As previously mentioned, I am doing a series on what I call the jump or step up transaction. This is whereby the client will need to sell a property in order to purchase the next property on the property ladder. Today we will go over the first way of accomplishing such a transaction: the subject to sale.
Subject to sale is probably the most commonly known way of doing a jump up transaction. This is whereby the potential buyer will look at properties with the agent with an eye of putting an offer on the property. However, because a large part of the down payment will come from the sale of the client property, the offer will have the common subjects to things such as inspection, financing, strata documents, pds, title, insurance, etc etc; on top of that, there will be a subject to sale clause which basically says that the purchase is subject to the buyer procuring a “firm” offer on their own property during a certain time. This clause typically runs for a lengthy period of time anywhere from a few weeks to a month or two. This sounds like a low risk way for the buyer to accomplish the jump because if their own property doesn’t get sold, they are protected by the subject to sale clause so they simply wont remove subjects on their own purchase, no harm no foul.
As you can imagine, the seller isn’t exactly thrilled to receive such an offer. In marketing properties, seller agents acting in the best interests of the sellers would like to keep subject dates to as minimally as possible; giving away a subject that potentially runs for a couple of month isn’t exactly ideal. To protect the seller, there is usually a 48 or 72 hour out clause in the subject to sale. This clause would allow the seller upon receipt of another bonafide offer to give written notice to the buyer that they have a period of time, usually 48 or 72 hours depending on the original contract. During this time, the buyer needs to either remove the subject or the buyer gets “bumped” from this contract and lose the accepted offer to the other party.
This is only one of the risks to their buyer. In addition, in order for the seller to accept such an offer, the purchase price has to be higher than what is normally offered on a typical subject offer. As you can imagine, the longer the subject period, the more money that the seller will demand to compensate for the uncertainty associated with this type of offers. In addition, let’s imagine that you are in the middle of this type of transaction. You have an accepted offer subject to the sale of your own property; and on the sale of your property you received a typical offer with a standard subject removal date of say a couple of weeks. During this time, you are given notice by the sellers that someone else has put in a bonafide offer and they wish to bump you unless you remove subjects within seventy two hours. However, that time isn’t enough for the buyers of your property to complete their subject removal. If this happens to you, you could end up in a case whereby you have lost the property you are looking to buy but are now in a binding contract to sell your own property. This certainly isn’t a fun situation to be in. Some of the ways that we use to get around this issue is to convert the subject to sale to a subject to confirmation of sale clause which is a standard subject clause without an out by the sellers. But such a move may not be agreed to by the sellers which means you might be back at square one.
This post more or less gives you some basics on how a subject to sale works but this method is a deep and complicated one; by no means does this post cover everything. A more in depth discussion is required. If you have any questions, feel free to contact me. But as you can see, it’s not a cut and dry process and pose many risks to the client in the jump transaction.