Time For A Refresh
This article was originally published back in 2019 with an average sales ratio of 23% compared to today’s average sales ratio of 26%. Very similar markets in which the average home has a 1 in 4 chance of selling. We’re now approaching half way through 2024 and we’ve already participated in three subject to sale style transactions, with more clients asking about them, so it’s time for a refresh with some ‘2024 Additions’ – we’re always improving, so we’ve actually managed to mitigate some of the pitfalls.
‘Pick Your Poison’
Now, 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; 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 property address* on or before *insert a date usually 1-2 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 one to 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 and how long they’ve been on market.
2024 Addition – We’ve had five years of reputation building within the industry since 2019, including becoming a co-owner of the Fraser Valley’s top brokerage and serving as a director at the Fraser Valley Real Estate Board. We’ve also consistently sold our listings two to three times faster than our client’s purchases have been on market. That has strengthened our hand somewhat as agents recognize our ability to sell our listings.
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.
2024 Addition – We have begun inserting some protections for our clients by drafting the entire subject to sale clause with our preferred verbiage below:
SUBJECT TO SALE – SUBJECT to the Buyer entering into an unconditional agreement to sell the Buyer’s property at *Insert Property Address* on or before *Insert Date 1-2 Months Out*.
However, the Seller may, upon acceptance of another acceptable offer deliver a written notice to the Buyer or to the Buyer’s Agent requiring the Buyer to remove all conditions from the contract within 72 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.
The Seller agrees not to invoke the time clause to the Buyer or their representatives prior to *Insert Standard Subjects Date* during standard subject due diligence period. The Buyer reserves the right to inform the Seller of an accepted offer on the Buyer’s property at *Insert Property Address* and the Seller agrees not to invoke the time clause to the Buyer or their representatives while the subjects are being satisfied for a period of no longer than 14 days from the receiving of an acceptable offer at *Insert Property Address*.
This condition is for the sole benefit of the Buyer and may be waived or removed by the Buyer unilaterally.
This way we cannot have the bump clause invoked on us: 1. within 72 hours (excluding Sundays and Stats); 2. during our standard subject removal; or 3. within 14 days of an accepted offer at your own current property.
We can’t always get that exact clause accepted, but often we can, and it does mitigate some of the bump clause pitfalls.
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.
2024 Addition – The last two years have been lower sales ratio environments, leading to more balanced markets where extremely conservative valuations are our standard practice. You will never list your home without us having thoroughly reviewed a price range with the lowest possible sale price being very candidly discussed.
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.
2024 Addition – As much as we’ve mitigated some of the risks, the above still does ring true. There remain pitfalls to subject to sale offers that may still cause the below to be the best course of action.
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 route 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.