Time Clause Offers - Should You or Shouldn't You?
Posted: Jun 06, 2012
"This Offer is Subject to the Sale of Another Property..."
Whenever we see a market with so many listings, it becomes very tempting for REALTORS® to try to spur on activity by getting seller clients out in the market to shop for their next home. Either to show them the amount of selection they will have when they sell their current home (assuring them they won’t be homeless or on their REALTORS®’ sofa1) or because the seller(s) want to put an offer on another property to know what they’re working toward.
A lot of people who have bought or sold are familiar with Time Clause offers, but for those who aren’t, here’s the skinny: a buyer puts an offer on a house subject to the sale of their own property (whether their principal residence or other; sometimes more than one property is included) which usually has a further clause that states that the seller may accept a subsequent offer (bump 1st buyer out) by giving them X days/hrs notice (usually 24-48 hours) whereby 1st buyer must remove all conditions and commit to the purchase – whether or not their property is sold. High stakes.
But what happens in a market like we have now where there are more new listings coming on the market than there are sales? Buying another property when you haven’t sold your current property can leave you tied to a property that could be going down in value and limits you from correctly adjusting the price on your own property if the market warrants it.
From the sellers’ point of view, you’ve got a bona fide buyer who wants your property, maybe even at close to your current list price. Even your friendly, neighbourhood REALTOR® is going to have an urge to scratch that itch! But wait; is this the right move for you? If you say yes, you’re gambling on the sale of their place as much as your own. If you say No, they might not come back.
From a buyers’ point of view (a buyer who has a property that must be sold in order to buy), you’ve found a property you love, love, love and can’t live without. There’s a sense of urgency that if you don’t secure an offer, someone else is going to get it. And even though Time Clause offers generally come with a ‘bump you out’ clause, at least you feel a little safer knowing you must be notified and thereafter have a big (quick) decision to make. Nonetheless, at least you’ve secured first shot at it at a set price. But then again, you’ve secured yourself to a property and at a set price. No more shopping around. You’ve got to make sure you get enough out of your property to make this move make sense.
For both the buyer and the seller there are obvious benefits and drawbacks to Time Clause offers, but there are ways to protect both sides. Interestingly it employs one strategy!
Ideally, it would be great if we could include in the offer a clause that stipulates a set time whereby if neither property has sold by a given date, both properties will be price reduced, but you can’t have a contract within a contract that affects another contract. Huh?
Example #1: Seller #1 says to their buyer (Buyer #1) who has a potential offer coming in on their own place from Buyer #2, “Okay, reduce your price for Buyer #2 and we’ll reduce the price on our Contract.” If this was in Seller #1’s Contract with Buyer #1 it wouldn’t hold up in court. However, the principle is there.
Example #2: Seller #1 says to Buyer #1, “If you haven’t sold your place in 15 days (or whatever is agreed on), you agree to reduce the price on your place to X and we’ll reduce the price on the Contract for our place to X accordingly.” Again, this stipulated a Contract within a Contract (the second Contract being the Listing Agreement Buyer #1 has with their Agent.) Again, the principle is there.
Nonetheless, even though these conditions wouldn’t hold up in Court, in practice it can be discussed at time of offer and the condition to the sale of the Buyer’s property left relatively short (i.e. Subject to sale of the Buyer’s property within two weeks instead of the more common 30-60 days) which then allows the contract to collapse and renegotiation to take place at that time. The Seller and Buyer can agree to extend the Contract and reduce the Contract price if the Buyer’s property has been properly price adjusted. (Their respective REALTORS® would be able to advise on this.)
Paul Ives, Ives Burger Law, notes, “Agreements to Agree are not enforceable… as such, I would not recommend that this variation on time clauses be considered… it would create too much uncertainty to the point that perhaps the whole deal is unenforceable.”
Reality for Sellers: if no one else has stepped up to buy your place within the time frame of the Time Clause, you’re likely overpriced (this market is changing quickly) and had you not accepted this (now falsely inflated priced) offer, you would have been more amenable to adjusting your price. Do it anyway! Either someone will come along and bump out Buyer #1 or Buyer #1 will step up and remove their conditions. (Make sure you have a substantial non-refundable deposit agreed to in your original Contract to protect you should Buyer #1 not be able to complete!) You can agree to any price on a subsequent offer, higher or lower than your first offer. Note, too that if you decide to renegotiate your Contract with Buyer #1, you are ‘opening the Contract’ and thereby putting yourself at risk for them to be able to walk. (Obviously, there’s way more detail to this and you need to be talking to your lawyer and/or REALTOR® about your particular situation.)
Reality for Buyers: if no one else has stepped up to buy your place within the time frame of the Time Clause offer you have on your dream property, then both your and their properties might be overpriced! As per above, you’ll need to adjust your price. In order to be able to do this, you may need (or at least want) to get Seller #1 to adjust the price on your Contract as well. Again, any time you open a Contract, you risk your position. They might have someone else waiting in the wings. But guess what, you’re not going to get it anyway if you can’t sell your place. And don’t just reduce your property in the hopes that if you get an offer, Seller #1 is going to be reasonable at that time and say, “Yah, sure, we’ll adjust the Contract price.” They might not, and then you’ve sold your property for less and are obligated to buy the next one at the Contract price. Oi! (Again, consult with your lawyer and/or REALTOR® about your personal specifics.)
So, should you? If you do it right, yes. Now that we’ve got past scary part of the story, I would like to point out that I like Time Clause offers! Getting buyers out looking at properties shows them the possibilities and the reality land and creates a buzz of activity that’s good for the real estate market. And every once in awhile we get that rare instance where REALTORS® get to help a whole bunch of clients at once (and pay off their lines of credit!) when a domino falls on a string of Time Clause offers! Yay!
And to make sure I’ve written nothing that will land me in real estate jail, I’ve got the thumbs up from lawyer, Paul Ives (thank you!), to the accuracy of this article. I accept no responsibility for the actions you choose unless of course you’re under the care (legal jargon: fiduciary duty) of my team!
1 I’ve only had to put someone on my sofa once.
©Anna Jorgensen
REALTOR® with Royal LePage in the Comox Valley
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