Anyone who currently owns an existing property and who would be making a move by both selling and buying are faced with a dilemma – do they buy first or do they sell first? [For more information about this topic, refer to my article Selling First vs. Buying First]. Unfortunately, many property owners have somehow been misled to believe that both can occur simultaneously without consequence. Below are key drawbacks as to why I believe offering ‘subject to sale of home’ is, a high majority of the time, a complete waste of time and effort making it an unreasonable and non-viable alternative:
(1). Contrary to the opinion of some Buyers, it is a fact that most Sellers are not naïve or stupid, most particularly those predominant Sellers who are represented by a licensed REALTOR® who is in the background providing them good advice on how to handle offers coming in on their property. Offering subject to sale of home can risk offending the Seller’s intelligence who may not want to deal with the Buyer even if they later agree to remove the subject to sale of home condition or if the Buyer is faced with a multiple offer situation competing with the offers from other Buyers.
(2). In general Sellers can only be pushed so far, and usually any pushing is accompanied by a quick one or two week condition deadline. Most offers are subject to financing and inspection only, and this is what Sellers are most accustomed with. In order to push Sellers outside of their comfort zone, Buyers who want to push through a subject to sale of home condition usually must be prepared to offer a combination of well over list price; irrevocable deposits; and / or dramatic under-pricing of their current home in order to ensure it sells within the required timeframe.
(3). When offering subject to sale of home, all details about the Buyers’ home are disclosed to the Seller on the offer. Often the list price of the Buyer’s home will be negotiated downward (and enforceable in writing) so Buyers are not often at liberty to discretionally set the list price of their current home as high as they want. Plus, upon a negotiated acceptance the Buyer can often expect to experience additional pressure from the Seller via the listing REALTOR® through to their own REALTOR® every time there is a new listing in the area or a new sale with questions about showings, if the price needs to be dropped, etc. in order for the home to sell quickly.
(4). When offering subject to sale of home, a Buyer’s offer can be ‘bumped’ by another offer that comes in where the Buyer is given a deadline of 24, 48, or 72 hours to remove all conditions. This means that just because the home is pending other Buyers may not be afraid to make an offer if they believe the first Buyer’s home may not have a chance of selling before the activated shortened deadline. In such cases where the deadline is imposed, the Buyer would need to get quick financing approvals and / or arrange a quick inspection or risk losing the home altogether.
(5). The odds of finding a Seller willing to accept ‘subject to sale of home’ is quite remote even at thousands of dollars above list price with an irrevocable deposit. Therefore a Buyer and their REALTOR® can waste hours on end viewing homes and writing as many as five or ten offers or more before finding a Seller willing to accept a ‘subject to sale offer’. Instead of a Buyer being able to buy their favorite home, they may then be limited to buying only their fifth or tenth favorite home.
(6). Unless the Seller and listing REALTOR® have a large irrevocable deposit in hand, it is dangerous to accept an offer ‘subject to sale of home’ because the days on the market of their home will artificially accumulate and they lose out on Buyers during this time who do not want to view the home because it is already pending but who may otherwise have bought. This added risk means most Sellers are advised to counter a ‘subject to sale of home’ well over list price or else more practically counteroffer to remove the ‘subject to sale of home condition’ altogether. If the Buyer walks away with this counteroffer, it usually indicates a Buyer who was never serious.
(7). It is not uncommon for ‘subject to sale of home’ Buyers to ask for long time extensions by as much as several weeks or several months, and usually the new deadline passes with no action and often the Buyers refuse to drop the list price of their current home in order to quickly sell. Therefore most Sellers in this situation will likely feel they are being ‘strung along’ by the Buyer and have no or little recourse aside from refusing to provide an extension after condition expiry.
(8). When an offer comes in through another REALTOR® on a home already pending subject to the sale of a home, all it does is usually push the first Buyer to act and remove their conditions (which happens some of the time) or else push them to walk away. Because most times it only helps to push the first Buyer, this can be perceived as a complete waste of the time and effort of other Buyers who end up losing out on the home but often would have provided a better overall offer.
(9). If a Buyer has a home to sell and makes an offer subject to sale, Sellers should consider the merits of letting the Buyer’s offer go with instructions to sell their home first and if this one is still available, they can always make an offer at a later date. The other option for the Buyer would be to make an offer subject to financing and inspection only. Accepting a ‘subject to sale of home’ offer is a desperate measure; it indicates a high degree of Seller desperation to the market; and is usually only agreed by Sellers selling by owner who do not have good market exposure, representation, and proper REALTOR® advice. There is no reason for the Seller to take a risk for the Buyer’s situation (especially without the comfort of an irrevocable deposit and / or thousands of dollars above list price) – it is the Buyer who must accept risk for their own personal situation. Buyers must be tested to determine if they are serious, and if they indeed are, more times than not they will decide to step forward to cater to a Seller's reasonable demands.
(10). Risk of market change – sometimes Buyers are worried: ‘what if the market suddenly jumps up by a few thousand dollars’ – usually (with rare exceptions) sharp market increases happen gradually over a period of many days or several weeks where someone who is looking to buy within a couple of weeks of selling their current home will usually not notice a very large discrepancy with their buying power. With the market stabilization that has occurred over the past year in the Greater Edmonton Area, the risk of a rapid market change over only a two week period is likely to be further diminished, particularly in the short-term. Plus, if a buyer is paying thousands of dollars premium for the privilege of tying up a home ’subject to sale of home’, would the market even jump up this high after only two weeks? The answer of course, most probably not. To counter this, a Seller with a home tied up for months ‘subject to sale’ waiting for a Buyer is definitely at risk of a sudden market crash where if the Buyer walks they may have to invoke a large price drop to sell.
In summary, if you are a serious Buyer or Seller, before you presume it is a viable option to offer or accept a ‘subject to sale of home condition’ first ask your REALTOR® to explain the risks. In my opinion, offering subject to sale of home is a ‘smoke and mirrors’ option for Buyers who are not serious, and should never be accepted by Sellers subject to the key considerations mentioned above. Buyers are advised to get prequalified for financing prior to viewing, and if they need the money from a current home sale in order to buy, they should call their REALTOR® to list and sell their home first (e.g. with a 90-day possession), and once conditions are removed by a Buyer on their current home they can secure strong financing and confidently make a proper offer to buy a property without sacrificing valuable negotiating leverage simply because Sellers refuse to deal with their offer or are charging the Buyer a steep ‘subject to sale’ premium penalty.
[Article written and ©2009 by Kelly Grant, M.Eng., ABR, NCSO, P.Eng. - REALTOR® at Maxwell Devonshire Realty in Edmonton, AB]
Disclaimer: for those readers not currently represented by another licensed REALTOR®, to obtain more information on this topic and / or if you are serious about selling or buying in the Greater Edmonton Area, call Kelly at 780-414-6100 (pager) or send Kelly an email to SOLD@KellyGrant.ca to schedule a confidential appointment.