Subject-to-Sale Clause in Real Estate: A Closer Look at This Contingency

Buying or selling a home is a significant financial decision that comes with its fair share of complexities. In real estate transactions, it's common for both buyers and sellers to include various contingencies to protect their interests and ensure a smooth process. One such contingency is the subject-to-sale clause, a provision that can play a crucial role in determining the success of a real estate deal. In this blog, we'll delve into the subject-to-sale clause, what it entails, and how it impacts real estate transactions.

Understanding the Subject-to-Sale Clause:

A subject-to-sale clause is a contractual provision frequently seen in purchase agreements when a buyer makes an offer on a property while still needing to sell their current home. This clause makes the purchase offer contingent upon the successful sale of the buyer's existing property. In essence, it allows the buyer to proceed with the purchase only if they can sell their current home within a specified timeframe.

How It Works:

1. Inserting the Clause: When a buyer is interested in a property and wishes to make an offer but hasn't yet sold their current home, they may include the subject-to-sale clause in their purchase offer.

2. Negotiating Terms: The subject-to-sale clause's specific terms are open to negotiation between the buyer and the seller. This may include the length of the contingency period and any conditions that must be met for the clause to be satisfied.

3. Contingency Period: The clause typically sets a specific timeframe during which the buyer has to sell their existing home. This period can vary depending on the market conditions and the parties' agreement. It could be a matter of weeks or a few months.

4. Seller's Position: The seller faces a certain level of risk when accepting an offer with a subject-to-sale clause. During the contingency period, the seller may continue to market the property and consider other offers. If they receive a better offer without a subject-to-sale clause, they may have the right to accept it, which would remove the initial buyer's offer.

5. Lifting the Contingency: Once the buyer successfully sells their current home within the agreed-upon timeframe, the subject-to-sale clause is lifted, and the purchase agreement becomes firm. The transaction can then proceed as a standard sale.

Pros and Cons of the Subject-to-Sale Clause:

Pros:

1. Flexibility for Buyers: The subject-to-sale clause provides flexibility for buyers who are dependent on selling their existing property to finance the purchase of a new one. It enables them to make a competitive offer without risking owning two properties simultaneously.

2. Protection for Buyers: By having the subject-to-sale clause in place, buyers can avoid the stress of being obligated to purchase a new property if they fail to sell their current home.

3. Securing a Desired Property: For buyers eyeing a particular property that's in high demand, the subject-to-sale clause allows them to make an offer and reserve the property while they work on selling their home.

Cons:

1. Risk for Sellers: Sellers may be hesitant to accept an offer with a subject-to-sale clause because it leaves them uncertain about the sale's finality. If a more secure offer comes along, they might choose to accept it instead.

2. Extended Transaction Period: Dealing with a subject-to-sale clause can prolong the transaction process, especially if the buyer struggles to sell their current home within the specified timeframe.

3. Lost Opportunities: If the seller waits for the buyer's current home to sell, they may miss out on other potential buyers who are ready to make a firm offer without contingencies.

Tips for Buyers and Sellers:

For Buyers:

1. Be Realistic: Before including a subject-to-sale clause, make sure your home is ready for sale and appropriately priced to attract potential buyers quickly.

2. Negotiate a Reasonable Contingency Period: Set a realistic timeframe for selling your existing home. This shows the seller that you're serious and committed to the purchase.

3. Stay Proactive: Actively market your current home and be prepared to adjust the price if necessary. The sooner you sell, the more likely the seller will be willing to accept your offer.

For Sellers:

1. Evaluate the Buyer's Situation: Assess the buyer's readiness to sell their current home. Ask for details about their property, its market value, and the efforts they've made to sell it.

2. Consider Alternatives: If you receive another attractive offer without a subject-to-sale clause, carefully weigh the risks and benefits of both offers before making a decision.

3. Consult with a Real Estate Professional: Seeking advice from a real estate agent or lawyer can help you navigate the complexities of subject-to-sale clauses and make informed decisions.

In conclusion, subject-to-sale clauses can be a valuable tool for buyers and sellers in real estate transactions. While they offer flexibility and protection for buyers, they also present some risks for sellers. Both parties should carefully consider their options and negotiate the terms to ensure a smooth and successful transaction. When used wisely, subject-to-sale clauses can help facilitate the process of buying and selling homes while mitigating potential challenges along the way.

Written by:

Adam Struch

604-991-6393