Beware the Real Estate Boom.
Bidding wars are again getting to be the rule rather than the exception in Toronto and Vancouver. Recent articles in the Globe & Mail (1, 2) describe multiple offers resulting in properties going for more than $100,000 over list!! This blog post cover two major, serious issues to watch out for when dealing with a booming real estate market.
- Conditional offers subject to financing are producing financing appraisals that do not support the purchase price.
- The time for conducting diligence, removing diligence conditions, and time to close the deal are all being compressed.
Today, let’s talk about number one: financing appraisals that do not support the purchase price. In a hot market, emotional frenzy causes overbidding. Here’s a classic comment, “OMG, if I don’t buy now I’ll never be able to afford it.”
Completely wrong, of course, but very common in a boom market. Along with overbidding for property, buyers are pressured to write unconditional offers. That’s right, excited buyers write offers that are not subject to financing. Then, when the buyer goes go to their bank, the bank orders an appraisal. The current lending climate is making appraisers very conservative.
If the buyer bid $350,000 with 20% down, the cash portion is $70,000. If the bank appraisal says the property is worth $320,000 then the bank will only finance 80% of $320,000, which means a mortgage of $256,000. That makes the cash in not $70,000 but $94,000. The buyer needs to come up with an extra $24,000 or they cannot purchase the property. That’s fine if they have the extra money, but many folks don’t.
For a great discussion of this topic, see Garry Marr’s Financial Post article that I found in the business section of the Vancouver Sun. There is one thing Garry doesn’t talk about, and it’s huge exposure. If a buyer walks from the deal, they may lose their deposit and are exposed to further loss if the seller can’t sell to a new buyer for agreed price in the purchase contract. Enough said, you get the idea.
Now’s the time to contact Barry if you’re making an offer to purchase on a home in Alberta.