When your house is for sale, it's exciting when an offer comes in at the price you want and the closing date you want. You're ecstatic! But wait, your real estate agent tells you that there are conditions on the offer. You take a look at the offer, also known as Agreement of Purchase and Sale, and skim through the conditions on Schedule A, but become quickly overwhelmed with the legal terminology. As legalese as it may seem, conditions can be easy to understand once you know the framework, which can be broken down into 6 questions that you can ask yourself, as described next.
The 6 W's
Much like how kids are taught that storytelling contains the 5 W's: (who, what, when, where, and why). Similarly, in real estate, a condition that is written properly, typically contains 6 W's that ask the following questions.
Who is to do it?
Who is to pay for it?
What is to be done?
When does it have to be done?
What happens when it is not done?
Waiver option included?
Conditions are often added for the benefit of buyers to be able to opt-out of the deal. As sellers, it is important to understand how conditions can be unfavorable before accepting the offer. Some conditions such as financing and home inspection are pretty common and most sellers accept these knowing the risks. But we will also look at a clause about a new survey that might not be so beneficial for sellers to accept.
Financing Condition
Most buyers need to borrow money to purchase a home. So it is advantageous for buyers to include a financing condition to ensure a bank would lend them money before the deal becomes firm. Buyers should be pre-approved and have a deposit ready with their offer to the seller. Beyond that, buyers often include a financing condition in the offer. An example is shown below.
This Offer is conditional upon the Buyer obtaining satisfactory financing, at the Buyer’s own expense. Unless the Buyer gives notice in writing delivered to the Seller personally or in accordance with any other provisions for the delivery of notice in this Agreement of Purchase and Sale or any Schedule thereto not later than 5:00 p.m. on the 15 day of March, 2021, that this condition is fulfilled, this Offer shall be null and void and the deposit shall be returned to the Buyer in full without deduction. This condition is included for the benefit of the Buyer and may be waived at the Buyer’s sole option by notice in writing to the Seller as aforesaid within the time period stated herein.When we dissect the financing condition, we see that all 6 questions are answered as indicated by the colored text.
Who is to do it? Buyer
Who is to pay for it? Buyer’s own expense
What is to be done? Obtaining satisfactory financing
When does it have to be done? March 15, 2021 at 5pm
What happens when it is not done? The deposit shall be returned to the Buyer
Waiver option included? Yes, may be waived at the Buyer’s sole option
These answers give you all the essential information you need to know about the condition. As you can see, the onus is on the buyers to obtain a new mortgage before March 15, 2021, at 5 pm. If a mortgage is approved, then the condition is fulfilled. Great news for both the buyers and sellers, as the deal is one step closer to being firm.
However, if a mortgage is denied, then the buyers can:
back out of the deal and have their deposit returned, or
go ahead with the deal anyway by providing a waiver to disregard this condition, or
do nothing and let time expire and have their deposit returned.
Unfortunately, sellers take a risk by accepting this condition. They can hope for the best that this condition is fulfilled, but ultimately there is nothing they can do to speed up the process before the deadline. The power lies with the buyers. All the sellers can do is wait.
Home Inspection Condition
Oftentimes, buyers want to find out if the house is in good shape. To do this, they hire a home inspector to examine the house's roof, attic, insulation, walls, ceilings, floors, windows, foundation, basement, and structural components. If there are any major defects, buyers can choose to not buy the house. This is a fair condition that sellers would generally accept. An example of a home inspection condition is shown below.
This Offer is conditional upon the inspection of the subject property by a home inspector at the Buyer’s own expense, and the obtaining of a report satisfactory to the Buyer in the Buyer’s sole and absolute discretion. Unless the Buyer gives notice in writing delivered to the Seller personally or in accordance with any other provisions for the delivery of notice in this Agreement of Purchase and Sale or any Schedule thereto not later than 5:00 p.m. on the 15 day of March, 2021, that this condition is fulfilled, this Offer shall be null and void and the deposit shall be returned to the Buyer in full without deduction. The Seller agrees to co-operate in providing access to the property for the purpose of this inspection. This condition is included for the benefit of the Buyer and may be waived at the Buyer’s sole option by notice in writing to the Seller as aforesaid within the time period stated herein.When we dissect the above condition, we see that the color-coded text answers all 6 questions.
Who is to do it? Buyer
Who is to pay for it? Buyer’s own expense
What is to be done? Obtaining satisfactory report
When does it have to be done? March 15, 2021 at 5pm
What happens when it is not done? The Deposit shall be returned to the Buyer
Waiver option included? Yes, may be waived at the Buyer’s sole option
As you can see, this condition is similar to the financing condition discussed earlier, with only two exceptions. First, the "what is to be done" is now referring to obtaining a home inspection report that is satisfactory to the buyers. Second, the sellers agree to provide access to the property during the inspection. If the buyers are unhappy with the home inspection results because the house is in rough shape, they can back out of the deal, waive the condition, negotiate to have the seller carry out repair work, ask to reduce the price or let time run out. For sellers, the risks are the same as previously discussed. Once again, the sellers have to wait until the condition deadline.
New Survey Clause
A new survey clause can be included in an offer like the one shown below.
The Seller agrees to provide, at the Seller’s own expense, not later than 5:00 p.m. on the 15 day of March, 2021, a new survey of said property showing the current location of all structures, buildings, fences, improvements, easements, rights-of-way, and encroachments affecting said property.If you read the clause correctly, you would notice that it doesn't answer all the 6 W's questions.
Who is to do it? Seller
Who is to pay for it? Seller’s own expense
What is to be done? New survey
When does it have to be done? March 15, 2021 at 5pm
What happens when it is not done?
Waiver?
This is because this is not a condition. A condition allows buyers to back out of the deal if a certain criterion isn't met. Based on this wording, this is a requirement. The buyers are stipulating that the sellers pay for a new survey. As you know from one of the earlier blogs, a new survey can cost thousands of dollars. This is not in the best interests of the sellers. However, if you cross out the word "new" and replace it with "existing", then the clause becomes favorable to sellers. An existing survey clause is commonly included and often agreeable by both buyers and sellers. In fact, most sellers already have an existing survey on hand, and it only costs them a few cents to make a photocopy. As you can see, a single word can make a big difference!
To make it even clearer, sellers can indicate that buyers are to pay for a new survey if the existing survey is not sufficient for the buyers' needs. The modifications to the clause would look something like the following as shown in red.
The Seller agrees to provide, at the Seller’s own expense, not later than 5:00 p.m. on the 15 day of March, 2021, an existing survey of said property showing the current location of all structures, buildings, fences, improvements, easements, rights-of-way, and encroachments affecting said property. Buyer acknowledges that, should this survey not be sufficient for his purposes, the Buyer is entirely responsible for the obtaining of, and payment for a new survey.Other Conditions...
There are over hundreds of conditions and clauses that can appear on an Agreement of Purchase and Sale, but once you understand the pattern, and can pick out the answers to the 6W's, you'll feel more comfortable when it comes to counter-signing the offer. Of course, it's always best to check with your real estate agent or real estate lawyer if you have any questions or concerns.
Whether you're buying or selling, we hope you find the information in this blog helpful. We know we will certainly lookout for the 6 W's when it comes time to review offers on our current house soon.