What is a conditional offer on a house?

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What you Should Know

  • A conditional offer includes contingencies that must be met within a certain timeframe for the transaction to finalize.
  • Their goal is to protect a certain party from unplanned events.
  • A standard contingency is a financing contingency where the transaction only qualifies if the buyer can obtain mortgage financing.
  • You can back out of a conditional offer without penalty if the criteria is not met.
  • In a seller’s market, buyers have less negotiating power and can’t demand many conditions.

What Is a Conditional Offer on a House?

conditional offers

A conditional offer is an agreement between a buyer and seller where the sale of a house is dependent on certain conditions. Both parties negotiate the conditions because some benefit the buyer more than the seller. Agreed upon conditions are included with the offer and deposit. The transaction finalizes if the needs are met within a specified timeframe (usually 3-7 days).

If the conditions are not met, the offer is void, and the seller returns the deposit. There is no penalty for walking away from a conditional offer if the terms aren't met. Conditional offers can make or break a real estate deal, so it's best to learn when to use them to your advantage. Please continue reading to learn about common conditions and when they aren't good to use.

Financing contingency

A financing contingency protects buyers if they can't qualify for a mortgage after making an offer. This is a common contingency because it protects the buyer from breaching the purchase agreement if they can't receive a mortgage.

If the buyer receives mortgage financing, the deal finalizes as typical. However, the purchase contract becomes void if the buyer does not receive funding and the offer terminates. This leaves some risk for the seller because they could lose the sale if the funding doesn't follow through. As such, the seller should keep this in mind when negotiating clauses.

Inspection contingency

conditional offer

This clause protects buyers. They can cancel or withdraw their offer depending on the results of an inspection. It enables buyers to understand the house before buying. A standard inspection includes the examination of a home's interior, exterior, and HVAC systems. However, a buyer can negotiate additional checks, such as a mold inspection or wood damage.

If the inspection yields unsatisfactory results, the buyer can negotiate the price, force the seller to fix the issues before buying the house or even walk away from the sale altogether.

In some Canadian cities where there is a seller's market, homes are selling without an inspection. This nuance is explained in more detail in the seller's market section.

Home sale contingency

This is another favourite contingency amongst buyers that protects them if they cant sell their current home. A home sale contingency allows buyers to walk away from a deal and receive a refund if they can't find a buyer of their current property within a specified timeframe.

However, sellers avoid this contingency whenever possible. This is because there is little guarantee the buyer will be able to sell their home quickly. Today, many sellers will avoid offers with this contingency, so buyers should opt for bridge financing or a HELOC to submit competitive bids.

Appraisal contingency

For Sale

Appraisal contingencies protect the buyer by giving them the option to withdraw from a home purchase if the appraisal of a property is worth less than the agreed-upon purchase price.

If an appraisal comes back at a lower value than expected, the buyer can back out of the agreement and receive a refund of their deposit. However, this is rare because a comparative market analysis (CMA) will accurately estimate a property's value.

How market forces affect conditional offers

A real estate market will either favour the buyers, sellers or remain balanced. Depending on the type of market, certain parties have more leverage and can negotiate favourable conditions.

Seller's market

In this market, sellers have more negotiation leverage than buyers. This is because there is a lot of demand for homes with a low supply. As a result, many buyers are competing to buy a handful of homes. Sellers are in the driver's seat and can cherry-pick the best offers.

Sellers will take advantage of this environment by asking for higher prices or negotiating a firm offer. For example, a seller would avoid offers that include a home sale contingency because they can find another buyer without this clause.

Some Canadian cities housing market have seen extreme seller's markets during the pandemic where the sellers have significant negotiation leverage. As a result, homes were selling even without an inspection.

Buyers market

This is the opposite of a seller's market; there are few buyers and many homes for sale. As a result, sellers are competing to sell their homes, and buyers can negotiate better terms.

This environment has more conditional offers, including financing, home sale, and inspection contingencies. If a seller does not provide favourable conditions, the buyer will bid on another house. There are many options for buyers so they can cherry-pick the best deals.

The bottom line

home contract

A conditional offer is an agreement between a buyer and seller where the sale of the house is dependent on certain conditions. Contingencies are negotiated between parties depending on the market conditions. Their goal is to protect a party from unforeseen circumstances that could arise during or after closing.

This post has given insight into what types of conditional agreements exist in real estate transactions. If you're buying property, it's essential to be aware of these contingencies so you can evaluate how they work best for your situation.

FAQ

Can you back out of a conditional offer?

Yes. A buyer can back out of a conditional offer if the agreed-upon contingencies are not met within a specific timeframe. For example, a buyer with a financing contingency can walk away from a deal if denied a mortgage. However, you can only walk away for reasons pertaining to the agreed-upon contingencies. For example, if you only have a financing contingency, you will be penalized for backing out of a deal due to inspection results.

What happens when you back out of a conditional offer?

If you back out due to an agreed-upon contingency, you will receive your purchase deposit back without penalty. However, you can be sued for damages if you back out for a contingency not included in the offer. Additionally, if you fake a failed contingency, you can still be sued.

What is a firm offer?

A firm offer is a competitive offer that a buyer can make to increase their chances of closing a purchase. The buyer makes a direct offer without any conditions attached. These offers favour the seller the most as the deals are most likely to finalize. Firm offers are typically seen in seller's markets where buyers have less negotiation leverage.

What conditions should I put on a house offer?

The conditions included in your offer depend on the market conditions. If you are buying a property in a seller's market, you will have a hard time closing a deal with many conditions. However, in a buyers market, you have more leverage to negotiate financing, home sale, inspection, appraisal, and any potentially other contingencies that favour you.

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