Whether you are listing your house with a real estate agent or you are handling the marketing and negotiating personally, you may at some point receive what is often colloquially called a “conditional” offer to purchase. These can be common in Newfoundland and Labrador, especially in communities with soft market conditions where there are more sellers than buyers.
What is a “Conditional” Offer?
Almost all formal offers to purchase real estate have a number of conditions attached (e.g. a condition that the seller has good and marketable title, a condition that there are no liens or encumbrances at the date of closing, a condition that the property meets a certain appraised value, a condition that the seller provide certain representations and warranties, &c), any of which may or may not be the subject of some negotiation.
Often, though, when a person presents you with an offer to purchase your house or land and they explicitly say it’s a “conditional offer” what they mean is that the offer is conditional on the sale of the house they already have. That is, their offer to purchase your property is conditional on them successfully selling their own property first.
These types of offers are often made for very practical reasons that usually come down to money. A purchaser wants a newer home, or a larger home, or a home in a different location, or just a home that’s different than the one they have, but they can’t afford to own two homes at once. They may need the sale proceeds from the first home to get the down payment for the second home, or their bank may simply not be prepared to approve them for two mortgages at once. Therefore, to buy a new home, this purchaser needs to sell the first home.
Problems with Conditional Offers
The main problem with conditional offers for sellers is that your property can be tied up for a long time while you’re waiting for a conditional sale to close.
Additionally, there’s also more that can go wrong to delay or prevent a closing because instead of everyone needing to get their ducks lined up to make ONE closing happen, now you need TWO closings to come together in order to get your property sold.
As well, consider the situation where the person who conditionally offered to buy your property themselves in turn accepted a conditional offer to buy THEIR property. Now you’re getting into a possible cascade of conditional sales where a problem at the beginning of the chain causes all of the sales to collapse. The most I’ve personally heard of in one chain of conditional offers is six, which is enough to be almost unworkable.
Should I accept a Conditional Offer?
That’s entirely up to you. You aren’t obliged to accept any offers you don’t like. That said, the problem with accepting an offer to purchase which is conditional on the purchaser selling their own property is that you have no control over how long that will take. Meanwhile, you may be missing other potential buyers because you’re now locked into a contract with this buyer.
A common way to protect yourself in these situations is to negotiate an “escape clause”.
What is an Escape Clause?
In the context of Purchase and Sale Agreements for real property, an “escape clause” is one that allows a property owner a way to “escape” from a conditional offer that they’ve accepted if they get another willing buyer who can buy the property sooner rather than later.
Even though a seller may have accepted a conditional offer to purchase, they are still allowed to market their property, AND, depending on the wording of the clause, if they get another offer, then the first buyer typically has 48-72 hours to remove or waive the condition on their offer to purchase and complete the deal whether or not they’ve sold their first property, OR to release the seller from their offer and let them sign with the second willing buyer.
Should I make a conditional offer?
If you absolutely can’t afford to buy a second property without selling your current property, then obviously yes. If, however, you can afford to purchase the second property without selling the first one, then it’s more of a judgment call. If money is tight, then maybe consider making the conditional offer to avoid taking on too much financial risk; if it is not, and the property you’re eyeing is one you really want, then the problem with making a conditional offer is that the seller might reject it in favour of a better offer with no strings attached.
Good info to know!
Very useful information. I would say there is no merit in accepting a conditional offer, because the transaction might not materialize ever while the condition will prevent the seller from approaching other buyers. If it’s a buyer market, the seller may not have a choice, but will s/he be able to insert an escape clause in such a market? The best course would perhaps be to wait for the market to improve instead of accepting a conditional offer, as the stakes are high.