WHEN THE BUYER HAS A HOME TO SELL...
Quite often, when people are moving, they have a home to sell as well. And quite often, that home can complicate the process. This blog looks at the scenario from both sides of the table.
First, what does the offer look like.
The buyer’s offer will have a condition in it that reads something like this.
“This offer is conditional on the sale of the Buyer’s property,
known as 123 Main Street, Anytown, ON. Unless the
Buyer gives notice in writing no later than ____ that
this condition is fulfilled…”
That condition is known in the real estate world as an SOP condition. That’s code for “Sale Of Property”. The SOP condition typically runs for four to six weeks which means the home has a conditional offer in place for a month or more.
The truth is, there is always a bit of a letdown when an offer comes in with that contingency in place. The big one is it adds a serious amount of uncertainty to the offer, particularly in a slower market where homes are harder to sell. Afterall, even if the offer is great on all accounts, that condition is a ‘get out of jail free’ card for the buyers. Afterall, if their home doesn’t sell, it was all for not and the deal is dead.
Market Conditions + Confidence. There is an inverse relationship between confidence and the presence of SOP offers. When the market is moving well and confidence is up, the need for an SOP condition goes down. However, as the market slows down and becomes a bit shaky, SOP conditions become more and more common, if not, almost normal.
If you are in this situation, whether as a buyer or a seller, here are the main points to consider.
TIMING. A buyer’s Realtor will always try to get as long as possible for the SOP condition. They may ask for six or eight weeks.
our advice for sellers: there is no reason to have an SOP condition in place for six weeks. We would suggest four weeks maximum. The reason is, while the SOP offer is in place, the sellers’ home is tied to it. Overall activity can be impacted since it is conditionally sold, even if it can be bumped. As well, the Buyer’s Realtor will know in a few weeks if the buyer’s home is going to sell. Six weeks is overkill.
our advice for buyers: absolutely, try to get six weeks for your SOP condition. Depending on the market and the situation, you might be able to get that extra time.
ESCAPE CLAUSE. This is the clause that allows another buyer to ‘bump’ buyer number one. This clause is attached to the SOP and simply states that if the seller receives another offer that is satisfactory to them, they can give notice to buyer number one that they have to remove the SOP condition (or all conditions) or release from the offer, at which point buyer number two would move into first place.
our advice for sellers: the escape clause should be maximum 48 hours, no more. Depending on the situation, we may reduce it to 24 hours. Afterall, most buyers know in about 5 minutes if they’re in the position to firm up the agreement or let it go. As well, you’ll want to make sure the escape clause is worded that the buyer is to remove “any and all” conditions.
our advice for buyers: absolutely, try for 48. Heck, if you can get 72, go for it! Also, try to word it that the escape clause is related to the SOP (this) condition only.
BUYER ACTIVITY. When you have an SOP conditional offer in place, showing activity will decrease, but there are a few key pieces to know. Your home will still appear the same on Realtor.ca, so the public will not be aware of the existence of the conditional offer. That said, the computer program that Realtors use will indicate that there is an offer in place. As a result, Realtor showings will slow down in quantity but not necessarily quality. For those without a home to sell, they will still look at the home and if they like it, they can make an offer. It will have a condition in it on the Seller being released from Buyer number one. This is where the escape clause will come in.
our advice for sellers: yes, showing activity will slow down, but it will filter out other buyers who also have a home to sell. Typically, you’ll only have buyers through who have nothing to sell.
our advice for buyers: if you have nothing to sell, absolutely, go see the home and make an offer. You may appear as the Knight in shining armour to a weary seller.
THE BUYER’S PROPERTY. The SOP property is a huge factor. How sellable is it? What will it be priced at? When will it be on the market? You could get the most incredible SOP offer but if the buyer’s property is a difficult sell, you really haven’t accomplished anything.
our advice for sellers: ask those questions. Make sure you know what you’re hitching your wagon to. Will they put it up for sale $50,000 higher than it should be? Does it show well? Make sure you know that info.
our advice for buyers: have your home ready to go on the market and priced reasonably. If you have photos or info to share, that may be a big help. Remember, the seller is going to be a bit disappointed to see the SOP condition, so any of this info can help mitigate that letdown.
PRICE. Sometimes, an SOP offer will need to have a higher offered price to get the seller to accept it. Remember, that contingency is more complicated than a typical finance or inspection condition, so the compensation may need to be be monetary.
our advice for sellers: if you can get an acceptable offered price and the buyer’s property is sellable, it may be a viable option. It really is a case-by-case basis.
our advice for buyers: be prepared to sweeten other parts of the offer in order to compensate for the SOP condition. Those could be conceding on a closing date or offering a bit more money.
IN SUMMARY
Most decisions come with some amount of risk and reward. The reality is that the SOP condition is security for the buyer. For a buyer to purchase without that condition, the risk is not selling their home in time while the reward may be increased leverage on their purchase, resulting in better terms.
For the buyer, that SOP creates the risk that their offer may not get accepted or they’ll have to acquiesce on other parts of the offer (price, closing date etc.). The reward, however, is they don’t have to worry about their home not selling. That paragraph essentially becomes a security blanket.
For the seller, that SOP condition comes with its own mix of risk and reward. The risk is reduced buyer activity along with the possibility that the buyer can’t sell their home. The reward though is their home may ultimately sell and possibly for more money than they might otherwise get.
With any situation in the purchase or sale of a home, you have to sit down and map out your risk and reward tolerance. What is important to you and what isn’t? What is your financial position? Know the ‘what ifs’ and the safety net (if any) that you would need to avoid getting into a difficult spot.
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