With the real estate market moving at an unprecedented pace for so long, unconditional offers have become the norm. Historically, offers typically had at least one to three conditions that had to be met before the sale could go through. However, buyers have needed every advantage they could get in the current competitive market. Dropping all contingencies is one way to make their bids more attractive to a seller. How does this help?
While every homeowner wants to earn as much as possible from their sale, the highest amount isn’t always everything. The chance to skip a time-consuming and potentially deal-breaking home inspection can be appealing, even if it is a few thousand dollars less. Of course, all things being equal, a seller will accept the highest amount with the fewest contingencies possible.
The Spring market is underway and houses are still commanding unprecedented high prices. Is the time right for you to sell? Here are some articles to guide you:
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However, there has been a recent change in the market, which seems to be slightly less competitive than it was just a few months ago.
What is Driving the Change?
The real estate market is complex, and there are natural fluctuations throughout the year. We won’t know if what is happening is the beginning of a long-term trend or just a brief hiccup. However, we can make our best guess based on what has happened in the past and the current information we have now.
Rising Inflation Costs
Housing prices have soared to unprecedented highs all over the country. In addition, gas prices have also increased significantly, which drives up the cost of many other goods and services. As the cost of living increases, some buyers have withdrawn from the market due to a lack of funds. Others are watching with a hopeful eye to see if things will shift in their favour.
The Recent Interest Rate Increase
Earlier in April, the Bank of Canada raised the target interest rate by 50 points, the most significant overnight change in decades. This follows the 25-point increase that took place earlier in March. In addition, they have announced that another hike is likely to come in June. As a result, many homeowners are selling now, while buyers are motivated to take advantage of the still relatively low interest rates.
The Busy Spring Market
The real estate market never slowed down during the pandemic, but Spring is traditionally the busiest time of year. Things are slowly getting back to normal, and the past month has seen slightly more available listings. It will be interesting to see if this slight cooling of the frantic seller’s market continues after the busy season is over.
Potential Anti-Speculation Legislation
Ontario has already imposed a foreign buyer tax on non-residents, raising it from 15% to 20%. And both the provincial and federal governments are considering additional legislation to discourage speculation, foreign investors and house flipping. If this happens, the market might become less competitive for buyers.
Real estate is still one of the safest investments, even in a changing market. Here’s How To Grow Your Portfolio in 2022.
The Surprising Return of Conditional Offers
Some sellers have been surprised to receive conditional offers for their homes. However, these have always been the norm. It’s only in the last few years that the situation has become very unbalanced. The market hasn’t changed significantly and still strongly favours sellers. Even though conditions seem to be making a comeback, many listings still receive multiple offers that are well over the asking price.
The Most Common Conditions
What kind of conditions can sellers expect if the market continues to rebalance? There are many contingencies, but we see these three most frequently:
- Conditional on sale of the buyer’s current home. A buyer rarely has enough cash available to pay for a new home outright. Most people rely on the funds from selling their existing property before committing to purchasing another. As the market got more competitive, many potential buyers took the calculated risk and placed offers without this condition. It paid off most of the time because every listing was almost guaranteed to sell.
- Conditional upon home inspection. Buying a house with a host of expensive problems is everyone’s worst nightmare. After coming up with enough money to purchase the home, many people don’t have a lot left over for extensive renovations. This condition protects the buyer from committing to a purchase that is unsafe or unsuitable.
- Conditional on finance approval. Before a buyer commits, they want to ensure that they will get enough financing to cover the purchase. There are few things worse than signing on the dotted line only to find out the bank won’t lend you enough to buy the home. In the current market, most buyers get a pre-approval before submitting offers. As a result, many buyers drop the financing condition to make their offer as compelling as possible.
How To Respond To Conditional Offers
You can respond to any kind of offer in three ways:
- You can meet the condition and accept the offer.
- You can make a counteroffer, either for more money or to drop the condition (or both).
- You can reject the offer and move on to the next one.
Some sellers may feel discouraged when conditional offers come in, but there is no cause for alarm. It is better to receive a conditional offer that proceeds than an unconditional offer that fails because a buyer got in over their head. How do you know if you should accept or reject an offer? Real estate can get complicated, especially in competitive markets.
An experienced Realtor® can guide you and help you make the best decision for your situation.
Do you have questions about buying or selling in the current market? You can book a free call with our team right here.
