By Jennifer Watts

A question that gets asked a lot in an uber-competitive real estate market—like the one we currently find ourselves in—is, “Can I go subject-free?”

The answer to that is, sure!

But there’s one caveat. You need to be aware of and understand the risks associated with doing so, and be sure you are making an informed decision.

It’s kind of like asking, “Can I jump out of an airplane at 10,000 feet?” Again, yes you can, but doing so involves taking on some level of calculated risk.

People have different levels of risk tolerance, so if you’re not prepared for the uncertainty that lies ahead with an ‘all-in’ offer, then subject-free may not be for you.

What is a subject-free offer?

Let’s first review what we mean by a subject-free offer. Subjects are conditions included in a purchase offer that must be satisfied before the buyer will move forward with the deal.

For example, a buyer who requires financing to make their purchase would insert a subject in their offer stating they will not purchase the property unless they can secure financing by a specific date.

On the other hand, subject-free offers are those with no conditions to be met for the deal to close. This is usually done in the hopes of making the offer more appealing to the seller, particularly in highly competitive markets.   

It’s no secret that in today’s rapidly moving real estate market, subjects are seen as dirty little contract provisions that no one wants to deal with. But it’s still important that your decision reflects your personal risk tolerance. Remember, with subject-free offers there are no guarantees.

Think of subjects as being your parachute

In this way, you can think of subjects as your parachute. Typical subjects (or conditions) include things like financing, inspection, strata/condo document review, and they are put in place to protect you, the buyer, should you ultimately determine that it’s not the best investment for you.

In some cases, professionals with extensive experience in the lending industry can give you a clear idea of the likelihood of an approval coming back and help you mitigate your risks.

But nothing is 100%. Things can happen.

For example, what if that house you fall in love with turns out to be a former grow op, or the appraisal comes in below the purchase price, or you find out through the strata minutes that there’s a huge assessment coming on the condo building that the lenders won’t like? Or, what if an unexpected and sudden life event happens right in the middle of the offer process (job loss, family tragedy)?

What if you need to sell your current house to buy the next one, but the offer you accepted falls through and you can’t sell it in time to close on the purchase? This could end up being a tricky (and expensive) situation if you don’t have the income to qualify for both properties, and it could force you to start looking at lenders with higher appetite for risk and possibly with high fees and rates that are potentially in the double digits.

Remember that subject-free means you’ve committed to buy that property no matter what.

Despite our best intentions as lenders and brokers, all kinds of weird and wacky things can happen. For example, what if your subject-free offer is accepted and afterwards the sellers or tenants block access to the property and won’t let the appraiser get in? A small thing like this alone could jeopardize your chances for financing with certain lenders.

How to minimize your risk with a subject-free offer

There are ways to do subject-free more safely, but even following the steps below won’t eliminate all of the risk.  

1. Work with an experienced Realtor and mortgage broker who are working in tandem (This is the most important piece of advice, in my opinion.)
2. Have a pre-approval in place. As an extra step, your Realtor can give your broker the MLS listing and all the documents for the property in question so they can run the actual numbers with strata fees, taxes, etc. and look for any red flags.
3. Consider having an inspection done in advance of an offer.
4. Have your Realtor thoroughly review the most recent comparable sales in the neighbourhood so you can be confident that the appraisal will come in at value or, better yet, have your mortgage broker order an appraisal in advance. Lenders generally finance based on the lowest valuation, so if the appraisal comes in below your purchase price, then you must make up the difference in cash.
5. Get independent legal advice and/or consult with a lawyer in advance of making offer.
6. Be prepared for (and comfortable with) all worst-case scenarios. This can include prepping a parent/family member to be a back-up co-signer, potentially increasing the down payment, or being prepared to go with an alternate lender at higher rates and fees.
7. Have your insurance broker review the MLS on the property and confirm you will be able to get house, fire and possibly earthquake insurance on your property, as part of the condition of your mortgage closing will be to have fire insurance in place, and if you can’t get insurance, they won’t provide you with a mortgage.
8. Steer clear of subject-free if you have less than 20% down. Why? Because Canadian mortgage law requires the mortgage to be insured by one of three mortgage default insurers, and if all three say no, then you’re out of financing options. 

So, what happens if you go subject-free and then can’t make the deal work? Unfortunately, it may mean saying goodbye to your deposit and hello to a potential lawsuit if the seller can’t sell the property for as much as you were willing to buy it for.

I know it’s tempting to press your broker for a decision before making a subject-free offer—it’s human nature to want 100% assurance that everything will be fine. But it wouldn’t be responsible or professional to give clients assurances without also highlighting the risks.

As brokers, we work for you and have a duty to ensure that you understand exactly what kind of airspace you’re jumping into. 

That said, we know subject-free offers are very common in the current market environment, and as mortgage brokers, we are most equipped to provide you with the best risk-mitigating strategy as you navigate this market.