When you have a real estate purchase and a real estate sale that close at nearly the same time, you may wish to consider getting a bridge loan from your lender.
Depending on the timing of your transactions, the sale proceeds from your current property may not be available to you to use in time for your purchase (even where your sale closes before your purchase). With a bridge loan, or “bridge financing”, the idea is that your lender helps you to “borrow” from yourself. Bridge loans are designed to “borrow” sale proceeds from your sale transaction, to use to purchase your new property. Bridge loans are repaid from the sale proceeds of your sale transaction once those sale proceeds are available. Bridge loans are typically only granted where both an unconditional sale contract and an unconditional purchase contract exist.
For example, let’s say:
- You live at 123 Apple Street, and you’ve sold it with the closing date of July 15th;
- You’ve recently purchased 456 Peach Lane with a closing date of July 12th; and
- You need $15,000.00 from your 123 Apple Street sale to put towards the purchase of 456 Peach Lane.
As you can see, because your purchase closes BEFORE your sale, you won’t have that $15,000.00 from the sale of 123 Apple Street in time to use for the purchase of 456 Peach Lane. In other words, you won’t be able to pay for your purchase of 456 Peach Lane purchase until July 15th at the earliest (and even later if the sale of 123 Apple Street closes late).
While the above scenario demonstrates the obvious example of a sale closing after a purchase, because real estate transactions sometimes close late, the need for bridge financing can arise even where your purchase closes after your sale.
Where our clients have a sale that closes within 14 days of their purchase, and where those clients need to access funds from the close of one transaction in order to complete the other, we always recommend that they obtain bridge financing, or negotiate with the other parties to extend the closing dates to allow more time between their deals.
Here is why:
- If the purchaser in your sale transaction is late in making the payment to you, which can happen for perfectly innocent reasons, such as a delay in them receiving their mortgage funds, because there are so many moving parts in a real estate transaction, then:
- You’ll be in breach of your purchase contract by failing to pay the purchase price on time;In the typical Alberta Real Estate Association contract it is the Vendor’s choice to accept late payment of the purchase price – meaning that the vendor has the choice not to accept late payment (while it would be unusual for a Vendor to tank a deal instead of waiting a day or two for payment, the risk lies in not knowing if a particular vendor had a second deal in the background for which they’d be willing to tank the current deal);
- You likely won’t get possession of the home, so you won’t be able to move in until you pay the purchase price;
- You’ll be paying the late interest (as under your purchase contract) to the Vendor until you pay the purchase price;
- If your lawyer has been able to request mortgage funds, and mortgage funds have been advanced to your lawyer, there is typically a deadline by which your lawyer must use the funds for the purchase transaction; if the funds aren’t used in time (i.e., if your sale transaction has delayed the purchase transaction for that long), then your lawyer may be obligated to send them back to the lender;
- You’ll very likely be paying additional legal fees to your lawyer in order to negotiate the extensions to the transaction, and to deal with the legal issues involved in such scenarios.
- Even if we receive the sale proceeds on time:
- For the most part, lawyers cannot instantaneously transfer money, it is moved by way of trust cheques which can sometimes result in delay at the bank (especially where transactions happen at month end and the banks are busy), giving rise to those risks identified above;
- When we receive your mortgage instructions, we have certain conditions with which we must comply before even requesting the mortgage advance:
- If we are required to have your cash difference in our trust account prior to requesting funds (which does sometimes happen), then there will be a delay in receiving your mortgage funds as most lenders require at least 48 hours between the request for funds and when they actually advance the funds.
- In other words, it could be that we won’t be able to request your mortgage advance until we have your sale proceeds, and once we have your sale proceeds, it could then take up to 48 hours to get your mortgage funds.
Remember, unless your contract states so, your purchase contract is not conditional on your sale contract closing. You have contractual obligations to pay the purchase price on time, regardless of what happens to your sale transaction.
The cost of bridge financing varies, and there can be some risk with bridge financing (such as your sale transaction failing to close), but it is typically quite reasonable given the peace of mind that it can offer.
If you’d like more information about bridge financing, real estate transactions, or any other matter, please get in contact with us directly.
This content is provided for general information purposes only and does not constitute legal advice nor does it constitute an opinion of any kind.*