They’re back!!! While Toronto hasn’t seen properties being sold conditionally on the sale of another property in a long time, we’ve seen the Sale of Property Condition a few times in the last months. Here’s what you need to know.
What it Is: The Sale of Property Condition (also known as SOP)
Toronto Buyers and Sellers are accustomed to properties being “sold conditionally” on the Buyer obtaining financing or conducting a satisfactory home inspection. In these cases, everything about the sale is agreed upon between the two parties, with the exception of one final, specific element of due diligence that the Buyer retains the opportunity to complete–for a short period of time, (and for only that one reason), they have one last window to back out of the deal without penalty. The Sale of Property Condition works in much the same way.
A Buyer makes an offer to buy a home, conditional on them selling their existing property during XX period of time. If they don’t sell their home during that period, the deal dies and the Buyer gets their deposit back. If the Buyer successfully sells their property during the time period, they waive the condition just like they would a financing condition, and the home is considered legally sold and binding.
Important: The Escape Clause?
An escape clause is an important part of the Sale of Property condition. It allows the Seller to continue to market and show the property during the conditional period and gives them the right to accept the second offer, with the original Buyer retaining the right of first refusal. During the right of first refusal period (usually 24-72 hours), the Buyer has a choice: either remove the SOP condition (whether or not they have actually sold their home) and commit 100% to the purchase or walk away from the agreement. For example:
- The Seller accepts an offer to buy their home, conditional on the sale of the buyer’s own property (SOP) from Buyer A, with a 48-hour escape clause. Buyer A has until March 31st to sell their home if the escape clause isn’t activated.
- The Seller continues to market and show the home
- On March 1st, the Seller finds a second Buyer (Buyer B) and accepts an offer to purchase the home conditional on Buyer A not removing the SOP condition.
- The Seller activates the Escape Clause: Buyer A is given 48 hours to remove the SOP condition or walk away from the agreement.
- If Buyer A removes the condition during that 48 hours, Buyer A get the house, and Buyer B is out of luck.
- If Buyer A is unable or unwilling to remove the condition, Buyer A gets their deposit back, and Buyer B is now the successful purchaser.
Note: The second offer from Buyer B doesn’t have to be a higher price or better in any other way – it just needs to be accepted by the Seller for the escape clause to come into effect.
When does it happen?
Usually, the Condition of Sale of a Property happens in a Buyer’s market, when there are more Buyers than Sellers; the Buyers have control and the Sellers are motivated.
Benefits and Risks
From the Buyer’s perspective, buying a home conditional on selling your own home is a great option. It secures the house they want and reduces the risk of them not being able to close or being stuck with two mortgages if they are unable to sell their original property. While they might pay more for that luxury and condition, it can buy peace of mind (and avoid more serious problems if things don’t go well).
From the Seller’s standpoint, the SOP can be a way of solidifying a Buyer when market conditions aren’t in your favour, and you don’t have any other good options to sell to. And if you ask any of the spring 2017 Sellers who had to deal with buyers who were unable to close, it can save a lot of headaches later.
How common is the SOP?
While common in much of Ontario’s smaller communities, it’s still exceedingly rare in Toronto. While we’ve seen some Buyers trying to negotiate the Sale of Property condition lately, the Sellers haven’t been particularly receptive to it. Unless a property has been on the market for a long time and the Sellers don’t anticipate finding another Buyer any time soon, most Sellers would rather continue actively looking for a Buyer while the interested party continues to try to sell their home.
If you’re a Buyer and considering adding the Sale of Property condition to your offer, recognize:
- It’s still rare in Toronto. It might not fly with the Seller and you may be putting the entire negotiation at risk.
- It will come at a price – the Seller is going to command a premium price for accepting the condition.
Talk to your REALTOR about the pros and cons of adding the Sale of Property condition to your offer. A better plan might be to sell before buying and eliminate the risk without having to navigate and negotiate the condition. [Related: Should I Buy or Sell First?]
Tips for Sellers about the Sale of Property Condition
If you decide to accept an offer that is conditional on the sale of the Buyer’s existing home:
- Include an escape clause (24-72 hours is common) to force the initial Buyer to firm up the sale or walk away in the event you find a second buyer (thus allowing you to sell to the second Buyer, ideally without the uncertainty of an SOP)
- Continue to market the property to other Buyers during the conditional period. Expect far fewer showings – most Buyers will see a property is ‘sold conditionally’ and won’t bother making an appointment (particularly right now, as Toronto realtors and buyers are still getting used to this idea). So while an escape clause is helpful, it might not be as beneficial as you’d expect.
- Watch what’s happening to prices. If prices go down during the conditional period, be prepared for your Buyer to renegotiate or walk away…so keep your conditional period reasonable, but as short as possible.
- Command a premium price. The SOP usually comes at a price…how much more $$ do you want for your home in exchange for accepting the risk that the Buyer’s home won’t sell?
- Work with an experienced realtor! While you might want to help out your cousin who just got their real estate license, this isn’t a common purchase condition right now, and it can go sideways in a number of ways.
- Find out as much as you can about the other home…via your agent. If you’re entertaining a Sale of Property condition, you’ll want to know what kind of property they have to sell, how much money they want for it and the condition it is in.There’s no sense in tying up your property if your Buyer has an unrealistic price in mind for their home or if there are other big objections that will get in the way of them selling.
- Find out as much as you can about the agent selling your Buyer’s own property. What’s their track record? Do they take professional photos? Stage? What kind of marketing do they do beyond the MLS? If the successful sale of your home depends on an agent you didn’t hire, you’ll want to make sure they are equipped to do the job.
- Know the facts. If the Buyer’s property is already for sale, make sure your agent gets the FULL history of the home – not just the current listing. While it may appear that the Buyer’s property has only been listed for 21 days, this may well be the second or third listing for the home, and it’s been on the market for 150 days. Get all the facts before deciding whether to accept the condition.
I’m curious to see how often we’ll see the Sale of Property condition this year and if Sellers will be open to accepting it. Still have questions? Talk to your REALTOR!