RESALE OF EXISTING PROPERTY WHEN PURCHASING
A NEW HOME FROM A BUILDER
One of the most difficult decisions that the purchasers of a new home have to make is when to market their existing home. More often than not the closing date for the new home is months if not a year or 2 into the future. The problem is compounded by the fact that the closing date for a brand new home is nearly always fluid (i.e. the Agreement of Purchase and Sale provide that closing dates may be delayed or escalated B it is hard to gauge). In the last few years we have experienced a new housing boom in Ontario. More often than not the original closing date agreed to by the Builder and the Purchasers is delayed by the builder as a result of unforeseen circumstances. These unforeseen circumstances could consist of:
- untoward weather conditions that delay construction;
- labour disputes resulting in strikes, work to rule, etc.;
- shortages of materials – for instance a few years ago many closings were delayed as a result of the summertime brick shortage;
- inefficiency on the part of the builder, the builder’s representatives, the builder’s contractors or sub-contractors;
- an overly optimistic original closing date that the builder never had any intention of meeting in the first place;
- the designation of your particular home as a fire break lot. This would result in your home not being constructed until the homes on both sides have been completed. Yours could be the last home constructed on a particular block or street;
- delays in obtaining building permits and approval from the various municipal and governmental authorities.
The conservative approach is to list your house for sale as soon as you have entered into a firm Agreement with the Builder. You would close the sale of your existing house in a month or two; thereafter you would bank the equity, perhaps in a term certificate which may pay better interest, and reside in temporary housing for the time up to your closing of your brand new home. For younger couples with parents with ample space this could actually provide an opportunity to accumulate a greater down payment. The advantages of this conservative approach are four fold.
The first advantage is that you are buying and selling in the A same market. Accordingly, if prices depreciate you have had the advantage of selling your existing home in a better market. Of course, the converse is also true. In an appreciating market you loose the benefit of your existing home increasing in value prior to its being sold.
The second advantage is that the stress of trying to market your existing home so as to coincide the closing dates is eliminated.
The third advantage is that the risk of having the new home closing date approach and still have an unsold existing residence disappears.
The fourth advantage eliminates any concern over the builder accelerating the closing date. Many Builder Agreements allow for the Builder to accelerate the closing date. This means that the closing date could actually take place earlier than expected. If you have already sold your existing residence then the result of such an escalation could be much less dramatic.
The less conservative and more risky approach is to market your existing residence only 2 or 3 or 4 months prior to the anticipated new home closing date. This approach has its own advantages and disadvantages. The greatest pitfall to this approach is that in a slow market you will be left frantically trying to scramble for closing funds because you have been unable to secure an acceptable offer on your existing residence. Obviously, people with a treat deal of equity in their home are able to withstand this disaster by arranging short term mortgage financing or bridge financing through their bank. However, the failure of people without equity to secure an acceptable offer would usually lead to default on the new home purchase. The default results in a loss of your deposit and a potential law suit. One must remember that the Builder is not obligated to grant an extension of closing because the purchasers are unable to sell their existing residence. Finally it has been my experience that these risk taking people who market their homes at the last moment and do manage to coincide their closing dates are quite often inconvenienced in the end as a result of last moment delays by the builder. In other words, the best laid plans often go awry.