Firm Offers Are Risky For Sellers
Whenever the supply of homes for sale is significantly lower than the demand we can expect to see heightened competition for properties in the form of multiple offers, many of which exceed the list price and the exclusion or removal of conditions. While educated buyers may understand the risks of not having conditions for financing or inspection, a firm offer can be a risk for the seller as well.
First, let’s look at why sellers like a firm offer. To start, it means that they don’t have to worry about more showings. On top of that it means the seller can focus on or finalize their own purchase and they have the emotional satisfaction of their home being “sold”. But is it really sold?
Let’s examine a typical scenario:
Seller receives a firm offer on their house versus a conditional offer (which would have taken their property of the market for typically 5 business days while the potential buyer arranges their mortgage and/or gets an inspection). Without the firm offer the seller would be risking that the offer could fall through if the buyer did not get their financing or had a satisfactory inspection. This would mean the seller’s property goes back on the market, losing 5 days during which other prospective buyers had moved on to other properties. It’s easy to see why the seller would prefer a firm offer.
Now in this scenario the seller has a firm offer and proceeds to purchase a new home and firms up on their offer. In the meantime the buyer proceeds with arranging their financing. Ideally they are successful and everything runs smoothly, however this is not always the case. The buyer, although pre-approved, cannot secure financing. How could this happen? Well, there are a several factors including but not limited to:
1) the property value is not supported due to the offer price being higher than recent sales in the area (typically in multiple offer situations)
2) the pre-approval was not based on the same numbers as the purchase (i.e. purchase price, property taxes etc.)
3) issues with the property known to the lender or insurer that would have been identified by an inspection and/or review of status certificate (for condos)
4) the insurer not supporting the application, despite the lender willing to approve
5) changes in the buyers financial situation and/or credit between the time of pre-approval and the accepted offer
Of course the buyer continues trying to get financing, but unfortunately they still can’t. About a week before closing they ask for an extension of the closing date. At this point anxiety sets in with the seller and questions start arising… why do they need and extension? What could the issue be? Are they going to close if we give the extension?
Regardless of giving the extension or not, the buyer is not able to arrange financing and the sale doesn’t close. The seller may have some legal recourse, but it does little to help them currently. Their purchase is due to close, without the sale they don’t have the profit for their down payment and without a firm sale they can’t get a bridge loan for the down payment. They are left scrambling to be able to close on their purchase and not end up in breach of their purchase agreement. Frantically the sellers are trying to get their property back on the market to get a sale again to ull everything together while exploring other options like help from family or private financing to save their purchase.
Without a doubt, this is not a position that anyone would want to be in, but this could have been avoided. If the buyer had a condition of financing, they would have been able to determine if there would have been an issue with arranging a mortgage and would have either firmed up or cancelled the offer. Yes the seller would have lost some days on the market but in hindsight it would have been a small price compared to the situation they found themselves in.
Bottom line, a property isn’t sold until the deal closes. Sellers need to understand the just because they have a firm offer, it doesn’t guarantee that their house it sold. As a spin on the old adage… “seller beware”.