In a competitive real estate market, many buyers face the challenge of needing to sell their current home before committing to purchasing a new one. The Subject to Sale clause is a critical tool that offers protection to buyers in this situation. However, this clause introduces complexity for both buyers and sellers. This blog post breaks down the subject-to-sale process, outlines protective clauses that safeguard all parties, and provides practical advice for navigating these complex transactions.
What is the Subject to Sale Clause?
The Subject to Sale clause is a contractual provision that allows a buyer to make an offer on a property, conditional upon the sale of their existing home. If the buyer is unable to sell their home within a specified timeframe, they can withdraw from the purchase without incurring penalties.
How It Affects Both Buyers and Sellers:
- Buyers: This clause reduces financial risk by preventing buyers from being obligated to carry two mortgages and provides a buffer period to secure the sale of their current property before finalizing the purchase.
- Sellers: While it can provide the seller with a qualified buyer who is actively working to sell their home, it can also introduce uncertainty and potential delays.
Understanding how to balance these interests is key, as it sets the stage for the protective clauses discussed below.
Key Protective Clauses in Subject to Sale Transactions
Scenario 1: The Original Agreement (Subject-to-Sale Buyer and Seller)
The subject-to-sale buyer makes an offer on a property, conditional upon selling their current home. This agreement requires careful negotiation to protect both parties.
Key Elements:
- The subject-to-sale buyer includes a condition that they must sell their current home before finalizing the purchase.
- The seller may agree to this, but they want to avoid being locked into waiting indefinitely.
Protective Clause: Seller Invoking Time Clause (a.k.a. Time Clause) This clause must be negotiated between the seller and the subject-to-sale buyer—it is not automatically included in the agreement. The time clause allows the seller to issue a notice to the buyer to remove their conditions within a set timeframe (typically 48 hours) if they accept a back-up offer from another buyer.
Potential Risks:
- Without a time clause, the seller could be bound to the subject-to-sale buyer’s uncertain timeline and unable to entertain other offers.
- For the buyer, failing to sell their home before the time clause notice period ends could result in losing their desired home.
Scenario 2: The Subject-to-Sale Buyer Lists and Sells Their Home
In this scenario, the subject-to-sale buyer becomes the seller of their current home.
Key Elements:
- The subject-to-sale buyer needs to secure an offer for their home quickly to meet the conditions of their purchase.
- The buyer for the subject-to-sale buyer’s home may include their own subjects (e.g., subject to financing, inspection, etc.).
Protective Clause: Seller’s Unconditional Purchase Clause This clause ensures that the subject-to-sale buyer’s sale only proceeds if they have removed subjects on the home they are purchasing. Without this clause, they risk selling their home without having secured their next home.
Timing Risk Example: If the subject-to-sale buyer accepts an offer with a seven-day subject removal period from their buyer, but the seller of the home they want to purchase issues a 48-hour notice, they could be in a difficult situation. If the buyer for their home doesn’t remove subjects within 48 hours, the subject-to-sale buyer may be unable to proceed with their purchase but still be legally obligated to sell their home.
Outcome: Without the Seller’s Unconditional Purchase Clause, the subject-to-sale buyer is at the mercy of their buyer’s timeline and risks losing both homes.
Scenario 3: The Back-Up Offer
A back-up offer is an offer submitted by a new buyer to the original seller after the subject-to-sale offer is in place.
Key Elements:
- The original seller continues to market their property and receives a back-up offer.
- The back-up offer only moves into first place if the subject-to-sale buyer does not remove their conditions within the notice period.
Notice Process:
- The seller accepts the back-up offer and issues a 48-hour notice to the subject-to-sale buyer.
- The subject-to-sale buyer must remove their conditions or walk away.
- If the subject-to-sale buyer cannot remove their conditions, the back-up offer becomes the primary contract.
Potential Risks:
- Subject-to-Sale Buyer: Risks losing their desired home and potentially their deposit.
- Seller: The back-up offer may come with its own conditions, which could still delay the sale.
- Back-Up Offer Buyer: Risks disappointment if the subject-to-sale buyer removes their conditions in time.
Risks When Protective Clauses Are Missing
Without protective clauses, each party can face significant risks:
- Buyers: If the seller invokes the time clause and the buyer does not have an unconditional offer to purchase in place for their current home, they may be forced to walk away from their desired home, potentially losing deposits or incurring extra costs.
- Sellers: Without the ability to issue a notice based on an accepted back-up offer, the seller risks waiting indefinitely and missing out on more favorable offers.
- Subject-to-Sale Buyers: If they fail to include a Seller’s Unconditional Purchase Clause when selling their home, they could lose control of the transaction. This becomes critical if the buyer for their home still has conditions to remove while the seller of their desired home has issued a time clause.
Hypothetical Scenario: For example, if a subject-to-sale buyer receives a notice to remove subjects from the seller but their own sale has conditions still outstanding, they may face losing their desired home and potentially their deposit. Meanwhile, the seller may miss out on better offers because they were obligated to honor the subject-to-sale agreement until it was resolved. This waiting period can deter new buyers who prefer more certainty, causing the entire process to unravel and leading to delays and additional expenses for everyone involved.
These missing clauses can cause timelines to collapse, inspections and fees to be wasted, and opportunities for other buyers and sellers to be missed, creating a ripple effect.
Responsibilities of Each Party
It’s important to note that subject-to-sale buyers must stay in regular contact with their real estate agent and lender to receive timely updates and address any potential issues quickly.
- Subject-to-Sale Buyer:
- Should list their home competitively and act quickly to secure a sale.
- Prepare for contingencies, such as price adjustments or bridging finance options.
- Seller:
- Can continue marketing the property.
- Can only issue a time clause notice when a back-up offer is in place.
- Buyer for the Subject-to-Sale Buyer’s Current Home:
- Plays a pivotal role in the timeline of the subject-to-sale transaction.
- Any delays in financing, inspections, or closing could impact the entire chain of transactions.
- Back-Up Offer Buyer:
- Must be prepared for a quick transaction if elevated to the primary offer.
- May face disappointment if the subject-to-sale buyer successfully sells their home and removes the condition.
Practical Advice for Realtors
In addition to the advice below, it’s important to coordinate timelines with all parties involved to avoid bottlenecks in the transaction process and ensure smoother communication throughout.
1. Understand Your Client’s Needs and Risk Tolerance
Before drafting an offer, assess your buyer’s financial position. Can they afford temporary housing or carrying two mortgages? Tailor the subject-to-sale clause accordingly.
2. Insert Protective Clauses at Key Decision Points
- Use the Seller Invoking Time Clause when negotiating subject-to-sale offers to give sellers flexibility without sacrificing buyer protection.
3. Set Realistic Expectations for Timelines
Ensure your client understands the timeframes involved and the potential need to adjust their strategy if their home isn’t selling as expected.
4. Pre-Sale Preparation
For subject-to-sale buyers, a quick sale of their current home is critical. Help them prepare by:
- Pricing their home accurately.
- Staging and marketing effectively to generate early interest.
- Having pre-approvals and all paperwork in place to avoid delays.
5. Bridge Financing as a Contingency
Instruct your buyers to explore bridge financing options, which can allow them to proceed with the purchase of their new home even if the sale of their current home is delayed.
Conclusion
Subject-to-sale clauses can be powerful tools for buyers navigating the sale-and-purchase process, but they must be handled carefully. Realtors play a key role in protecting their clients by inserting the correct protective clauses and preparing for potential roadblocks. By ensuring all parties understand their roles and responsibilities, Realtors can guide their clients through these transactions with confidence, avoiding costly missteps.
By mastering subject-to-sale strategies, you can help your clients make informed decisions, mitigate risks, and achieve their homeownership goals while safeguarding their financial well-being.
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