ‘subject-free’ may not be for you.  While it’s no secret that in today’s rapidly-moving real estate market subjects are seen as dirty little contract provisions that no one wants to deal with, it’s still important that your decision reflects your personal comfort with risk, because in subject-free offers there are no guarantees.  In this way, it’s helpful to think of subjects as your parachute.  Typical subjects (or conditions) are things like financing, inspection, strata/condo document review, and they are put in place to protect you as the buyer should you ultimately determine that it’s not the best investment for you.

Yes, it’s true that with my past experience in the lending industry I can probably give you my professional opinion of the chances of an approval coming back…BUT….

Anything can happen right?

For example, what if that house you fall in love with turns out to be a former grow op, or the appraisal comes in below the purchase price, or you find out through the strata minutes that there’s a huge assessment coming on the condo building that the lenders won’t like?  Or what if an unexpected and sudden life event happens right in the middle of the offer process (job loss, family tragedy)?  What if you need to sell your current house to buy the next one, but the offer you accepted falls through and you can’t sell it in time to close on the purchase?  This could end up being a tricky (and expensive) situation if you don’t have the income to qualify for both properties (and you could end up looking at last resort lenders with high fees and rates potentially in the double digits).

Remember that ‘subject-free’ means that you’ve committed to buy that property with absolutely no turning back.   Basically, you’re free falling without a parachute, and trusting that there will be a safe landing at the bottom.

That’s the thing about real estate (especially in BC) – even if you think you’ve seen it all, chances are that you haven’t.  Despite our best intentions as lenders and brokers, all kinds of weird and wacky things can happen.  For example, what if you offer ‘subject-free’ and after it’s accepted the sellers or tenants block access to the property and won’t let the appraiser get in?  A small thing like this alone could jeopardize your chances for financing with certain lenders.                                                                                                         

 But what about that Pre Approval I got?

Absolutely, a Pre Approval is a crucial step in the home buying process, however it’s important to pay attention to the ‘Pre’ part of the equation and remember that:

A PRE APPROVAL REVIEWS THE BORROWER’S SITUATION AT A SINGLE POINT IN TIME (i.e., income, down payment, credit history) AND PRE-QUALIFIES THEM FOR A BORROWING AMOUNT

PRE APPROVALS DO NOT REVIEW ANY DETAILS OF THE PROPERTY  

Properties themselves cannot be Pre Approved and lenders only fully underwrite what are called LIVE DEALS, so FIRM FINANCING can only happen when the above two things come together (the borrowers Pre Approval and an accepted offer on a specific piece of real estate).

That’s why it’s important to remember that not all real estate is created equal and even if you as the borrower have been vetted there are still challenges that you can run into with the property.  For example: age-restricted properties, condo/hotel properties, co-ops, self-managed strata properties, properties with zoning issues, etc.

I’m not saying that you can’t get financing for these types of properties, but the pool of lenders willing to give you money becomes more limited, so if you make a subject-free offer on an atypical/non-conforming property type you could find yourself in a free fall and hurdling toward the ground more quickly that you’d intended.

There are ways to do subject free more safely (though you need to keep in mind that the steps below do NOT eliminate all risk):

1) Work with an experienced realtor (this is the #1 most important thing IMO)

2) Have a Pre Approval in place (as an extra step you can give your broker the MLS listing for the property of interest so that they can run the actual numbers with strata fees, taxes, etc.)   

3) Consider having an inspection done in advance of an offer

4) Have your Realtor thoroughly review the most recent comparable sales in the neighbourhood so you can be confident that the appraisal will come in at value (because lenders finance the lowest value, so if the appraisal comes in below your purchase price then you have to make up the difference in cash)

5) Get Independent Legal Advice and/or consult with a lawyer in advance of making offer

6) Be prepared for (and comfortable with) all worst-case scenario options (prepping a parent/family member to be a back-up co-signer, potentially increasing the down payment, or being prepared to go with an Alternate lender at higher rates and fees)

7) Steer clear of subject free if you have less than 20% down.  Why?  Because Canadian mortgage law requires the mortgage to be insured by one of 3 Insurers and if all 3 say no then you’re out of financing options.

So what happens if you go subject free then can’t make the deal work?  Then goodbye deposit and hello potential lawsuit.

I know it’s tempting to press your Broker for a decision before making a subject-free offer – it’s human nature to want 100% assurance that everything will be fine.  But it wouldn’t be responsible or professional to give clients assurances without also highlighting the risks.  As Brokers we work for you and have a duty to ensure that you understand exactly what kind of airspace you’re jumping into.

Questions?  Let’s Talk.