‘Pick Your Poison’
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 season 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.’
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? Our consistent 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 are often worse.
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.
The simplest subject to sale clause reads, ‘Subject to the sale of the property at *insert address* on or before *insert a date usually 2 months or so out*’ 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? I don’t believe so, and here are my three reasons why:
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 have to overpay to get an accepted offer, and we’re not talking about a few dollars and cents, expect to have to overpay by $10,000-50,000 depending on the list price of the home.
The Dreaded Bump Clause
The subject to sale clause I shared above isn’t going to slip by most listing agents, there’s no way they’ll let the buyer tie it up without a way out for their sellers if an acceptable backup offer comes in. So the listing agent will usually counter the subject to sale clause with the below:
‘However, the Seller may, upon acceptance of another acceptable offer deliver a written notice to the Buyer requiring the Buyer to remove all conditions from the contract within 48 hours of the delivery of the notice, not to include Sundays and Statutory Holidays. Should the Buyer fail to remove all conditions before the expiry of the notice period, the contract will terminate.’
You read that correctly. You may have overpaid to get your subject to sale subject in there, and then with 48 hours notice if another acceptable offer comes in, you may be in the position where you have to remove your subjects anyway! Not good.
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 potentially overpaid for your purchase, 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.
The Alternative
We don’t discourage subject to sales because we’re rubbing our hands together over the prospect of listing your home; we do it because the above scenario clearly isn’t ideal. You may overpay on your buy, undersell on your sale, and also be exposed to the bump clause where you may have to remove your subjects anyway.
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 far superior course of action for most buyers that also have a home to sell.
If you’ve got any questions about what strategy is best for you when it comes to selling and buying, don’t hesitate to reach out at david@davidsmithhomes.ca or on Facebook or Instagram.