Long closing dates a strategy in rising markets

Closing dates for the sale of a home are often negotiated for simple, innocent reasons. The vendor has purchased another home and wants to move by a certain date, or the buyer is renting and wants to move into the new home as quickly as possible. But closing dates can also be part of a strategic plan to maximum profits for a real estate investor.

If you are a selling a home in a Canadian market where prices have been rising or have the potential to rise sharply -- the Beaches area of Toronto, the West Side of Vancouver and downtown St. John’s Newfoundland are current examples -- be careful about accepting a long closing date.

If you are an investor in this type of market, on the other hand, using a purchase contract with a long closing date can represent a chance to make extra cash without investing your own money.

For a buyer, a long closing strategy would best be applied where you see that the market is rising but the vendor doesn't. You have to test the vendor to see how far the vendor will go. Most vendors would probably sense that a long closing date is not favourable to them. However, it is possible that you are negotiating with a vendor who has personal reasons for delaying a closing, or is simply ignorant of market conditions.

In rising markets, I have seen cases where buyers will enter such deals without even having the funds to purchase. This is a risky situation and the best protection for you, as the buyer, is have subject clauses in the purchase agreement that allow you to get out of the contract before it becomes binding.

If you don't do this, you are at high risk of defaulting on the contract.

If you were going to take the long closing date strategy as a buyer, you must include in the contract a right whereby you can assign the contract to a third party. By including this right, you have effectively locked up the property, and given yourself the right to "flip" it. In some cases, vendors have been distressed to see their own home advertised for sale for more than they have already agreed to sell it for.

Say you have agreed to purchase a home for $200,000 with a closing date in six months. The real estate market is heating up and prices are rising. The vendor is hoping you will default so he or she can resell the property. It's coming up to the closing date and the property has increased in value by $20,000, but you don’t have the cash to close the sale. However, you had the presence of mind to include an ‘assignment clause’ in the contract, allowing you to sell the contract to a third party. Even if you sell the contract for $10,000, you have made a tidy profit for yourself and the ultimate purchaser has saved $10,000 off the purchase price. Thus the inclusion of an assignment clause is extremely important for this type of strategy and you would be remiss if you did not include it. Be aware however, that the assignment clause will not protect you in a falling market. If you made a bad deal going in, no one is going to purchase the contract from you.

Closing dates are often innocent agreements. It is up to both buyers and vendors to understand the power they can play in an overall real estate transaction.

By: Frank O'Brien
July 30, 2001

Copyright 2001 Inman News Features
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