Tuesday, May 29, 2007

“Subject to sale” clause requires a reality check

It’s been a ball, hasn’t it? The real estate market has been so hot for so long, we can hardly believe what houses are selling for these days. Everyone’s got a story about a friend or neighbour who got some fantastic price for a home. However there are some down sides to an up market. Among other things, buyers and sellers with stars in their eyes don’t always act rationally. We all want to believe that we can strike a big win in a hot real estate market. And sometimes we do.

But when we pin those hopes to a ‘subject to sale” clause in an Offer to Purchase, those hopes need to be accompanied by a solid reality check.

Here’s what can happen if you’re the buyer: You’ve found the home of your dreams, and while they’re asking a pretty penny for the place, you’re not really worried because your current home is also expected to sell very well. After all, the neighbours are still talking about how much the family around the corner got for their place last year! You put in a great offer on the house of your dreams, and use a “subject to sale” clause to give yourself a few months to nab a good price for your own place. Sure, you could have offered the vendor a lower price, but you can’t “go cash”, and you want to offer a price that’s attractive enough to make it worth the vendor’s while to wait for you, while you hope it all works out.

You might both be lucky: the home you’re buying might be worth what you’re offering, and your own home might be worth what you hope. And the banks might agree with your assessment of the value of both. But that’s a lot of “might”s. If you don’t get the price you want for your own home, are you prepared to honour your Offer to Purchase? Or will you need to scramble financially or plead with the vendor to negotiate a lower price? And what if the vendor is similarly counting on the offered price to purchase his or her next home? When your high hopes are disappointed, the result can be a nerve-racking and even ruinous game of financial dominoes that leaves lenders, brokers and several sets of homeowners in a cold sweat.

What if you’re the vendor? A buyer has paid you the compliment of a very attractive offer on your home – “subject to sale” of their own home, of course. Usually, an offer which contains a “subject to sale” clause requires a longer completion date so the buyer has a reasonable amount of time to capture a good price for his own home. The immediate result, then is that your home will be generally considered “off the market” during this period of time, and other buyers
will look elsewhere for a home which is clear of existing offers. Sure, you can entertain other offers, but an existing offer always puts a damper on interest – particularly if the offered price seems a little high.

The result is that your perfect buyer may not even get through your front door. And while it’s flattering to get a great offer on your home, keep in mind that you don’t have the money in your hand yet. A buyer who has unrealistic expectations about what his own house may sell for, could also have offered you an unrealistic price for yours. If he is disappointed on his own sale, you can expect to be disappointed on yours. Your buyer may either be forced to collapse the Offer to Purchase. or come back to negotiate for a lower price – after you’ve spent a few months of missed opportunities with other buyers.

These “subject to sale” clauses don’t need to be an obstacle to a smart and realistic transaction. But in a strong real estate market, optimism sometimes overcomes good sense. Before either offering or accepting a “subject to sale” clause in an Offer to Purchase, do a reality check. An independent mortgage broker can explain the consequences for both buyers and sellers, and help you chart the best course for your own financial situation.


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Anais said...

Keep up the good work.

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