The Case Against Subject-Free Offers



By Dustan Woodhouse, Special to CMT


Regulators have made several changes to the mortgage market each year since the 2008 financial crisis. The most recent changes are the most disruptive—to the industry, to clients who seek competitive low rates and to mortgage insurance premiums.

Ironically, the moves have resulted in increased rates and insurance premiums for better-qualified applicants. Yes, you read that correctly, you now pay higher rates and/or higher premiums for being a higher-calibre less-risky borrower. But that’s a separate story for a different day.

While many of Ottawa’s changes have strengthened the overall foundation of the financial system (should any shocks to the system arise), the litany of rules appear to have done little to rein in the price increases in Greater Toronto and Greater Vancouver.

This is by design, they say. The federal government is less concerned about controlling prices (a good thing) in a few specific markets as they are about ensuring the overall stability of the national economy.

Housing Warfare 

We are now entering the third consecutive spring market with subject-free offers and bidding wars. It’s already taking place in the two hottest markets, and even in previously docile markets like Ottawa. It’s also happening in smaller communities as far as 100km away from Toronto and 30km from Vancouver.

Clearly something needs to change to address these valuation spikes.

And so the question of the day, or perhaps the question of the year, is: Why do we continue to allow subject-free offers?

Self-Fuelling Phenomenon

Allowing buyers to write condition-free offers on an aging housing stock is risky on its own. But when people start using this as a tool to compete for homes, it allows them to buy into a pressurized situation and overpay “in the heat of the moment.” That inflated price is then used to justify similar overnight jumps (sometimes 10% or more) in the surrounding area.

Last spring I personally watched units in one particular building increase 20% in the span of 30 days. People felt their offers simply had to match the previous high-water mark set by people who often over-bid.

And then came the multiple sales, all triggered by one pressured buyer that bid far too high. These become “comparables” and, in the case of an appraisal, wind up supporting each other.

Legislating a mandatory cooling-off period can be done

In new construction sales, a mandatory rescission period of seven days exists in most provinces.

In other words, the one property—a new build—that is least likely to have significant issues is the one property you cannot write an offer on without having sufficient time for due diligence (arranging an appraisal, inspection and satisfactory financing).

Regulators have done a wonderful job protecting consumers from unwittingly walking into a new project sales centre and entering into a binding contract without an opportunity for outside consultation.

On the flip side, one could argue that regulators have done an abysmal job of protecting consumers from entering into a binding contract on a 100-year-old home laden with asbestos/vermiculite, plumbed with lead or poly B piping and wired with knob-and-tube or aluminum. These are all potentially show-stopping red flags for mortgage financing.

We often trust and counsel consumers to make smart choices without the pressure of circumstance or cajoling salespeople. Yet, seemingly just as often, we implement regulations to save people from themselves, suggesting they don’t know any better. So which is it?

The Double Standard

Apparently new property buyers are emotional train-wrecks that need protection from themselves via a rescission period. But buyers of used properties are calm, cool and collected market experts with finance degrees and construction experience?

I think most buyers know which category they fall into, especially the first time around. So why is there not equal protection for both groups of buyers?

Regulators need greater policy alignment here. The implementation of a mandatory rescission period for all real estate transactions, new or used, should be welcomed by all parties in the process.

Even sellers who benefit from high-pressure bidding wars and unconditional offers should be open to it. They themselves almost instantly step into the losing side of the equation after they sell, when they try to purchase a property themselves.

The implementation of a mandatory rescission period for all real estate transactions would help defuse a meaningful amount of the frenzy, frenzy that is creating markets that economists increasingly deem unsustainable.

 

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Comments

  1. Comment avatar

    Bill    

    Sounds like a great first step to calming some of the frenzy – and, as a Mortgage Broker, I would love to remove some of the stark terror of trying to purchase a property in this already crazy marketplace.

     
  2. Comment avatar

    Jessi Johnson    

    Outstanding article, I would love to see this implemented.

     
  3. Comment avatar

    Whistler    

    I disagree.

    I think its important to point out the differences between the two types of transactions you are talking about: New build contracts concern the contractual promise of a home, not an existing physical home where due-diligence can be performed prior to an offer – accordingly, caveat emptor is significantly different for each. Purchasers of new builds are often under-represented (if not un-represented) and dealing with a professional sales rep on the other side; many walk onto a sales centre or do research without an agent. Additionally, a standard new build PA will often run over 60 pages, is prepared exclusively by the selling party, and absolutely warrants ILA.

    Contrast this with resale homes, where a cool-off period would be a disaster for sellers if a skittish or remorseful buyer were to pull out. The higher ‘days on market’ and the disclosure requirement around prior deal collapse would both significantly impair perceived value. Sellers would easily be forced into accepting price abatements or risk having to re-market their property. And many of the prior bidding parties would likely be gone/unreachable after 10 days.

    The buy-side is unquestionably driving prices in many Canadian markets today, but this won’t always be the case. Regulatory tools need to look well beyond the current asymmetries and should make sense in a normal ‘balanced market’.

     
    1. Dustan Woodhouse    

      To your points, buyers are often just as under-represented here in BC where dual-agency agreements remain an option. And in a dual-agency agreement the fiduciary duty of the Realtor is to the seller. For the Buyers entering into a dual-agency contract they get little more than functionary representation.

      It is not that we are looking for a ‘cool-off’ period, we are looking for a due-diligence period. As such the same rules would apply as standard in a conditional offer which few members of the public understand. i.e. a condition in an offer is not a catch-all escape clause. feeling ‘skittish’ or ‘remorseful’ is only an out if you wrote that specific condition in.

      If your conditions were inspection and financing (with specifics of financing detailed) and the inspection is clean and the financing approved as requested then the buyer cannot simply walk away. Should they walk away the seller can sue for completion – in the absence of buyers. Which for the forseeable future in GTA and GVA there will be little absence of.

      The current system has fundamental flaws that create risk for buyers, Realtors, Brokers, and bankers and even the seller – happy as they are on the day of the sale – in most cases finds the tables turned on them the following day when they become a buyer.

       
      Comment avatar
  4. Comment avatar

    Jeff Gingerich    

    I disagree respectfully. I can only speak for Ontario and more specifically Kitchener Waterloo. Area home builders typically employ hourly salespeople not bound by the Realtor Code of Ethics. This allows them to say whatever they want and a cooling off period allows the buyer to determine the veracity of the claims made by the host/hostess. With a resale home, the buyer typically hires a Realtor to represent and counsel them and with that comes a fiduciary duty.

     
    1. Dustan Woodhouse    

      To be fair, in the case of a dual-agency (one Realtor for both buyer and seller) transaction (not uncommon in B.C.) the listing agent has a fiduciary relationship only with the seller, and a functionary one with the buyer. Leaving the buyer less than perfectly represented.

      Further in the heat of multiple offers there is often no time for inspections, appraisals, or additional due diligence.

      When spending upwards of 1M$ on a home as old as 100 yrs, one ought to be given reasonable time to perform said inspections and to confirm they did not overpay ‘in the heat of the moment’ by as much as 10% (or more) as we have seen happen in BC and ON markets.

       
      Comment avatar
  5. Comment avatar

    NIck Mitskopoulos    

    Dunstan… yes I agree in this crazy market this is something that overall would help bring some sanity back and give all parties some time to complete proper due diligence.

     
  6. Comment avatar

    Ron Butler    

    Cooling off period for resale of homes, interesting idea but Dead on Arrival. Every real estate agent from coast to coast and all the power of their Associations will fight this tooth and nail.

     
    1. Dustan Woodhouse    

      You would be surprised by the Realtor support for it in the GVA market.

      After three solid year of bidding wars, crazy dual-agency dealings, and pressure to write offers that complete in as few as 5 business days (you read that right – complete – not conditions removal) – I have had more than a dozen Realtors express support for this very thing since this post.

      There is risk for Realtors in condition free offers, and most that I have spoke with would prefer to avoid that risk.

      No negative Realtor feedback yet.

       
      Comment avatar
      1. Comment avatar

        Ron Butler    

        Dustan, we shall see, I do I know that I would take a bet on my position any day. Money in trust 1 year time frame. Let me know amounts..

         
  7. Comment avatar

    Kd    

    A variation on the theme might be helpful.

    Say a three day cooling off period combined with a non-refundable $5,000 deposit to compensate the Seller for the risk of the Buyer changing his mind. A second more meaningful deposit could be due 72 hours after the offer was signed. Under this approach nothing could stop the Seller from taking a backup offer, especially if the cooling off periods ran concurrently. Thus the Seller’s risk would be manageable.

    The bigger issue though is the increasing absence of conditions for condo status certificates, home inspection and finance. While an inspection and status certificate could be obtained up front by the listing realtor (or better yet be insured over), an unequivocal financing commitment is a harder nut to crack.

    It’s really too bad both the property and buyer can’t be independently approved up front with a rock solid guarantee. I guess we’ll need wait a few years for Quicken to show us the way.

     

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