why the commercial vendor won’t accept subject to finance >>>

Recently our client was trying to purchase a freehold business, and the vendor would not accept any offers with conditions, including subject to finance. The vendor vehemently only would accept unconditional offers. When the commercial vendor won’t accept subject to finance this means that once the contract of sale is signed, you need to be 100% certain that you can complete the sale, or you risk losing your full deposit. This sale was worth $1M, so that would be $100k lost assuming a 10% deposit. This requirement for unconditional offers is not common in the private sale world, but it is of course standard practice at auctions, where the sale is unconditional upon the fall of the hammer.  It is so uncommon that it even surprised the bankers I was working with and finding a way forward proved difficult, due to the amount my clients needed to borrow to complete the purchase. My clients were borrowing 100% of the purchase price, so $1M. To do this they were borrowing 80% of the value of their home and also 70% of the value of the commercial property being purchased. The total of the two amounts gave them just enough to refinance their current mortgage, pay the asking price for the business and the property, and also pay for all borrowing and transaction costs. In this situation, you are relying completely on the valuation of the property you own and the valuation of the property you are buying, being high enough so that the lender will loan you enough money against the two properties to give you the money you need to pay for everything. Here is a link to another one of my posts, explaining how to use equity to buy a freehold business. My clients needed the commercial property they were buying to be valued at $800k for the deal to work, otherwise they wouldn’t have enough money to complete the purchase. This was at the upper value of what my clients thought it would be worth, so there was a good possibility that it may be valued at less than $800k.  We then provided all of the personal financial information and the financials for the business they were buying and requested an agreement in Principal (AIP), which is similar to a pre-approval, where the lender agrees that based on your personal financials and the financials of the business you are buying, the lender is satisfied that you will be able to afford the repayments. In this case, the business had a strong, consistent profit and was able to comfortably afford the repayments, so the AIP was approved with some conditions and one of those conditions was the commercial property valuation being at least $800k. Consequently, my clients had finance approved, subject to a valuation on the commercial property. Our clients approached the vendor with the AIP from the lender and an offer. The vendor accepted the offer, but this stalled as our client did not have unconditional finance.  This is when we need to think creatively to find a solution. To receive unconditional finance from the lender, the lender needs a signed contract of sale and a valuation from a bank-appointed valuer, to confirm that the valuation is high enough to support the amount to be borrowed. Our clients could not get a signed contract of sale, because the vendor would not accept an offer subject to finance, so they could not get an unconditional offer of finance from the lender. In most transactions, the buyer would: -

  Make an offer subject to them obtaining finance,

 Sign the contract of sale with the subject to finance clause,

 Pay a deposit, 

 Go through the lender application process, 

 Obtain the finance and complete the sale.

Due to the uncertainty of the commercial property being valued at $800k, my clients did not want to risk making an offer, paying a deposit, and then finding that the

valuation fell short, causing them to cancel the sale and forfeit their deposit. The next step was to obtain a pre-purchase valuation that must be instructed by the purchaser

and not the bank. This pre-purchase valuation provides an indicative range that the property could be worth, but has no impact on the final valuation that the lender receives

after the contract of sale is signed. The bank-instructed valuation is generally not able to be from the same valuer that completed the pre-purchase valuation, so it is possible that the property value from the different valuer and the bank could be quite different. This is not so much of an issue when you have a large deposit and you are not relying so much on borrowing against the property you are buying, but when you need the property to be valued at the upper limit and you are borrowing the maximum amount allowable by the lender, in this case, 70% of the value of the property, then this becomes a transaction with higher risk. Ideally the pre-purchase valuation comes in much higher than you need it to be, then the bank valuation becomes less risky because you are confident that it will come in over the value you require. To add to the situation, the vendors advised that they had received an unconditional offer and my clients had 48 hrs to make their own unconditional offer. As all of this was happening in the week leading up to a main public holiday and both the residential and commercial property markets are incredibly busy seasons, we were unable to find a valuer that was able to complete the pre-purchase valuation in the time required and my clients missed out on this particular purchase.  To learn from this scenario, you could benefit by knowing what to do if you encounter a vendor that will not accept offers subject to finance: -

1.  Always confirm the vendors requirements for any offers, such as the acceptance of any conditions, deposit amount, settlement time, etc.

2. Obtain an agreement in principal (AIP) to confirm that the lender will lend you the money required to complete the sale.

3. Arrange a pre-purchase valuation, preferably with one of the valuer that the lender uses, as this may give you a better gauge of value than using an arbitrary valuer.

4. Order the pre-purchase valuation as soon as you receive the AIP, so that you can be ready to make an offer as quickly as possible. 

5. If you can afford it, order the pre-purchase valuation when you apply for the AIP, just in case the AIP takes longer than expected. 

6. Ensure that you have a buffer of time between the pre-purchase valuation result and the price you need the bank valuation to come in at. 

7. The pre-purchase valuation needs to be higher than the required amount. Always assume that the bank valuation will come in less than the pre-purchase valuation. 

8. Always get advice from trusted advisors such as your accountant, solicitor and finance broker.

9. Submit your offer and sign the contract.

10. Submit your full, complete, and formal application and all required supporting documents to the lender.

11. The lender will order the valuation, review all documents, and then if approved, extend an unconditional offer for finance.  

If you need funding to purchase a commercial property or business, regardless of size, then please reach out. I would love to hear about your story and what you want to achieve next.

Shane Duffy is the Director and founder of Finance Story, a finance brokerage dedicated to helping businesses grow, through arranging business loans and home loans, particularly through the use of technology. Shane has 25 years of manufacturing and supply chain experience in the areas of operations, IT, consulting, and finance solution design. He uses this experience in his finance broking business to develop specialised financial solutions for clients.

This article is intended as information only and does not constitute financial advice. Please seek independent financial advice when assessing the feasibility of any project.