A large proportion of our clients who are purchasing a new home, also need to sell their existing property in order to have the necessary funds to complete the purchase. This of course leads to a significant timing issue – if the sale needs to be completed first, that means you could be without a home for a period of time. How do you arrange the timing of both transactions?
Some clients choose to complete both the purchase and sale on the same day, but this has a number of risks. Delays out of the control of all parties sometimes happen on closing, such as bank errors or last minute changes to financing requirements. Furthermore, it takes time for funds to be delivered to the lawyer’s office, processed, and turned around in time to complete the purchase. Typically in most residential purchase contracts, the funds to complete the transaction must be delivered by 12:00 noon on the completion date. If the sale of the existing property is delayed, or funds are not received by the lawyer in a timely fashion, this has a cascade effect which could put the client in breach of their purchase contract, which could have serious consequences including a cancellation of the contract and loss of the client’s deposit.
Another option is to leave a gap of at least 3-4 days between the sale of the existing home and the purchase of the new one. That way, any delays on the sale should be rectified in time – and if not, it provides plenty of opportunity to negotiate an extension to the completion day of the new purchase. This has its own obvious drawbacks – the client would not have a home for a few days, and would need to stay in a hotel, with family or friends, and put all their belongings into storage, which is a lot of extra work and headache.
The issues related to both of these can be avoided by acquiring bridge financing. A bridge is a short-term loan from a bank, which allows the client to access the equity in their existing home to complete the purchase, before the sale of their existing home goes through. Funds are provided by the lender on the date of the purchase of the new home, and are paid back upon the completion of the sale of the existing property. This has a number of advantages, the most significant being that since the purchase will occur a number of days before the sale, the client can move into the new property over the course of a few days, and prepare their existing home for its new owners. It avoids the cost and headache of hotels and moving items to and from storage, and alleviates the risk of delays discussed above.
There are costs associated with bridge financing. Typically the lender would charge an initial loan placement fee. Furthermore, the interest rate on a bridge loan is much higher than a traditional mortgage, and you would need to pay the interest on the loan from the date of the purchase to the date the loan is paid back on the sale. Typically, however, these costs are never more than a few hundred dollars, and tend to be less than storage and hotel fees – not to mention saving the hassle.
The only risk with a bridge loan is if the sale of the existing property somehow falls through. In that circumstance, the lawyer would be required to register the bridge loan as a mortgage against the home, and the client would be required to begin making regular payments at the high interest rate. In over 10 years of practice and hundreds of transactions I have only seen this happen once, so the risk is quite minimal. Moreover, a bridge loan would only be available in circumstances where the buyer of the existing property has waived all their conditions and the sale is firm. Therefore, backing out at the last minute means the buyers’ deposit would be forfeited to the client which could then be used to defray the cost of the bridge loan until a new buyer is located.
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An Associate Lawyer at Beaumont Church LLP in Calgary, Dan Hawkwood comes from a long line of farmers and ranchers in the Calgary area and brings the experience of his rural upbringing to his practice.