Your home hits the market and bam! You receive multiple offers – how excellent is that? And now you have to decide which offer to work with, or to accept. A quick glance reveals that the prices are all very close, the closing dates are all acceptable, and there is little to obviously set one of the offers apart from the crowd.
Then your agent points out that one of the offers has no financing condition, whereas all of the other offers have both financing and inspection conditions – the normal case when you don’t allow time upon listing the property for interested parties to potentially inspect prior to bringing an offer.

Your agent points out the strength of the one offer – and she calls it a “cash offer”. You have a cash offer for your house – no financing required; awesome! Or is it?

Tighter Mortgage Rules

In recent years, mortgage lending rules have become much tighter. New measures are being added all the time, making it more difficult for buyers to get approved for a mortgage, even when they are sure they can afford it. A lot of the new rules introduced over the past couple of years focused on high ratio mortgages – applying only to people who buy a home with less than 20% of the purchase price as a down payment.

But there are changes now that target people with 20% or more to put down. The latest rule changes were announced by the Office of the Superintendent of Financial Institutions (OSFI). This article from CBC provides a good summary.

The trend in lending rules, getting tighter all the time, is reducing the number of people who qualify for a mortgage. For people who do still qualify, it is reducing the amount of financing they can obtain. One of the government’s objectives is to lower home prices because of the hysteria over rapidly escalating prices in Vancouver and Toronto.

How Property Financing Work

The fact is that the lion’s share of home buyers in Canada are conservative in setting the maximum price they will shop and pay for a house. Most people have a solid sense that they do not want to get into trouble paying their mortgage, property taxes and utilities. Sure, there are some who are less careful, and if they manage to get past the prudent advice of their bank, parents, and Realtor, and still purchase over their heads they can end up in trouble. But most people who end up in trouble do so because of an unexpected change in circumstances, not because they lined things up incorrectly from the start.

Most people take a careful approach. This includes consulting with their bank or mortgage broker to get pre-qualified, or pre-approved before making an offer. In the “good old days” if a buyer was fully pre-approved, and they purchased below the maximum amount of their pre-approval, they had reason to feel assured of obtaining financing for the home they ultimately decided to purchase. There were always exceptions, or circumstances that gave reason to be cautious. My earliest memory of this was when my family was buying a home when I was a teenager, and we were told by the bank that CMHC would not approve the mortgage of a property that had “insul-brick” on the exterior. (Never heard of insul-brick? You must be a lot younger than I am. Here is a forum on the topic.)

As a side note, I found that fascinating and I think it was one of the early seeds planted in my mind that eventually germinated in a real estate career. Sounds funny I guess, but I just liked the idea that there were little unexpected complexities that could stop a transaction from occurring. Wouldn’t it be interesting to learn as much as possible about all of these property, insurance, financing, and technical facts?

Even in the good old days, a confident, highly approved buyer might find that their financing did not get approved once they submitted it to the bank with an actual property attached to it. That’s how the financing process works:

1. buyer gets pre-approved
2. buyer finds a specific property within his budget
3. buyer makes an offer, conditional on obtaining a firm financing commitment,
4. buyer and property get approved
5. buyer removes condition

Why The ‘Cash Offer’ Isn’t

Once again the devil is in the details. When you receive that “cash offer”, before you decide to accept it because your agent tells you it is “financially stronger”, “there is only one condition, the inspection”, or “these folks have their financing already; one less thing to worry about causing the deal to fall apart”, you need to make sure the cash offer buyer has worked through step #4 above.

The fact is that extremely few buyers will have completed step 4 prior to making an offer. Banks will not submit a deal for firm approval until there is a deal on the table. You cannot go to the bank and obtain firm approval to buy a property until they know what property you are buying, and you have an accepted agreement of purchase and sale in hand.

This means that the offer you received without a financing condition is exactly the same from a financial perspective as any other offer you received that does have a financing condition, as long as that other buyer was also fully pre-approved by a lender. As mentioned earlier, very few people attempt to make an offer without first getting pre-approved.

Both of these buyers, pre-approved by their bank, will need to submit the accepted offer to their bank for firm approval.

The key question is this: which buyer represents more risk to you as the seller? The one with no financing condition, or the one with a financing condition?

Both of these buyers could be declined for any of the following reasons (or other reasons):

• issues with the property that the bank does not like (could even be the neighbourhood – perhaps there was a recent chemical leak nearby that they heard about that you didn’t)
• an appraisal of the property that the bank does not like (in multiple offers, if the price escalates enough, perhaps the bank-ordered appraisal that is performed on the majority of purchases today comes in too low for the bank to accept the risk)
• bank or CMHC or OSFI or other lending rules changed subsequent to the buyer getting pre-approved, and now he doesn’t qualify for this price-point anymore
• items on the buyer’s credit history on another credit reporting service are discovered; lenders sometimes only check one bureau on pre-approval and then check others on firm approval; or the buyer was silly and took some credit-impacting action subsequent to his pre-approval

The key question is this: which buyer represents more risk to you as the seller? The one with no financing condition, or the one with a financing condition?

For many years it was considered a smart way to win in a multiple-offer scenario as a buyer: don’t have a financing condition. Omitting an inspection condition was also quite popular, but has become increasingly less advisable as the impact of major inspection issues is more widely understood (and feared). It used to be that post-offer diligence by the bank was minimal – CMHC approval could never be guaranteed but for buyers with at least 20% down, if you were pre-approved, you rarely got turned down for a firm financing commitment.

That is not the case any more. In my first 10 years in real estate, I never saw a properly pre-approved buyer get turned down during financing diligence related to an offer; but over the past 3 years I’ve seen it numerous times. Fortunately, it hasn’t happened to any of my clients, because we always advise including a financing condition; but my clients have on several occasions been able to buy a home they originally lost in competition when the highest bidder had to ungraciously back out of the deal for financing reasons even though they had no financing clause. In several nightmare cases (for the seller) that I am aware of, the buyer didn’t return to speak to their bank until a week or two before closing. The seller, thinking their home was sold, was left holding the bag 60 or 90 days later when the “cash offer” buyer could not close because they could not get financing.

Make sure your agent is living in the present in advising you regarding the strength of offers you receive.

There are two ways to deal with an offer on your property that does not have a financing condition, protect yourself, and turn it into a great, winning offer… or discover that it really does have an unwritten financing condition and is essentially a fraud. We’ll absolutely discuss those two ways with you when the situation arises.