In this episode, we're here to talk about the hottest trending topic, it seems to rear its head around every year to two years, which is what we call subject-free offers. Any hot real estate marketplace when there's a lot of competition, low supply high demand, this is a very common topic. Today we broke it down for you to understand specifically what the heck is subject free? Why are we doing it? What are some ways to protect yourself and more importantly, is this the right strategy for you?

WHAT'S CAUSING SUBJECT FREE OFFERS IN THE MARKET?

The market is incredible right now. Our first two weeks into January, we've had more new inquiries than we've ever had. There's a lot of people that we've been working with over the last two years that have been kind of sitting on the fence, they're all coming through again. A lot of people are realizing that the market is not taking a tumble down. When a lot of people sit and watch and they start to see that things are moving, they want to get get in on the action. While rates are low, people are trying to take advantage of that as well.

This drives a busy real estate market, which then drives multiple offers, which then drives subject free offers.

People are just coming through their holiday hangovers. They are getting back to work and back to, you know, the real world. Just this year, there wasn't a ton of typical work events/parties and Christmas holidays. People were just kind of stuck around the house. It gives people more time to think and watch real estate when you don't typically do that this time of year.

If you want to think back to 2017 and 2018 in Vancouver, Toronto, and most city centers where there have always been supply issues, It's always about how do you win the offer? What can you do? How can you position yourself for success? There's so much misunderstanding around what is the subject? Why do we use it? What situations do the arise? How do I win an offer? The reality is often it comes down to someone getting advice from the real estate agent. And that just might not always be the best thing to take, right? Let's be honest here. There's a lot of great agents out there. But there's a lot of them who may be uninformed.

SHOULD YOU GO SUBJECT FREE WITH LESS THAN 20% DOWN? 

If it's a strata property, as much as there's 50 lenders out there, there's three insurers to work with. If there's something wrong with that strata, and all three insurers catch it in the 1000 strata documents, that it's pretty easy for your realtor to miss or you to mis. There's no way to get financing if you don't have an insurer on board. If you're doing less than 20%, down, you should never be going subject free. Another big part of that is, subject free, typically you're not getting a deal on these homes. You're going over asking price to actually get the property tied up. Insurers can ask for appraisals. So if you go subject free on a property and you go $50,000 over asking price, the insurer could say, wait a minute, we don't really agree with that we need an appraisal. If you don't have a subject in there, and that appraisal comes in low and you only have your 5% down, you're hooped because

you have to make up the difference with your own money.

It's pretty rare that the insurers do ask for appraisals. In this type of market, when people are going up to $100,000 over asking price, it definitely can happen. The down payments are a big factor, because if you have 20%, or a big downpayment, it doesn't really matter if the appraisal comes in a bit low, right? If you have 35%, down, it's not going to make that much of a difference. There's also alternative options, there's different types of financing that we could scramble and put together.

*WHY STRATA MIGHT BE A CONCERN?

Anything to do with strata is always a concern because we know most lenders are looking to review all of those documents that a strata will provide. There could be hundreds of pages there that do need to be reviewed at certain times. Regardless of having a certain downpayment, you may just have such a major issue in those strata documents that no lender wants to move forward with. Do all your due diligence, review these things ahead of time before putting an offer in, but the likelihood of somebody that's uneducated, from a perspective of reading a full stack of strata documents and know what they're looking at, it's very unlikely that you you could do such a thing in that period of time before making an offer. That our fear is anything that involves a strata subject free, regardless of the down payment, is not not an ideal situation by any means.

It doesn't make a lot of sense to move forward by trying to purchase a property where there's any remote question about that.

WHEN WOULD YOU GO FORWARD WITH A SUBJECT-FREE OFFER?

If you do have a substantial downpayment, 35% or something in that neighbourhood, if the appraisal comes in low, so as an example, you pay a million and the appraisal comes in at $950,000, you have that additional capital to make up to the $50,000, that you're short. So that would be somebody that I would say you are in a position to to go forward with a subject free offer, because you have that bandwidth to basically cover you and a poor situation when it comes to an appraisal.

 - REAL LIFE SCENARIO

We've seen it come up in the past where there's different and older types of wiring and plumbing. We saw this happen in 2019. It wasn't disclosed upfront but what happened is eventually the lender found out that this building had knob and tube wiring. Your typical lenders don't like this type of wiring and it was very difficult for the client to obtain insurance. So I can't imagine what would have been like had this client not being able to obtain the insurance that they needed, even temporarily, they wouldn't have been able to get any financing at all. They placed a large deposit of around $75,000. That's 75,000 bucks, you lose. It's gone.

WHY IS A GOOD PRE-APPROVAL IMPORTANT?

Any of our clients that might have a little bit of a wonky income structure or their credits not quite where it needs to be like, you should not be going subject free.

The only clients that we've typically seen go subject free, have a very clean cut application.

They're well qualified, have a good size down payment, and a backup plan. We had a client go subject free six years ago. They wrote on a duplex in Abbotsford, and it wasn't allowed to be a duplex, it was non-conforming and no lenders would touch it not even private lenders. They weren't able to close. You do your due diligence and as much as those clients qualified, that was something that nobody knew. So there's just a lot more to it than just the amount of your down payment.

Self employed clients are not the easiest clients to get approved. The mainstream lenders, like the big five banks and the triple A lenders that we work with do happen to say no. Having more than 20% allows you to go to lenders, like a private lender, like an alternative lender, because if you don't have at least 20% down, those lenders will not work with you. They just simply are not lenders that you can get a CMHC insured mortgage It's just so important to do that upfront review.

*What's a good down payment when going subject-free?

If you're going subject free and you are going in that direction, the first thing that we do recommend is ideally be in a situation where you have more than 20% down, and I say not 20%, but I say more than 20% down because we have comfort and flexibility because of the appraisal.

*WHAT IS YOUR WORST CASE SCENARIO??

Your worst case scenario is that something pops up and you cannot get financing. What does that look like? Do you have family? Do you have your parents that have a paid off home with a huge line of credit that you could borrow from if you really needed to? Or if you have wonky income and you're going in subject free? Do you have someone that could cosign and step in and help you out if it came to that? Understanding that there is a backup solution, because the worst case is that you lose your deposit and there's a potential lawsuit. That's a terrible, terrible, situation for anyone to go through. Nobody wants to deal with that.

Understand what private lending means. You need to know how those loans are structured, you need to know the costs involved, and know what the monthly budget is going to look like if you have to go that route. It will be more expensive monthly than your traditional mortgage with a bank.

GET AN APPRAISAL AHEAD OF TIME

Timelines are key when you're looking to go subject free on a property.

You should 100% order an appraisal ahead of time. A lot of these issues come up with the appraisal. There's a lot of key areas that we know where to look in regards to seeing red flags, comments in the report, certain things like we mentioned, non conforming issues, structural issues, there's some very, you know, specific areas of a report that we would look at not just value. Economic life is one of the first things that the actual the lender looks at not the value, it's actually the life of the home. That's a big one, we would 100% recommend doing an appraisal upfront, it will cost you anywhere from $300 to $400. You're going to spend $500 plus on a home inspection, no brainer to spend the same amount of money on an appraisal.

*Sometimes you can do a subject for an inspection, if you're going completely subject free, that is hands down the most risky situation you can be in. We've had some clients that will go subject free subject to the appraisal. They actually asked for two or three days to get an appraisal done. Two or three days to get a home inspection done. So it really just depends on the property and the competition. Sometimes putting a three day subject in there for one thing is not going to get you the house. So you gotta be prepared to deal with that upfront.

GET A HOME INSPECTION AHEAD OF TIME

Another thing that you can get done ahead of time is the home inspection. The inspection itself can help find a lot of the issues we talked about through the show, whether it's the wiring, the plumbing, the foundation, anything like that. Spend the $500 bucks. At the end of the day, spending a few bucks on the appraisal, the home inspection, a good lawyer and working with an incredible mortgage team and real estate agent is going to get you the home, or at least save you from making these massive mistakes. We've had probably three or four phone calls this week from people who have been declined or have not got the financing that they need in the subject removal timeline. Just imagine if these people went subject free and couldn't go ahead and do that. And the reality is it just became came down to the fact that they weren't trusting the right people and they were looking out for it.

*When you go subject free, most sellers won't let you in near their home after until you complete on the property.

We've seen this happen where you actually can't they won't give you access to the home unless you ask for it or put it in the contract. Doing these things upfront or letting them know that hey, I'm going subject free, but I'm going to do that after, it's super important that you know, you have access to that home if you need it.

 - REAL LIFE SCENARIO

One client, there's a really good rate at a bank, I told him to go try them to see what happens. Just go have a conversation. He came back to me and told me that on a 10 minute phone call with this bank, they pre-approved him, no documentation, no credit, no nothing. They pre-approved him by multiplying his income by six. That was his mortgage qualification, the farthest thing from a proper pre-approval and they weren't going to look at documentation or do an application. That's how they pre approved him. Different situation was actually a mortgage broker that some clients were having some challenges with, he pre-approved them about two months ago, they've been shopping the entire time, they haven't accepted offer. They do not qualify because he didn't look at the job letters. One of the People's job letters outlines that the income isn't guaranteed. Just tying into how important it is to work with someone that knows how to do this job. Surrounding yourself with a good real estate agent that isn't going to push you into a situation that you shouldn't be in. Your realtor and your banker, your mortgage broker should 100% in a detailed conversation about this before you're ever going subject free. Those are prime examples if those people thought for a second that they could go subject free. Those are lawsuits waiting to happen.

Knowing what a true pre approval is, is so important.

WHY A TRUE PRE-APPROVAL IS IMPORTANT

One thing if you are a buyer or you're a real estate agent, this type of market will define a real estate agent or lender or anybody else, it will define someone because not pushing or making a buyer or borrower feel uncomfortable to go forward with a mortgage or a property during a time like this is so key and so important. The flip side is if you want to buy and you want to get in because you think the market will continue to grow or your family needs a home, then the key for you is working with those professionals who are going to do what they can to make that happen. So do you want to quickly do a once over on what what they should be looking for in a true pre approval.

We are doing a full deep dive underwriting of that file. We're fully underwriting the file internally, meaning we are requesting every single document we know the lender is going to request. There's no last minute, hey, I need this or I need that. We're getting everything up front. We're actually reviewing those documents. We would have spotted issues ahead of time, looking at financial statements of a corporation for a self employed borrower noticing that the company's carrying a loss, you know that individual may be paying themselves a very handsome salary, but the company's got a loss. That's an issue that a lender is not going to want to move forward potentially in that type of situation. I can't stress enough the importance of really looking at these documents thoroughly. Somebody that actually knows what the bank is going to look for and not look for and just understanding how we can mitigate some of these concerns. Knowing how to plan for the next steps when we do start to see some of these issues. That's a big one.

*HAVE FULL TRANSPARENCY WITH YOUR MORTGAGE BROKER

You have to tell us everything because if you don't, you're just digging your own grave. This actually has been happening all the time. So I'm going to use it as an example. It's pretty easy for someone that has been separated, but they're currently single to put single on their mortgage application, right? They can tag themselves as single because they're currently not in a relationship. However, they were actually separated 15 years ago, and they're paying child support, right? An application could come through saying single, we're not asking for a separation agreement. You go try to buy a house subject free and then we see later that you're paying child support payments, and you no longer qualify. So, something as small as that we do so much research, we have conversations we confirm, we double check everything that people tell us to make sure that's correct. Just tying into my point, full transparency, tell us everything and anything and we will help you guys work through it.

DEALING WITH CREDIT

There's one big one that's been coming up quite a bit over the last few months, it's credit. People will have these credit karma accounts or these, you know, these accounts where they can check their credit score and their scores. We pull the credit and we notice, great, you do have a great credit score. What happened in 2019, when you miss nine payments on your credit card, you know, it hasn't affected your credit score, yet, but something happened during that period of time. It seems crazy, but you missed nine payments in a row on your credit card, you got a great credit score still, but a lender may still say no because of that. Having the credit report looked at thoroughly is something that an individual consumer just can't do. You don't get the same information from these Credit Karma accounts and these other personal credit accounts. Doing a deep dive into that and us understanding your credit and the story that it tells is super important.

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