Most real estate offers are conditional on two main terms:
1) The buyer obtaining the necessary financing to complete the purchase; and
2) The buyer being satisfied with the results of a home inspection report, completed by a professional home inspection company.
However, there are many other important legal rights and obligations that must be understood.
Let us first focus on the financing condition in more detail. What most buyers do not understand is that just because their lender provides the initial approval, there are typically other conditions that still have to be satisfied before they will actually give you the money.
The main “other” condition is that the lender must be satisfied from their own appraiser that the appraised value of the home or condominium is equal to or greater than the amount the buyer has agreed to pay for it.
For example, let’s say an agreement is signed for $300,000 for a home and the buyer is approved for financing of $225,000, which is 75 per cent of the value of the home. If the bank’s own appraiser actually values the same property at only $275,000, then the bank in most cases will not lend you the full $225,000. They may only lend 75 per cent of $275,000, or $206,250, and then expect the buyer to come up with the difference of $18,750. This can occur perhaps just before closing, making it extremely difficult for the buyer to come up with the extra funds in time.
When interviewing potential lenders, buyers must also make sure they inquire as to what the lender’s appraisal practices are and what other conditions have to be satisfied before they receive their funds. Where possible, make sure that all bank conditions, including the appraisal, have been satisfied before waiving the financing condition.
It is also important for buyers to understand that when they make a transaction conditional on financing, they have a legal obligation to act in good faith in trying to satisfy this condition. The buyer cannot simply do nothing and then say to the seller that the deal is off because they could not obtain financing. They must actually apply to a lender in good faith for the financing and then be turned down, in order to legitimately cancel the agreement. If not, the seller can take the position that the buyer has not acted in good faith in trying to satisfy the condition and the seller will then not only refuse to return the deposit, they may also sue the buyer for damages for breaching the contract.
Let’s say an agreement is conditional on the buyer obtaining a mortgage for $200,000. The buyer applies to a bank for the mortgage but is not approved. Can the seller then offer to take back a mortgage for $200,000 and try to force the buyer to waive the condition? The answer is no, unless there was an additional clause added to the agreement that gave the seller the right to provide the financing in the event the buyer was not approved by the lender.
Waiving conditions
Once a buyer is satisfied with the results of a condition, whether it is financing or the home inspection, immediately have the waiver signed and delivered to the seller or the seller’s salesperson. Sellers have successfully terminated agreements when the waivers were delivered late.
In the condition, we write that the waiver must be for “the sole benefit and option of the buyer” because the buyer may want to buy the house even though the condition is not satisfied.
Mark Weisleder is a lawyer, author and speaker to the real estate industry. He practiced law for 25 years in private law firms and as in-house counsel and has educated Realtors since 1986 as an OREA instructor. www.markweisleder.com.
