“SCE”

Three letters that are wreaking havoc in the real estate industry right now.

SCE

What in the world is that?

The letters “SC” on an MLS listing mean the property is “sold conditionally,” and agents not only know this, but are quite accustomed to seeing it on listings.  When the market is hot, fewer properties are sold conditionally, but some still are.  And in a changing market, like the one we’re in right now, we’re accustomed to seeing many listings appearing as “sold conditionally” on MLS.

But what the heck is SCE?

An agent in my brokerage asked this last week.  A newer agent, to be fair, so let’s not judge a person for not knowing something that maybe they shouldn’t be expected to know.

“Is that a typo?” she asked.

She was told that it was not.  It was simply an extension of SC, since the property was, in fact, “sold conditional,” but with an escape clause.

Hence: SCE

Market bears can feel free to use this trend as a sign of the real estate apocalypse on the horizon, but we’re seeing a lot of properties sold conditionally with an escape clause in this market.  Not in the central core, however.  But in the suburbs, it’s quite commonplace.

I’ve written blogs about “escape clauses” before, but for those that don’t know what it is, perhaps a refresher is needed.

As it sounds, the clause allows you to “escape” from your conditionally-accepted offer.

You, being the seller, that is.

Let’s say that your home in listed for sale and you receive an offer, but the offer has a condition.  And let’s say that the condition is ten business days, which is a long time.  If you want to work with the buyer and their offer but you’re a little weary of tying the property up for so long, then you insert an escape clause that allows you to potentially get out of the agreement.

Why potentially, you ask?

Because the way the clause is written, you have to give the buyer the option of firming up the deal.

Here’s an example:

Provided further that the Seller may continue to offer the property for sale and, in the event the Seller receives another Offer satisfactory to the Seller, the Seller may so notify the Buyer in writing by delivery to the Buyer personally or in accordance with any other provisions for the delivery of notice in this Agreement of Purchase and Sale or any Schedule thereto. The Buyer shall have 48 hours from the giving of such notice to waive this condition by notice in writing delivered to the Seller personally or in accordance with any other provisions for the delivery of notice in this Agreement of Purchase and Sale or any Schedule thereto, failing which this Offer shall be null and void, and the Buyer’s deposit shall be returned in full without deduction.

Let’s say my house is on the market for $1,500,000.

I receive an offer from a buyer for $1,480,000, but this buyer wants a 15-day condition and I’m weary of tying up my property for that long.

I agree to the terms and conditions therein except I want to include the above escape clause.

Two days after the buyer and I have come to terms on the agreement, a subsequent buyer wants to make an offer.  This offer is for $1,485,000, however, it’s unconditional, and with a quicker closing date.

I want to work with this offer.  Who wouldn’t, right?

So I exercise my escape clause and the original buyer, who is under contract at $1,480,000, has 48 hours to sign a waiver and firm up the deal, or walk away.

This is how an escape clause works, and once you work through an example like that above, it’s pretty simple.

So when would you use an escape clause in today’s market?

If you don’t know by now, then you apparently didn’t seem to notice the topic of today’s blog!

In the suburbs of Toronto right now, a slew of houses are being sold conditionally on the sale of the buyer’s property, and most of these conditions include escape clauses.

We’ve discussed this before, but again, let’s have a refresher.

In a “normal” Toronto market, which means “red hot” (that’s a joke but also a truth…) most people will look to buy before they sell.

You own a condo at 1030 King Street West.  It’s a standard 1-bed, 1-bath, and these are selling for around $700,000.  Most are listed at $599,900 with an offer date, but regardless, the demand is absurd and it’s not a question of if you’ll sell but rather for how much.

You’re in the market to purchase a freehold property in Leslieville.  Your budget is $1,400,000 and sadly, you’re looking at all these houses listed at $999,900 with offer dates, but that’s the market!  You made three bids on houses that were unsuccessful before you finally bought that renovated beauty on Winnifred Street.

Having paid $500,000 for your condo, you’re going to net about $160,000 in profit from the sale, and along with about $150,000 in savings, you’ve got your 20% down payment for Winnifred along with closing costs.

You would like to close the purchase of Winnifred on April 7th but hold on to the condo a bit longer and close on April 14th.  You don’t want to be rushed and you also want to have that week to get the house painted, have furniture delivered, set up Rogers, etc.

In order to obtain bridge financing from the bank, you need to have your condo sold firm by mid-March so the banks and the lawyers can get their affairs in order.

Thankfully, the condo market is red-hot and you’ll simply take ten days to pack, paint, and stage the place, then list it for sale, hold an “offer date,” and sell the property firm by mid-February.

Tons of time to spare!

That is how we typically buy and sell real estate in Toronto, and for the most part, it works.

But the market changed in mid-2022 as we all know, and with that didn’t just mean a change in prices, but rather a change in process as well.

A lot of buyers out there today are looking to sell first.  They’re listing their houses or condos for sale while simultaneously looking at homes to purchase, and many are selling their existing property firm and then going out to buy.

This comes with an obvious risk, of course: that of being homeless.

If you sell your house on January 27th with an April 1st closing date, and you haven’t purchased a property by April 1st, then you’re homeless!  But even if you do buy a property, there’s no guarantee you can close the purchase on or before April 1st, so if the seller has leverage and insists on an April 15th closing date, then you’d better find a place to live for two weeks!

Then, there’s another option.  An option that can benefit both buyer and seller equally depending on the market: buying conditional on the sale of your home.

Let’s say you’re looking to move from Barrie to Georgetown.

There’s a property in Georgetown that’s been on the market for 92 days.

This property clearly isn’t moving, so let’s agree that the seller doesn’t really have any leverage, right?

You like this property.  In fact, you would buy it!  But you own a townhouse in Barrie and the market up there right now is kind of tepid.  You honestly have no idea whether your townhouse is going to sell or for how much.

The listing agent for the Georgetown house calls your agent and says, “We’re motivated, bring us an offer!”

Your agent explains, “Well, we’re not really ready to pull the trigger just yet.  You see, we need to sell our existing house and it’s a townhouse in Barrie, soooo…..”

The listing agent replies, “No problem, we can work with that.”

You can?

Well, alright then!

So with nothing to lose, your agent drafts an offer today, January 27th,  that is conditional for thirty days on the sale of your Barrie Townhouse.

The condition would look something like this:

This Offer is conditional upon the sale of the Buyer’s property known as 488 Mapleview Drive West, Unit #28B, Barrie, Ontario, L4N 9G4.  Unless the Buyer gives notice in writing delivered to the Seller personally or in accordance with any other provisions for the delivery of notice in this Agreement of Purchase and Sale or any Schedule thereto not later than February 27, 2023 at 6:00pm, that this condition is fulfilled, this Offer shall be null and void and the deposit shall be returned to the Buyer in full without deduction. This condition is included for the benefit of the Buyer and may be waived at the Buyer’s sole option by notice in writing to the Seller as aforesaid within the time period stated herein.

Of course, the seller would insist on the escape clause which we noted above, but the offer is ratified by both buyer and seller, with the condition for 30 days on the sale of your Barrie townhouse, and that condition has a 48-hour escape clause.  The deal is scheduled to close on April 7th, 2023.

Now you’ve tied up the property that you really want and you can go to work on selling your Barrie townhouse.

So why would a buyer do this?

And why would seller do this?

Surely there are situations where this is beneficial to both parties.

In our situation described above, the Georgetown house has been on the market for 92 days.  What’s the risk for the seller?  They listed in October!  They’ve been sitting for quite some time, with no action, and they too have nothing to lose.  I don’t think the seller is in a position to say ‘no’ to any offer out there, unless it’s about price.

For the buyers, they too have nothing to lose, except the house they’re purchasing.  If they’re absolutely head-over-heels in love, then sure, it could come back to bite them if they can’t sell their house within those thirty days, or, if somebody else comes along and makes an offer.

Remember, that is possible!

Let’s say that, despite the Georgetown house sitting on the market for 92 days, lo and behold, only two weeks after you conditionally purchased the property, another buyer is interested.

On February 10th, that other buyer makes an unconditional offer to purchase the house.

But there’s no condition for the buyer.  By that I mean no condition on financing, appraisal, home inspection, or sale of the buyer’s property.

In this case, it’s the seller that has to include a condition.

Huh?  What’s that?  A condition on what, you ask?

Well, that seller is already under contract to you!  You bought the seller’s house conditional on the sale of your Barrie townhouse.

So the seller will include this condition in the subsequent offer:

This Agreement is conditional until February 12, 2023 at 6:00pm on the Seller being released from a previous Agreement of Purchase & Sale for the Property and providing the Buyer with written evidence in the form of a Mutual Release signed by the Seller and the withdrawing buyer or buyers, failing which this Agreement shall be null and void and Buyer’s deposit returned without interest or deduction.

That date – February 12th, refers to the 48 hours from the escape clause.

Then the seller gives notice in writing to you, the original buyer that the seller is exercising his escape clause, and now you have 48 hours to sign a waiver or lose the house.

So how is the sale of your Barrie townhouse going?

Not great, eh?

It took you a week to get the property listed and you’ve only been on MLS for seven days, you’ve had two showings, and no bites.

What are you going to do now?

You’re scheduled to close the Georgetown purchase on April 7th.  Do you think you can have your Barrie townhouse sold firm by, say, late-March?  Or mid-March just to be safe?

If you can’t sell it, then you can’t close on the Georgetown house.  Then you’re in breach of contract and litigation ensues.

You can’t stomach the thought of living and breathing the real estate market for the next month so you decide not to go through with the purchase, and you sign a “mutual release” and send it to the seller.

The seller signs the mutual release, and then the seller waives his condition above to go firm with the second buyer.

In a different world, perhaps you sold your Barrie townhouse with ease, and in that case, you’d sign a waiver of your condition on the sale of your property, and you would be the one buying the Georgetown property.

Or, perhaps you took the risk, firmed up the Georgetown purchase, dropped your price on the Barrie townhouse, and found a buyer eight days later.

There are all sorts of ways in which this can play out, and both buyer and seller need to explore their risk tolerances, in addition to the markets in which these properties are located.

I showed six houses in Georgetown last weekend and three were sold conditionally on the sale of the buyer’s property.

This seems to be quite common in the suburbs right now, and while I typically represent clients who own downtown condos and are looking to move to the suburbs, and thus they aren’t as fussed about selling their existing property, I think a lot of people moving from suburb to suburb are looking at the “SOP” condition; sale-of-property.

Now just for fun, let me throw one more thing at you.

What if the seller doesn’t want to go firm until he or she finds a new house to move to?

Figure that one out.

Let’s say your agent knows of a would-be seller who isn’t listed for sale, but is interested in potentially selling.  But that person doesn’t want to sell unless he or she can find a property to buy.

That’s when the seller would use this condition:

This agreement is conditional until Friday, February 17th at 6:00pm on the Seller negotiating a firm and binding agreement for the purchase of a new home, failing which this agreement shall become null and void and Buyer’s deposit returned without interest or deduction. This condition is for the sole benefit of the Seller and may be waived by her by notice in writing to the Buyer or Buyer’s representative within the time period specified above.

I have only ever used this once and it was exactly the situation I described where we knew of a person, not listed for sale, who would sell under the right terms.  There was nothing available on the market and my buyers had no issue giving the seller three weeks to buy a home, so we agreed to the condition.

The seller was downsizing to a condo and bought within a week.

The seller then waived his condition, and voila!  My clients had bought a house.

I don’t know that we’ll be seeing this clause making a comeback any time soon, but conditional on the sale of buyer’s property is alive and well in the Golden Horseshoe…