Unconditional Offer Risk Calculator NZ
An unconditional offer is worth money to a vendor, and vendors will usually pay for it in price. The buyer's side of that trade is harder to think about, because what they are giving up is not a cost but an option: the right to walk away from something they have not found yet. Options are difficult to value by instinct, and the usual result is that people either dismiss the risk entirely because nothing has gone wrong yet, or refuse outright because the downside sounds catastrophic. Neither is a decision. Putting a number on each risk turns it into one, and the number that matters most is not the expected cost but the margin: how wrong your estimates can be before the answer changes. If the discount only just covers the risk, it is not covering it at all.
Each risk, priced
| Risk | Chance | Cost if it happens | Worth |
|---|---|---|---|
| Finance falls through and you cannot settle | 5.00% | $100,000.00 | $5,000.00 |
| A serious defect you did not find | 15.00% | $25,000.00 | $3,750.00 |
| Valuation below the price | 10.00% | $30,000.00 | $3,000.00 |
| Total | $11,750.00 |
The worst case, if everything went wrong at once, is $155,000.00. That is the number to be able to survive, not the $11,750.00 expected cost.
The decision
Every risk would have to be 27.66% worse than you have assumed before the discount stopped covering it.
What you are actually selling the vendor
A conditional offer leaves the vendor holding a property that is neither sold nor on the market. They cannot accept a better offer while your conditions run, and if you cancel, the listing comes back on with the quiet implication that something was found. Removing that is worth real money to them, and in a market with few buyers it can be worth more than the price difference between two offers. That is the trade being made, and it is a genuine one rather than a trick. The question is only whether the price they will pay for certainty exceeds the price of the risk you take on.
Expected cost is the wrong number to look at alone
Multiplying a chance by a cost gives the average outcome across many repetitions, which is exactly the situation you are not in. You are buying one house once. An expected cost of a few thousand dollars can sit on top of a worst case that would take years to recover from, and averaging conceals precisely the thing that should drive the decision. The useful reading is both numbers at once: the expected cost tells you whether the discount is fair, and the worst case tells you whether you can afford to be unlucky. If the answer to the second is no, the first stops mattering.
The margin of safety is the honest output
Nobody knows the chance that their finance will fall through. Any figure entered here is a guess, and the arithmetic built on it inherits that. What survives the uncertainty is the ratio: how far every estimate could move against you before the conclusion flips. A discount that beats the risk by a wide margin is robust to being wrong about all three probabilities at once. One that beats it by five per cent is not a decision at all, because a five per cent error in a guess is not an error, it is the normal condition of guessing.
You can buy most of the risk away
Two of the three risks here can largely be removed before you offer rather than after. A building report and a LIM turn an unknown defect into a known one, and finance approved against the specific property rather than a general pre-approval removes almost all of the settlement risk. Doing that work up front costs perhaps a couple of thousand dollars and may be wasted if you do not win the property. Set the probabilities to reflect that work if you have done it, and the expected cost falls sharply. That is usually the better answer than deciding whether to gamble.
Worked example
A buyer is considering an $800,000.00 purchase where the vendor will take $15,000.00 off for an unconditional offer. The deposit is 10%, so $80,000.00, and they judge their liability beyond it at $20,000.00.
They put the chance of finance falling through at 5.00% against a cost of $100,000.00, which prices at $5,000.00. A serious undiscovered defect at 15.00% and $25,000.00 prices at $3,750.00. A valuation shortfall at 10.00% and $30,000.00 prices at $3,000.00. Together the risk is worth $11,750.00.
The discount exceeds that by $3,250.00, and the margin of safety is 27.66%, meaning every risk could be more than a quarter worse than assumed before the discount stopped covering it. The worst case, however, is $155,000.00, and that is the figure to be able to survive.
How this is calculated
Each risk is priced as its probability multiplied by its cost. The cost of failing to settle is the deposit plus any liability beyond it, since both are lost in that event. The three are added to give the expected cost of going unconditional, which is compared directly against the discount to give the net position. The margin of safety is the discount divided by the expected cost, less one, expressed as a percentage, and it answers how much every risk could increase before the two are equal. The worst case is the sum of all three costs occurring together, which is not their expected value and is shown separately because a single purchase can produce it.
Official sources
- Buying a property, Real Estate Authority
- Buying and selling property, New Zealand Law Society
- Buying and selling a house, Consumer Protection
Related NZ calculators
- Deposit at Risk Calculator for the exposure on its own
- Auction Day Cash Required Calculator where every bid is unconditional
- Building Inspection and Due Diligence Cost Calculator for the cost of removing the unknowns
- Mortgage Pre-Approval Expiry Calculator for whether your finance is actually in place
- Conditional Offers, the guide behind this calculator