Risky Business – Going Unconditional Without Finance Approval

Risky Business

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We have been asked, “Is it possible to go unconditional on an O & A contract, which is subject to finance, without finance approval being gained?”

The short answer is “Yes”, however, we don’t recommend this course of action

We were reminded of this recently when a long-term client shared an archive case story with us where 3 inexperienced buyers went “unconditional” on their O & A without finance approval in place, causing not only a delay to settlement but also some sleepless nights for all concerned.

In this instance, 3 business associates, Trevor, Warren, and Charles (not their real names) purchased an investment property by private sale. It had an older house at the front of the block and plenty of land at the rear to create an additional block via subdivision.

Trevor was to arrange the finance which involved some refinancing.

As part of the O & A contract they also requested prior possession so that they could commence the subdivision process before settlement.

All was going well until the finance approval date arrived and the refinancing had still not been approved. After speaking with his mortgage broker – who assured Trevor that the refinancing would be approved “no problem” – they decided to go unconditional on the offer without finance approval.

Between the finance approval date and settlement date, Trevor again followed up the mortgage broker to see how the refinancing was going. He was assured all would be in place before settlement.

Meanwhile the Bank was assessing the refinancing and noted that all of the purchasers were employed by the same small company and queried the strength of this position. Things were not looking good, and to make matters worse, they had already got the subdivision underway.

Finally on the day of settlement Trevor contacted the mortgage broker to find that finance had only just been approved and the bank would require more time to process the transaction. He was able to call in every favour he could to get the deal across the line.

Ultimately it took a further 3 days to complete the process and he was able to avoid incurring late settlement penalty fees.

The buyers in this case were fortunate with the outcome, however they may not have been so lucky and exposed themselves to the following risks:

1. An unconditional O & A contract means that the sale must proceed. Therefore if the buyer defaults on the contract because finance is not available, the seller may be entitled to force the buyer to proceed.

2. If they can’t proceed, the buyer may have to forfeit their deposit and the seller may be entitled to take court action to recover any losses suffered as a consequence.

3. If the buyer still chooses to proceed, but requires further time to secure finance, penalty fees and interest may be charged by the seller due to the delay with settlement.

Image by alobos Life via Flickr.