Last week, I met a family who had fallen in love with a property we have for sale in an upmarket area. It offered them space, quality, schools, and more- all in a waterfront subdivision of similar houses. After their second visit, they decided they wanted to buy it.
Problem is, their house isn't sold (it's not even on the market) and they don't have the capability to arrange contingent financing. Actually, they didn't think they had a problem since no one in past had really explained the pitfalls of their predicament. It then dawned on me that consumers believe this is the way transactions occur, so here are some pointers on why it's a poor solution:
Making an offer "subject to the sale of my house" is a fix-all no doubt created in past for those who are hesitant to sell first for fear of being homeless. "What happens if my house sells and I can't find something else..." is the usual concern.
Even worse is a soft market. The seller knows what the market is like: they are in it! For a buyer to make a Subject To offer, they are really saying "I'll beat you to the finish line". But there's an old saying: "when the tide goes out, all the boats go with it", meaning the probability of success is equal.
Here are the pitfalls of "Subject to Sale" offers:
1. The seller is in no way obligated to accept such an offer
2. If they did, rest assured there will be little or no negotiation room. It's a weak offer, so the seller will expect full pop when granting you that luxury
3. Subject to Sale offers always have a "Time Clause" attached, basically a right of first refusal. The home remains on the market and when another buyer is found who is able to purchase with cash, you will be forced to decide within a specified time frame whether you'll fully commit or back off.
4. You will be required to remove all other conditions (financing, building inspection, review of title and other documents) within the usual timeframe of 1-2 weeks, meaning you will be spending $500-$1000 in research with the likely possibility your house will not sell.
5. As time goes on and the dream house remains unsold, you will start wondering about it's value in the marketplace. If you have already agreed upon a higher sale price, the seller will hold tight waiting for your sale- knowing they did better than the market dictated. And, if successful, you have paid more!
In every transaction, there is a buyer and there is a seller. Subject to Sale is a benefit for the buyer, in theory allowing them to buy without having sold first. Think of this from the seller's perspective, though: why would a seller put their house on "hold" when there is a higher probability of an unencumbered cash buyer waiting in the wings? If they did accept such an offer, the seller will lose potential buyers- better qualified buyers- who will not want to proceed knowing there is a chance that they will not be able to buy the house because of the prior commitment. You should note that many Agents will not show their Buyers homes with Subject to Sale offers in place since they would not want their client to get their heart set on the home, only to have the first party follow through.
From an Agent's standpoint, Subject To offers are imperfect because the risk level is high. Basically, the Agent conducts all of the tasks as in a conventional transaction (assisting the buyer perform due diligence- reviewing title, Municipal files, arranging appraisal and building inspection) with a high probability that the sale will not proceed. This could be a solid 8-20 hours of hard work squandered on an unsuccessful sale, not to mention the eventual emotional counseling for the disappointed client.
There are no formal records on the success rate of Subject To offers since only the eventual sales are recorded on the MLS system- it is never known how many unsuccessful offers existed prior to the sale. Based on conversations with other Agents in the past 20+ years, I would doubt if the success rate is as high as 30%. This is likely the reason seasoned Agents or top performing experts advise against them.
The Subject To is a terribly weak offer. It's actually not even a contract- it is an "option". Basically, "I will buy your house if I can sell mine". Whim and Fancy, as it's known- it has the same merit as "Subject to me winning the lottery", especially in softer markets.
What's the solution? If you are seeking a relatively common home (ie. traditional styling, size, features) and your Agent can demonstrate such homes enter the market regularly (it is easy to pull up such listings in MLS history), you are well advised to get your home on the market first and gauge interest. You'll either know in days how marketable the house is and the Agent will get a sense of whether it will happen. Just be sure to negotiate a longer Possession Date when the offer comes thru, giving you time to find your next home.
When you find that home, you'll know exactly how much money you have to spend. You are also in a position of WANTING to buy a home instead of HAVING to buy a home- a big difference. Best of all, you will significantly overpower any other suitors who are encumbered with a property to sell. For Sellers, "Surety" trumps cash every single time.
About the people I met last week: They have a phenomenal home in a good area but are massively overbuilt. In another area, the home would be $900,000-$1,000,000 but they are currently surrounded by $500,000-$600,000 homes. They want $850,000 to be able to move to the dream home and the likely value of their home is closer to $725,000. They don't want to sell first for fear of being homeless, want more than market value for their home and will likely attempt to lowball the dream home. And they will only make their offer Subject To.
Sadly, the dream home won't go to those folks. Just today, an interested party viewed it and are preparing an offer- they do not have a house to sell and do not require a mortgage. These people will end up owning the other folks' dream home.
Call or email me for more discussion on this topic or to chat about Real Estate in general.
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He has been awarded the Victoria Real Estate Board's "Special Gold" and "President's" awards for consistent top performance and remains in the Top 10% of Victoria Agents.
Internationally, he has received the coveted RE/MAX "Lifetime Achievement" award and was recipient of the RE/MAX Western Canada "Special Service" award in 2009 for service in the industry.
Tony served as a Director of the Victoria Real Estate Board for 3 terms and was President and Spokesperson for the Association in 2008.
He remains a busy Agent with his team of 4 specialists while also volunteering on the community Boards of the Victoria Hospice Foundation, Anawim House, Victoria Dragonboat Festival and the Chinatown Night Markets.
Currently he is a sought-after sales trainer and instructor for the British Columbia Real Estate Association.
Tony resides in spectacular Oak Bay with his partner Susan, 2 kids, 2 dogs and his Star Trek collection.
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