By Diane Saatchi
Let me begin, here, by describing a real estate situation that’s far more common (and much more complicated) than you might think:
A would-be buyer finds a four-bedroom home that’s almost perfect. It’s just lacking a fifth bedroom — however, there’s plenty of space for one in the basement. The buyer offers to purchase the house, subject to being able to create that extra bedroom in the basement. Shouldn’t be a problem.
What the buyer probably doesn’t realize is that aside from the obvious walls, a door, legal egress, a closet, and HVAC, that fifth bedroom very likely will trigger the need for a whole new septic system. In addition to a surveyor, architect and general contractor, an engineer must be engaged to design the system and Health Department approval is required. The existing septic system may be closer to the property line than is currently permitted, meaning if that is the only practical/possible location a variance may be required and if wetlands are nearby, in addition to the other jurisdictions involved, the Department of Environmental Conservation (DEC) will join the team.
Chances are, if not immediately clear it can’t happen, with competent counsel and patience, that fifth bedroom will be permitted. It may cost thousands of dollars and take several months to determine. And since the buyer has made an offer subject to the fifth bedroom, the deal falls apart if for some reason they can’t add it.
That’s what I want to talk about today: deals with conditions, usually described with the language “subject to.”
“We’ll buy it, subject to that fifth bedroom, or tennis court, or dock or selling another home.” “We’ll sell it, subject to going to contract on the co-op we have our eyes on.”
The most common subject to or condition of a contract is a mortgage loan. In such cases a purchaser may commit to a price and conditions “subject to” obtaining a mortgage of a specified amount, type, term and interest rate. During the time it takes to get the mortgage, the seller is unconditionally obligated while the purchaser is conditionally obligated. That is, if the mortgage at the terms and rate proposed is not approved, there is no deal and no consequences to the purchaser.
The seller, however, suffers from having removed the property from the market. However it is spun, no listing agent wants to voice the words “back on the market.” From the seller’s perspective, it would be far better for a purchaser without the cash on hand to use a mortgage, but not to make it a condition of the sale. It’s better because it means that the risk would lie with the borrowers. The seller can keep showing the house while the buyer secures the funds.
There is a long history of real estate sales subject to financing and in most markets, it is expected. But in a luxury second home market, there is something kind of odd. Usually a buyer will tout a pre-approval letter from a lender as proof of ability to obtain a mortgage. If the pre-approval were indeed sufficient reassurance for the seller, the purchaser would not need the contract to be subject to a loan. Nonetheless, maybe because of convention, the practice of making a deal subject to financing persists. However curious, we can navigate the process by keeping it as short as possible and continuing to show the property to other prospective buyers until a written commitment is delivered.
Deals subject to financing are very common, but we also see deals like I described above, that are subject to the buyer being able to make changes to the house. As it’s no doubt clear, things get complicated fast, and changes that involve an element of zoning — say, relocating the pool — get more complicated, faster. The very first thing anyone considering making a deal subject to changes should do is engage a local real estate attorney, and not just any attorney: a zoning specialist.
When all other terms are acceptable and the attorneys think the requests are reasonable, the solution or compromise can be a due diligence term wherein the seller agrees not to accept another offer and will cooperate with the purchaser-funded investigation into that fifth bedroom or relocated pool.
Conditional deals are only one piece of the always complicated typical negotiations, but there is some inherent comfort to the anxious seller in this structure: Only really motivated purchasers would even bother.
Sellers also present conditions that can also be complicated, but that’s for another blog.
© 2019 Diane Saatchi