• Every spring in Canada there is a buying and selling frenzy in the real estate market. Because of the low inventory in the market, we tend to see multiple offer scenario’s playing out.

    A multiple offer scenario occurs when more than one buyer is presenting an Offer to Purchase to a seller at the same time. All the offers are being reviewed at the same time by the sellor for consideration. When markets are considered a “seller’s market” this can often occur when buyers are vying and competing to have their Offer accepted over others.

    There are many cases where this is a valid and sometimes normal strategy. However, on occasion it has been known that these buying frenzies and multiple offer scenarios, can be artificially created by others, which does not benefit the buyer or the seller.

    As a mortgage agent, my role is to ensure I can secure financing that not only meets your needs, but also provides you with the dollar amount you require. When there are multiple offer scenarios many buyers are tempted to either:
    a) Go in “firm” with an Offer with no conditions (financing or inspection are most common) at all in the hope that they win,
    b) Go in at a much higher purchase price than may be necessary – often over list price. This is what I like to call an “emotional price premium” on the property. You may be tempted to pay whatever it takes to get the home and that increased price is the emotional price tag that you agree to pay, but someone else might not.
    My primary role is to ensure your financing is secure, thus there are a number of things to consider when going in with a multiple offer scenario and you are tempted or pressured to do the above:
    i) You as the borrower may be pre–approved BUT this is always subject to the property being “approved” by the lender. Let’s say you go in firm with no financing clause in your offer. You need to be aware that there are risks with this. The lender might not like the property you are purchasing because maybe it is unique, has structural issues, requires major repairs or doesn’t meet the lenders specific guidelines. The lender that previously pre-approved you, may now decline you based on the property. There are always other lenders that may consider offering you a mortgage but you may have to consider increasing your down payment, a higher rate, not being able to select specific features you wanted and even higher fees involved.
    ii) Remember that the lender will provide you financing based on the purchase price or appraised value, whichever is the lessor. So let’s assume your purchase price cannot be supported by the lender, appraiser or default insurer – if this occurs, then you have to come up with the shortfall in value. For example, you are purchasing with a 5% down payment mortgage that you are already pre-approved for. Your offer was accepted in a bidding war for $350,000 BUT the default insurer and their appraiser believe the value is $330,000 – it is possible that you have paid that “emotional price premium” that the lender doesn’t want to loan against. So the lender will therfore provide you with a mortgage based on 95% of the appraised value of $330,000 as it is the lessor so $313,500. You still have to pay $350,000 for the property and so your down payment is now $36,500 instead of $17,500. What happens in this situation? You the buyer will have to come up with the difference out of your own pocket!

    So how do you avoid this from happening? When you are in a market where there are “supposedly” multiple offers and bidding wars, I recommend inserting the following clause into your Offer to Purchase Agreement.

    “This offer is being submitted on the basis that it is part of multiple offers. If the seller receives no other offer by 10 pm, the seller or the seller’s salesperson, will notify the buyer or the buyer’s salesperson and the buyer will have one hour to revise or revoke their offer. If the seller accepts the buyer offer, the seller shall provide, within 24 hours, the name, address and phone number of the salesperson and brokerage company that submitted the competing offer.”

    Note: This clause was written by esteemed real estate lawyer and author, Mark Weisleder. Feel free to consult with your real estate lawyer for further advice on this clause.

    Wishing you all the best in your house hunting – there is the perfect property out there for you – sometimes it is just a matter of time and patience!