If you ask several real estate lawyers should we close our purchase and sale transaction on the same day, most would say that it is not a good idea as it could lead to some serious complications. In this article we will discuss the challenges of the same day closing and offer tips that could minimize potential complications.
The Risks of Same-Day Closing
Purchase and selling real estate in Ontario is stressful enough but closing both transactions on the same day can add the unnecessary stress and potentially lead to a default situation. If you are closing both transactions on the same day, most likely, you will require the funds from your sale transaction to pay for the purchase transaction. But what happens when the sale transaction does not close? Or if you get the funds really late in the day? At this point, you are already moved out with all your belongings in the truck with nowhere to go. If you do not have the funds from your sale as a result you are unable to close your purchase transaction and would require an extension or worse be noted in default. How can this be avoided?
The Benefits of Using Bridge Financing
If at all possible, set your purchase closing date before your sale closing date and use bridge financing option. Bridge financing is a short-term loan that you would take from the bank against the property that you are selling. Essentially you would close your purchase transaction first, using bridge financing and any of your personal funds if needed. Your sale transaction would close at a later date. You would then pay off your bridge loan together with any other mortgages registered against your sale property from the sale proceeds. Bridge loan is usually calculated at a higher interest rate than a traditional mortgage but incurring higher interest payment for a few days is a small price to pay to avoid default and/or additional stress. Setting your purchase closing date first allows you to inspect the new house, get a cleaning service, move and unpack at your own pace without the pressure of same-day closing. Most importantly, using bridge financing allows you to fulfill your contractual obligation on the property that you are purchasing.
Potential Problem of Bridge Loans
Possible downside for using a bridge loan is the default of individual who is purchasing your property. If your sale transaction does not close for whatever reason, you are stuck paying the new mortgage on the new house, the old mortgage on the old house and the bridge mortgage. Take solace in the knowledge that while it is extremely painful making all these payments, you will be able to recoup it through court against the defaulting party. Having said this, not every transaction is going to default but knowing what happens if there is a default and what will happen will help you make an informed decision.
When bridge financing is not an option and you must close your sale and purchase transaction on the same day, there are a few things that you can do to minimize the challenge. First of all, communicate with buyer of your house, though your lawyer. Ask your lawyer to assist in enquiring if the buyer of your house has their financing lined up, what bank are they financing with? If the buyer is using private funds or alternative (B) lender? What bank does their lawyer bank with? What bank does yours? At the end of the day the buyer of your house wants to close as much as you want them to close, but knowing if they are prepared to close gives you an opportunity to plan ahead.
If you know ahead of time that your sale is going to close earlier, you can plan on having the movers come a bit earlier so that the house is vacant and cleaned by the time the title transfer takes place. Moving out while a new buyer is moving in is extremely stressful as personal belongings could get mixed up in the move. Another important thing to note that while most buyers would be understanding that it is a moving day and everyone is doing their best to vacate the premises, once the title to the property is transferred you are no longer the owner and therefore trespassing on the property.
Alternatively, should you find out that your sale transaction may close later in the day or not close that day at all, this gives your lawyer enough time to plan for extension on your purchase transaction or negotiate late closing arrangements.
Understanding Extension and Liability
If you need to ask for an extension on your purchase transaction because you are unable to get the funds from your sale, the liability will fall on you and in turn you will pass the liability to the buyer of your house. This is called a chain. The more people involved in the chain, the higher the extension fees or damages. For example, if the person who you are buying from ( Mr. Smith) is also buying ( Mr. Ford), you would be responsible for the cost incurred by Mr. Ford as well as Mr. Smith. Lets take it a bit further, if Mr. Ford is also selling and buying, then you would be liable for the costs of all the transactions that are not able to close because you could not deliver the funds to Mr. Smith. Sounds stressful, it is. The good news is that once you deliver the funds and close the transaction with Mr. Smith, you are no longer liable for any damages as a result of further defaults by other parties involved in the chain. So, if you delivered your funds to Mr. Smith in the late afternoon but Mr. Smith ran out of time to deliver them to Mr. Ford and so on, the liability would fall on Mr. Smith and not you.
The Importance of an Experienced Lawyer in Same-Day Closings
Choosing a lawyer who has extensive experience with same-day closing is vital to the success of your transactions. If the buyer of your property is funding with a bank and financing conditions were satisfied, most likely this transaction will close earlier in the day giving you an opportunity to close your purchase transaction as well. If the lawyers for both sides of the transaction bank at the same banking institution the funds will be transferred faster if they are in different ones. We always insist on direct deposit from the other lawyers’ office rather than a wire. A wire could get held up and delivered within 24 hours after it leaves the other lawyer’s trust account. This delay could put you in default. Therefore, we always insist on direct deposit to ensure that the funds are delivered and available as soon as they are deposited into our trust account.
If closing both transactions on the same day cannot be avoided, make sure that you have a good line of communication set up with your lawyer. It is important to be available to answer calls and emails from your lawyer on the day of closing and be prepared to make difficult decisions with respect to extension. Finding the right lawyer for you who is committed to closing your dual transaction will diminish your stress. Your lawyer should anticipate the challenges that can occur and guide you through the same-day closings offering legal advice and practical advice.
At MBLAW, we have extensive experience to ensure your transactions go smoothly. Say goodbye to unnecessary stress and potential pitfalls. Let us be your guiding hand through the intricate real estate process. Choose expertise. Choose assurance. Choose MBLAW. Contact us today for a hassle-free property transaction experience!