Buying and Selling on the Same Day? Why its Not Always a Good Idea
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If you are not a first-time home buyer and looking to move to a new home, chances are you are looking to both sell and purchase real property around the same time. Accordingly, we see many clients make the decision to have the closings of their purchase and sale transactions occur on the same day. In many cases, this decision can cause undue or unnecessary stress for clients leading up to, and on the actual day of, closing. In theory, it makes sense to make your closings on the same day – you get both transactions over with at once and you pack up all your belongings in a moving truck and head over to your new home on the same day. Here is why that is not always the case and why it is not always a good idea:
- Practically, there can be delays - If you are selling your existing home to buy your new home (i.e., if you require your sale proceeds to close on your purchase), you are subject to the purchaser on your sale transaction getting the funds to your lawyer in time for you to be able to then get them to your seller’s lawyer on the closing date. Section two of the OREA Form 100 Agreement of Purchase and Sale (commonly used for used residential freehold purchases in Ontario) provides that the Agreement shall be completed no later than by 6:00PM on the day of closing. This means your purchaser on your sale transaction likely has until 6:00PM to get funds to your lawyer to close the transaction. For example, if the funds come in at 5:59PM (due to delayed funding from the purchaser’s lender, delays from wire transfers, etc.), the purchaser has technically complied with the terms of the Agreement of Purchase and Sale. However, you are not going to be able to get funds to your seller prior to 6:00PM on the day of closing in order to close your own purchase transaction. This is further complicated and delayed if your purchaser is selling to buy as well – theoretically, the more parties down the chain that are selling to buy, the greater possibility for delay for you to be able to close on your own purchase transaction.
- You may expose yourself to a lawsuit or to paying additional amounts to your seller - If you are unable to close on your own purchase by virtue of a delay in closing your sale (or even a failure of your purchaser to close on your sale transaction), you may be vulnerable to claims by your seller for additional costs to be paid by you on closing to compensate the seller for the delay (i.e. interest charges on mortgages, additional moving costs, additional legal fees, etc.) and potentially exposing yourself to significant claims if the seller decides that they are going to treat your failure to close the purchase transaction on time as a breach of the Agreement of Purchase and Sale and seek damages against you. This could mean your purchase agreement would be at an end, your deposit would be forfeited, you would not get the home you wanted, and you could be exposed to a substantial lawsuit by your seller if they are unable to sell the property following the breach or if they are not able to obtain the same price you had agreed to pay for it.
- Your own costs may increase - If you are unable to close your purchase transaction on your closing date, you may experience additional costs incurred yourself. These could include premium fees charged by movers for having to attend on a different closing date or for working off-hours, unexpected storage fees, more time off work and additional legal fees and disbursements for dealing with and negotiating a delayed closing date.
- The STRESS – Moving is stressful. Trying to move all of your belongings from one home to another, without any guarantee of closing times (or even closing dates if there are issues: see above), can add more stress to what is already considered to be a very stressful life event.
What to do instead?
(A) Consider closing your sale transaction a few days before your purchase and arranging for storage and alternate accommodation during the interim period at a hotel or short-term rental.
(B) Alternatively, consider closing on your purchase a few days before you close on your sale and consider bridge financing during that period. Bridge financing is arranged with your bank and is a short-term financing tool designed to help homeowners ‘bridge’ the gap between the time your existing home is sold and your new property purchased. Bridge financing is typically arranged with the same financial institution that is arranging your mortgage financing. As of the time of writing, the cost of bridge financing (in most cases) is relatively low and worth the potential peace of mind it can bring in not having to scramble to deal with trying to close two transactions on the same day. Bridge financing also allows you to own both properties for a short period and to move out at a slower pace. Any bridge financing arrangements should be made as early as possible and finalized as soon as you have negotiated firm and binding agreements to sell your existing home and purchase your new home.
Practically speaking, sometimes clients are not able to spread out their closing dates by a day or more when closing a sale and purchase transaction – whether due to the inability to obtain bridge loan financing or simply not having available or affordable accommodation during that ‘gap’ period if you sell first. However, if you are in the position where you can avoid closing a purchase and sale transaction on the same day, it is worth considering what options are available and possibly speaking with your real estate agent, mortgage broker or agent and real estate lawyer about some creative solutions as well.
The foregoing should not be considered to be legal advice and should not be relied upon as such. Please consult a lawyer to get advice and an opinion on your unique circumstances.