Steven and Sheron's Blog

The Jump, Sale First With Rent Back

On my last post, I discussed in detail the advantages and disadvantages of the subject to sale method of doing the jump transaction. If that isn’t quite what you are looking for, there is always the sale first method. The sale first method is basically well, you sale first and then buy. It’s pretty simple really. You would put your property up for sale, and as soon as you get a firm sale on your property (subjects removed with deposit paid), you would go and look for the property to purchase. On the purchase side, you would look to align the dates so that you would transact the sale and buy in such a way that would ensure a seamless transition (split dates on the sale side which would allow us to slip the buy side dates into the middle).

There are a couple of major advantages of this method. For one thing, if this method works completely to plan, you have certainty. For example, most mortgage brokers are able to use the firm sale as confirmation on your down payment on the purchase side. In addition, if the market for whatever reason tanks from the point of your sale to the point of your buy, you won’t run into a financial risk that you can’t close on the buy side of the transaction because your own property value has gone down. In a way, the financial risk of this method is fairly low (though not zero as what you will see).

This method isn’t without risks however. As is any transaction that is dependent on another transaction, a firm sale doesn’t always close. The buyer may run into issues with closing which will mean that you may not be able to close on the purchase side. This would mean a risk to your deposit for example. In addition, there is always the risk that once you sold your property, you may not be able to find your dream property on the buy side. This means that there is a decent risk that you may not be able to find anything in time before you close the sale side of the transaction.

To mitigate this risk, what we usually do is two things. The first is a long close, so we put a longer date between when the subjects are removed and when the property closes. The intention is that this long close will give us enough time to find a property. Alternatively, we could also negotiate a rent back clause. This gives the seller a right to rent back a certain number of months after closing with a one month notice to vacate the premise similar to the notice that a renter would give a landlord to end a month to month tenancy. This way, we can comfortably take our time while we look for our dream purchase. The rent back clause idea sounds good in principle but may not work in practice. This is because the buyer of your property may not want to do it. So usually we would have to entice the buyer to do the rent back with certain concessions elsewhere, usually the price.

The final risk is the opposite of one of its advantages. What is the market went up in between the two transactions. This would mean that unlike the subject to sale, you would have sold your property without being able to buy and potentially are priced out of the market. Certainly this did happen to some buyers during the crazy period of 2015 and 2016 detached markets whereby the market was going up several percent a month.

There are a lot more details with the sale first then rent back method. I am simply presenting a few of the obvious ones here for reference. If you want a detailed analysis of how this works, feel free to reach out to me to have a chat.

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