With multiple offers and bidding wars now the new norm, our clients find themselves, in the heat of the experience, contemplating a subject-free offer.
Most of our clients are totally qualified. They have well established careers and businesses, amazing credit ratings, large down payment funds, etc. They are the type of clients who will almost certainly receive mortgage financing… no problem!
But there’s often an unanticipated hitch: the property itself.
No banker or Broker can give a client 100% assurance of financing without factoring in the actual property details. Until an appraisal is reviewed and approved, the application is not complete. There are some properties that some lenders simply will not lend against.
There are the obvious examples that lenders tend to exclude;
- Properties containing Asbestos, Aluminium wiring, Underground Oil tanks
- Re-mediated former grow-ops
- Re-mediated drug labs.
There are also less obvious ones;
- live-work units
- row-homes (attached non-strata properties)
- properties smaller than 450 sq ft
- properties on lease land, Government, First Nations, or Private.
When it comes to the appraisal process, there is more than the value to be considered.
Another major piece of the appraisal lenders look at is the ‘Remaining Economic Life or REL’ (as opposed to the ‘physical life’) of the home. This refers to how long this specific house is likely to remain standing on this property under the current care it is receiving.
Example: We have a perfectly habitable home for decades to come ─ lots of remaining ‘physical life’. The problem is that lenders are looking for remaining ECONOMIC life rather than the remaining physical life. The question is not “How long can that house be standing there?” it is “How long does it make economic sense for that house to be standing there given current market conditions?”
What if it is located in a neighbourhood where lots of the homes around it are older homes that are being purchased to be demolished and replaced with multimillion dollar homes. That could be a problem.
The REL is calculated by subtracting the Effective Age from the Total Economic Life.
65 years – 30 years = 35 years Remaining Economic Life (REL)
FEW lenders will lend on a home with a remaining REL of less than 15 years. Also, the effective amortization will be set at the REL minus five years, which drives payments sky high, and often leaves client unable to qualify for such large mortgage payments should they even want to sign on for them.
Clients would be wise to also minimize risk, by either writing offers that contain a ‘subject to inspection’ and a ‘subject to financing’ clause, or by having a conversation with one of us well in advance of writing a subject-free offer.