Buying a New Home Subject to the Sale of your Old Home
Selling the home that you live in and purchasing a new property with the proceeds can be a tricky affair. You need to get your timing exactly correct. You should also try and get the best possible price for your existing property and pay the minimum possible for your new home.
There is an option that Home Buyers may have when buying their new home, called a subject to sale. This subject allows Home Buyers to purchase their new home, subject to their current home selling by a certain date. The simplest reason for doing this is to line up the sales of these properties for financing and moving day reasons – it gives the family a chance to move out of their old house and into their new house without any hassles, rental places or otherwise.
A subject to sale offer is essentially a conditional offer to buy a new home. The condition that needs to be satisfied is that you are able to sell your existing residence.
I know we’re supposed to pretend all real estate transactions are super simple and stress free, but the reality is that as much as we try to minimize the challenges there are some that are simply inherent to the process. One of these challenges is that whether you choose to sell or buy first, there’s going to be a time when you’re in limbo. You’ve either sold and haven’t yet purchased your property, or you’ve got an accepted offer and not yet sold your current home. Both can be stressful situations, and when considering the options I’ve often told clients they need to ‘pick their poison.’
READ MORE: Is it better to sell first or buy first?
So, which position is better to be in? Is it better to sell first and then buy, or try to buy with a subject to the sale of your own home? Most of the time a realtors advice is to sell first and then buy, not because it’s super fun to potentially be homeless in a couple of months, but because the pitfalls of a subject to sale offer can be worse.
Why would a Buyer use a Subject to Sale Offer?
Like I stated before, typically to try to line up their financing and the moving dates to work perfectly with their old home and new home. A Buyer may have also been planning to sell their home, and before they had the chance to do that, they may have found the perfect home and don’t want to risk losing it. Seller’s can be hard pressed to accept this subject (especially if it’s a busy market with lots of Home Buyers), so the Buyers (or really, their Buyers agent) have to convince the Sellers that the Home Buyers current home will sell quickly because it’s a great house, priced to sell, is clean and ready, is on the market already, etc.
Why would a Seller accept a Subject to Sale Offer?
Subject to Sale offers aren’t strictly to benefit the Seller, so why would they “tie-up” their property to one Buyer? If their home has been on the market for a little while and hasn’t sold, it could be useful as it secures an Accepted Offer from an interested Buyer, which will lead that Buyer to focus on buying this home, rather than any others. Typically, Sellers balk at subject to sale offers and in order for the Buyer to convince the Seller to accept, they make their offer hard to refuse financially, either by offering above their asking price or the asking price, which of course, is great for the Seller.
First, let’s talk about subjects
Subjects are conditions in a Contract of Purchase and Sale that must be fulfilled in order for the sale to go through. Real Estate contracts have subjects for many reasons, the typical reason is to give the Home Buyers a chance to do their due diligence on their potential new home, including tasks like getting a home inspection (to discover thing that can’t be discovered during a simple walk through), getting their financing secure (mortgages can only be officially approved when there’s an accepted offer on a specific property) and gathering any documents that a potential Buyer has the right to see (so they know what they’re getting into). Legally, the Buyer has to use every reasonable effort to see that the conditions are satisfied.
What is a Subject to Sale Offer?
The subject to sale clause would usually follow the standard subjects; financing, home inspection, property disclosure statement review, title review, and insurance (add strata document review for strata properties). These subjects are all to the benefit of the buyer, meaning the buyer can walk away from the transaction with due cause, but the sellers are committed if the buyer chooses to firm up the deal.
A subject to sale clause which (typically states):
Subject to the Buyer entering into an unconditional agreement to sell the Buyer’s property at ____Address_____ by ____Date____. This condition is for the sole benefit of the Buyer. However, if the Seller receives another reasonable offer on their property the Seller may deliver a written notice to the Buyer requiring the Buyer to remove all conditions from the contract within 72 (or shorter) hours of the delivery of the notice, not to include Sundays and Statutory Holidays. Should the Buyer fail to remove all the conditions before the expiry of the notice period, the contract will terminate.
Reading through the legal jargon, this subject means that the Seller will give you a chance to sell your property by a certain date (typically the Buyer will have a month or so) – HOWEVER – if the Seller get’s another offer, then they can force you to decide if you’re going to go ahead and purchase their property (regardless of if they’ve sold their home) or the deal will terminate so the Seller can sell their home to this other Home Buyers. The buyer is basically requesting the opportunity to secure a firm offer on their home before they firm up their buy. Seems reasonable, right? At least for the buyer. It’s an attractive prospect, the best of both worlds, surely?
- The Seller accepts an offer to buy their home, conditional on the sale of the buyer’s own property from Buyer A, with a 72-hour escape clause. Buyer A has until March 31st to sell their home if the escape clause isn’t activated.
- The Sellers agent continues to market and show the home
- On March 1st, the Seller finds a second Buyer (Buyer B) and accepts an offer to purchase the home conditional on Buyer A not removing the time clause condition.
- The Seller activates the Time Clause: Buyer A is given 72 hours to remove the time clause condition or walk away from the agreement.
- If Buyer A removes the condition during that 72 hours, Buyer A get the house, and Buyer B is out of luck.
- If Buyer A is unable or unwilling to remove the condition, Buyer A gets their deposit back, and Buyer B is now the successful purchaser.
Note: The second offer from Buyer B doesn’t have to be a higher price or better in any other way – it just needs to be accepted by the Seller for the escape clause to come into effect.
Things to think of
Incentivizing The Seller
Put yourself in the seller’s shoes now, why would they let you tie up their home for two months, unsure if you’re well priced, if your home has issues, if your agent has communicated reasonable expectations… you’re going to have to incentivize them, and most sellers want that in the form of cash – the sale price! If you’re trying to go down the subject to sale route, expect to pay closer to list price to get an accepted offer depending on the list price of the home.
The Dreaded Bump Clause
The subject to sale clause is an important part of the subject, there’s no way a listing Realtor will let a buyer tie up a property without a way out for their sellers if an acceptable backup offer comes in. You read that correctly, you may have offered near to list price to get your subject to sale subject in there, and then with 72 hours notice if another acceptable offer comes in, you may be in the position where you have to remove your subjects anyway.
Pressure To Sell Your Home For Less
The final pitfall I raise with prospective buyers looking to try a subject to sale offer is that after having a subject to sale offer accepted, having been exposed to the bump clause throughout, and then perhaps having sat on the market for weeks, you could feel pressure to sell your home for less than you’d initially liked as the subject to sale date approaches.
Think about it, you’ve fallen in love with this home, you’ve invested not just emotional energy but finances into the home inspection and other due diligence, and perhaps the only offer that comes in for your home doesn’t meet your price expectations. Are you going to walk from your purchase? Or are you going to accept the low offer? That’s a tough decision for a subject to sale seller to have to make.
So, what’s the alternative? Selling first! By selling first you know exactly what your budget is, you know what your timeline is, and you strengthen your offer by being able to say ‘we’re already sold firm.’ Is it stress free? No. But unless you’re looking for something incredibly specific then it’s a sensible course of action for most buyers that also have a home to sell.
A subject to sale offer can make sense in a lot of situations, and they occur successfully fairly often, you’ll just need a smart negotiator (that's me!) on your side (whether you’re the Buyer or the Seller) to ensure that you are protected and understand every aspect of this situation. If you’re the Buyer, this same agent may be selling your home so you’ll want someone who can sell quickly to ensure that you can close on your ideal new home.