Why would a rational buyer offer to buy with no conditions precedent?

Question

Assume that the Canadian Reddit commenter beneath is rational. I corrected typos.

As an investor, I have a tactic where I only buy houses via the listing realtor, and do not use my own. Why?

If I go in with a clean offer 5k below a competing offer, but

• mine is no conditions and

• the competing offer has ≥ 1 condition AND another realtor,

the listing realtor is almost certainly going to push my offer because "it's clean" and "lots of offers fall through with conditions".

In reality, the realtor's pushing my offer so they don't have to split commission. They can pack up the listing and move to the next.

If they were working for the seller, they would go for the higher option at the risk of having it fall through, spend more on advertising and open houses.

There's ways it can work in your favour.

It doesn't feel savvy to offer without Conditions Precedent like Financing Condition, Subject to Appraisal Inspection, Legal Review, Survey. It's obviously cockamamie to complete and pay for these condition precedents before offering - all your money and time will be wasted if the seller rejects your offer. Thus what am I overlooking?

Answer 1

It doesn't feel savvy to offer without Conditions Precedent like Financing Condition, Subject to Appraisal Inspection, Legal Review, Survey.

For the average buyer, those typical conditions are very important. But for a team of investors, they are handling many of these internally.

• The purpose of visiting the house before making the offer is to do an inspection. They aren't looking for cosmetic issues; they are looking at potential big-ticket items that are hard to estimate. They know they will paint everything and replace the carpets. But they will never make an offer if it looks like roof or foundation problems.
  • At the same time they are doing an appraisal of the potential of the property, they make a guess as to what needs to be done to get it there.
  • Financing is not a concern because they are either self-financing or they have a partner who is providing the funds.
  • They have a person who writes all their contracts.
  • They have a person who can pull the local records to see if there are potential issues with the property records.

All of these are done quickly and before they make an offer.

It's obviously cockamamie to complete and pay these condition precedents before you submit the offer, because all that money and time will be wasted if the seller rejects your offer. Thus what am I overlooking?

They know that they will spend some time and money on properties and never make an offer, because the foundation is bad. But they compensate by avoiding a bidding war, and presenting offers the seller's agent will push.

I go in with a clean offer 5k below a competing offer

Listing price $200K, make a clean offer of 195K.

In the US that listing price assumes 6% commission, and they assume an agent on each side.

The listing realtor is almost certainly going to push my offer because "it's clean" and "lots of offers fall through with conditions".

In reality, the realtor's pushing my offer so they don't have to split commission. They can pack up the listing and move to the next.

So the listing agent expects a $6K commission but hopes for a $12K commission if the buyer doesn't have an agent.

The offer of $195K with no splitting means they will get: $11,700. They will push for the seller to accept. Why? They are getting 97.5% of the best they can hope for. If the seller doesn't accept this one, a buyer with conditions will take weeks longer to settle, and the agent might not get as much money.

For the investor, that will greatly increase the odds that their bid will be accepted.

Answer 2

Perhaps the commenter is paying cash and is a qualified surveyor who can do their own appraisal and survey at no cost, and has purchased enough properties that they can spot obvious pitfalls in the contract. And then the risk of something going wrong is small enough that the $5K saving more than outweighs it. If you only buy a couple of houses in your life and sink all your money into them, a purchase going wrong is a life-changing disaster. But if you buy one a month as an investment, it’s not the end of the world if one purchase goes south.

Answer 3

It doesn't feel savvy to offer without Conditions Precedent like Financing Condition, Subject to Appraisal Inspection, Legal Review, Survey.

Because skill-wise, you're not ready to do that.

You can skip financing condition if your financing is lined up and secure.

You can skip appraisal if you are experienced at pricing homes in the area.

You can skip inspection if you have enough experience and skill to inspect on your own. "Home inspector" isn't a highly schooled skill; it's a "jack of all trades" type of job.

You can skip legal review if you know how to read contracts. All due respect, if you are like most folks, you have never actually read any contract in your life, let alone have any experience at spotting a bad clause and the usual tricks of the trade. When you read real estate contracts regularly, you quickly learn how to recognize and disregard the 98% that is standard boilerplate, and see the few clauses of real importance.

You can skip survey if you know how to survey. There's a big leap between "can look at the numbers and see where that line rests in the grass" and "can set monuments, keep your state certification, and testify in court". You don't need to make that leap.

It's obviously cockamamie to complete and pay these condition precedents before you submit the offer, because all that money and time will be wasted if the seller rejects your offer. Thus what am I overlooking?

The thing I really do not like skipping is title search. I once paid for a title search even though I was buying it from the bankruptcy trustee, to be approved by court order. And by "buying it" I mean buying it at auction, an auction I had no intention of losing.

As a result of the judge's gavel we owned everything on the property, from the dumpster to the formerly rented Pepsi vending machine to the PCBs. (Pepsi doesn't sell vending machines outright, but they didn't bother showing up at the courthouse, so the machine is mine now). Someone would have needed a hell of an argument to claim the land wasn't ours, I did a title search anyway. For that I paid my title insurance company; the title search is most of the work involved in title insurance, so they refunded it when we did close and the seller paid for the title insurance.

Cockamamie, but par for the course for an auction where the conditions you mention above aren't allowed.

As for the PCBs, we did a level 2 Environmental Site Assessment, about $35,000 of legal work on a $120,000 property.

Answer 4

mhoran_psprep gave a great answer, I just want to address one part of the question:

If they were working for the seller, they would go for the higher option at the risk of having it fall through, spend more on advertising and open houses.

This part could be true in some situations, but most sellers also prefer a deal that is less likely to fall through. Think of the many people that are both buying and selling at the same time, they are much more likely to accept a slightly lower price to decrease risk of the offer falling through.

It could definitely be ethically questionable, but as long as state laws allow it and the agent discloses to the seller that they are also representing a potential buyer then they could still be acting in the seller's best interest.

Answer 5

It's obviously cockamamie to complete and pay these condition precedents before you submit the offer, because all that money and time will be wasted if the seller rejects your offer. Thus what am I overlooking?

In a hot market, people do do what you reject as cockamamie:

• They pay for a pre-inspection so they don't need an inspection contingency
• They get pre-approved for a mortgage so they don't need a financing contingency
• They hope to come up with extra money if the appraisal comes in low, so they don't need an appraisal contingency

In all cases, they can just take the risk that something that would otherwise be covered by a contingency might just cause the deal to fall through, costing them their earnest money and putting them back onto the market. But in a hot enough market, if they don't take that risk, they can lose bidding wars to more aggressive buyers willing to take the risk.

Answer 6

While other answers indicate why this might be something a 'rational' buyer might do, I will focus on another common scenario: why this might be something an 'irrational' buyer might do.

There are some areas in Canada [I note this because of where you source your question from] which have had incredibly hot property markets over much of the past 5-10 years. It was not uncommon in 2016 for houses being sold in Toronto to have 10+ offers within the first day of listing.

In that type of a market, people get desperate in trying to have their offer accepted. One of the first tactics to try and compete is to have no conditions on the offer. Someone who thinks they're savvy in trying this may reconsider if their lack of inspection, for example, leads them to buying a house with critical safety issues. That will help you every time, until it doesn't. This is an odds game, and just because you didn't die when playing Russian Roulette the first time, doesn't mean it's good advice for others to try.

Be very careful reading stories of housing "investors" with their one weird trick that flies in the face of common sense. In a hot market [which, again, many Canadian markets were for most of 2010-2017], anyone with money for a down payment can make money and consider themselves 'savvy'.

Answer 7

Why would a rational buyer offer to buy with no conditions precedent?

If the buyer planned to knock the house down, and build a new one.

Then no issues matter, as the house will be destroyed.