Overinflated home values seem to be synonymous with Vancouver real estate these days. And it’s left many people, especially those looking to enter the market for the first time, struggling to figure out ways to compete. Even banks are coming up with creative ways to tackle the problem, illustrated by Vancity’s mixer mortgage for families or friends willing to divide ownership.
So what exactly does it take to get the financing you need in order to secure your dream home in this aggressive market?
Recently, there have been many reports in Vancouver of properties sold without subjects. Largely used as a tactic to win the bidding wars that have saturated the Vancouver real estate market, buyers are making subject-free/no-condition offers in hopes of securing a home.
But without any subjects the buyer is in a vulnerable position, essentially crossing their fingers that everything will work out. Particularly if you are in need of a mortgage, a subject such as a home inspection can buy you precious time to work out financing. Not only that, a home inspection will give you a much better idea of what the property is worth in the long run. A home that you may think is undervalued (and therefore a good deal) really isn’t if the life expectancy of that home doesn’t outlive your mortgage. Most lenders for example, will not lend on a home that has a remaining economic life (REL) of less than 15 years. Appraisals look at what it is today, not what it could be tomorrow.
Financing on a Subject-Free Purchase
Subject-free offers are risky, so really understand the risk you are willing to take and prepare for alternative. If you have made up your mind to go in subject-free, if it's a strata unit, you and your real estate agent will need to get you the strata documents and review them before placing your offer. If it's a house, it's a sound investment to get a pre-inspection done.
Also ensure your mortgage broker has a copy of the listing in advance, and has scanned it for any comments that could give your lender reason to doubt the property’s stability (for example, full renovations needed). Of course, even with all the property documents in advance, the lender may decide not to advance the mortgage, so there is no 100 per cent risk-free method in going subject-free.
Documents for pre-approval before you make your offer are also a must; since you cannot back out of a subject-free offer, you need to know you can carry the payments without bankrupting yourself. And remember that if you win the bid, the lender will still perform an appraisal, and will only be prepared to finance you up to the value it appraises the property at, less the percentage minimum down payment. This could be a very different figure than the one you’ve committed to, if you overpaid for the property in a bidding war. In this scenario, you’ll be on the hook to make up the difference.
In matters like this, I advise clients to be cautious. Paying a mortgage should not overhaul your lifestyle to the point where you are spending all your income on it.
As bidding wars become the norm and homes continue to sell for thousands of dollars above the asking price, Vancouver real estate has gone from laid-back west coast to the wild west. As difficult as it can be, it’s important not to let your emotions get the best of you, especially when the stakes are high. But by putting as much down on paper as you can ahead of time, and working with a broker you trust, you can secure financing and eventually find the right home for you.