Real estate buyers muscle in with heavy demands

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In a nearly dormant real estate market, some sellers are confronting the revival of an anachronistic practice: Nervous buyers are making their offer to purchase a property conditional on the sale of the one they already own.

Buyers in a hot market have no chance with an offer tangled in such a gnarly condition, but in a market downturn or a region where properties are slow to trade, sellers become more amenable.

Matthew Regan, a broker at Royal LePage Real Estate Services, saw a few buyers attach the clause during the market slowdown of 2018 but it disappeared when sales rallied again.

In Oakville and Mississauga, where Mr. Regan concentrates much of his business, offers conditional on the sale of the purchaser’s property are rare today but starting to pop up, he says.

In Mr. Regan’s view, the strategy can be successful but sellers need to be wary. Once a property has been sold conditionally, that information becomes public. The property remains visible on the Multiple Listing Service but some buyers may avoid even booking a showing.

“It can slow the momentum,” he says. “It kind of red flags the house in the buyer’s eye.”

Mr. Regan says such a deal usually includes an “escape clause” in the Agreement of Purchase and Sale. The clause allows the seller to continue to market the house and show it to other potential buyers. If a second buyer submits an offer acceptable to the seller, the seller informs the first buyer, who then has a period time – typically 48 hours – to waive the condition or back off.

To trigger that escape clause, the second buyer must be willing to come forward with a tempting offer that forces the hand of the original buyer.

The risk for the second buyer is that they may end up being used as a pawn, cautions Mr. Regan, because they are providing the seller with leverage over the first buyer.

“The seller is, in theory, very happy with that offer. The seller is in the driver’s seat,” Mr. Regan says. “As the second buyer, you can waste a lot of emotional time.”

Mr. Regan says sellers should be aware that a lot of house hunters would rather avoid such a convoluted process and just look for a property that hasn’t been sold conditionally.

He knows of one deal in Oakville that fell through after the sellers of a home around the $2.5-million mark accepted an offer conditional on the sale of the buyer’s home in the $3.2-million range.

“In a market like this, it’s in an area where there’s just not a lot of houses selling above $3-million,” he says.

Two homeowners recently accepted the condition on sales agreements in the firm’s London, Ont., offices, he adds.

Mr. Regan says the pace of sales in London tends to lag the Greater Toronto Area by six to eight weeks, and sellers are more likely to be receptive to such a condition in areas where their property has been sitting for a long time.

“This might be the first offer they’ve seen.”

According to the London-St. Thomas Association of Realtors, the number of new listings was the highest ever recorded in the month of June, while the number of sales was at its lowest point in the past 10 years for June. That trend has pushed “months of inventory” – a measure of the time it would take to sell all the active listings at the current pace of sales – to 2.8 in June from 1.7 in May.

In the Waterloo region west of Toronto, broker Thien Nguyen of TrilliumWest Real Estate says he has seen more conditional offers in the past couple of months than in the previous two years.

In the first week of July, the number of conditional sales jumped 47 per cent from one month earlier.

The Kitchener-Waterloo Association of Realtors reported a 24-per-cent drop in sales in June compared with June, 2021. Prices have dipped as the number of properties for sale has steadily increased, according to the association.

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Making an offer conditional on the sale of the buyer’s property is also a growing trend, says Mr. Nguyen, with 38 per cent of conditional offers containing that clause.

If Mr. Nguyen is representing the sellers, he first gathers as much information as he can about the house that needs to be sold. He talks to the buyer’s agent to find out when they plan to list, in which neighbourhood, and at what price. If the house is not in a great area or needs a major renovation and therefore might take longer to sell, he would advise the homeowner not to accept and keep the listing on the market.

Elise Stern, broker with Harvey Kalles Real Estate Ltd., says the market in midtown Toronto is holding up better than those in the suburbs but, on average, houses are taking longer to sell compared with earlier this year. In recent years, when supply was tight, Ms. Stern advised homeowners to buy their next property before selling an existing one. Now she recommends they sell first.

Sales in the GTA plunged 41 per cent in June compared with the same month last year and dipped 4.7 per cent from May on a seasonally adjusted basis.

Buyers are adding more conditions to their offers, she says. The most common conditions concern financing or home inspection, but on some occasions they include the sale of a purchaser’s home, Ms. Stern says, “which we haven’t talked about in years but now is here again.”

She says some buyers have floated the idea but she thinks it’s better for sellers to agree to a longer closing if they can.

“I try and steer the deal that way,” she says.

In one recent transaction, the seller agreed to a closing after 120 days instead of the more usual 60 or 90.

If day 120 arrives and the purchaser hasn’t sold the property, she would suggest that the seller extend the closing again rather than lose the buyer all together.

Ms. Stern is also working with buyers who looked at a house they like but they need time to mull before making an offer. The seller’s agent called to say the homeowner is thinking about taking the house off the market and relisting in the fall. Ms. Stern asked if they would accept closing at a later date since they may have to wait for a buyer until the fall in any case.

“Why not offer a longer closing if it gets the deal done,” says Ms. Stern, who is a former lawyer. “The veterans have seen tough times. Now you have to be smart and creative.”

Mr. Regan of Royal LePage expects demand to pick up again, but if the market remains slow, more homeowners who are seeing their property languish may be motivated to consider such a deal. He would do his homework on the potential buyer’s existing home before recommending a seller accept such a condition.

He would ask for details on the home’s condition, neighbourhood and the marketing plan of the buyer’s agent.

If the house appears to be worth $1-million but they plan to list it at $10-million, he’d advise the sellers to send them on their way. But if the buyers plan to list their existing house at $999,000 and it seems likely to sell quickly, he might advise the sellers to accept.

“You would hope for a buyer with an easy sale,” he says.

If the buyer is unsuccessful in selling their first home before the agreement runs out, the buyer receives their deposit back and the two sides agree to a mutual release. Mr. Regan cautions that even that outcome can be hazardous to the seller.

“The unknown is, you don’t know how many showings you lost.”

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