Property chains can be incredibly dangerous. They can be easily avoided by taking a few simple steps.
Most people will often have two real estate transactions happening at the same time. You sell your old home and buy a new one. Often, your purchase also involves a mortgage.
When both transactions happen on the same day, that is called a back-to-back deal. Multiple back-to-back deals are called a property chain.
As the saying goes, a chain is only as strong as its weakest link. If one of the links in the chain fails, that failed link could cause a cascading chain of failures.
How does a property chain work?
A property chain is a series of people buying and selling property from each other. Each person needs the money from the sale of their old property to buy their new home. Each transaction is scheduled to complete on the same day.
The tricky part is that we can’t start the purchase of your new home until we get the money from the sale of your old home. And we can’t guarantee when we will receive the money from the sale of your old home.
Most contracts have a deadline of 4:00 pm on the closing date. We must submit documents to the registry for registration by 4:00 pm on your closing date. Anything after that, and you have a potential breach of contract. In many cases, the buyer and seller will look past a “late” closing if it is only a few hours, but it’s entirely possible for one of the parties to use this failure to file documents on time as a reason to get out of the contract.
The process to register most standard purchases takes about 4 hours. An organized conveyancer will get as much of this work done as early as possible. But we can’t file the documents with the registry until we have all of the money in our trust account.
Logistically, it becomes really hard to do more than two to three transactions in a property chain successfully in one day. Unfortunately, many chains are often five or more transactions long.
Surprises, delays and other logistical issues can derail the whole process really quickly. There is no time to respond to last minute issues or delays.
What kinds of problems happen with property chains?
Most chains fail because someone, somewhere along the chain, is unable to do what they needed to do.
Because that transaction failed, that other transactions in the chain are also at risk of failure. The only way to fix this is for the buyers to come up with the money to buy their new home from somewhere else.
Moving Money Around
Notaries and lawyers have very strict rules about how they manage your money. It’s extremely important that your money is protected.
Because of the size of the amounts involved, we cannot etransfer or email funds. Those systems are designed for smaller transfers.
Wires are possible, but are not instantaneous, and can’t be relied upon for same day delivery. The same goes with couriers.
We generally deposit the net sales proceeds to the buyer’s notary or lawyer’s trust account. This means we write a good, old-fashioned trust cheque, and walk it to the bank. A clerk stands in line (often for an hour) to deposit the funds into the other side’s trust account. Once they return to our office with the deposit slip, they send it to the other side, confirming that the funds have been deposited to their account.
If one of the notaries or lawyers is in a different community, or a small town with limited access to banks, that will cause a significant wrinkle.
All of this means that it can take far longer than expected to move money from one legal firm to another.
Title Surprises
Occasionally charges show up on title at the last minute. These charges can delay, or even derail the property chain completely.
These charges could be:
- a new mortgage the seller just got
- a Certificate of Pending Litigation from a divorcing spouse
- a judgment
When these charges show up, everything needs to stop, and the lawyers and notaries need to work out how to deal with this new issue.
Waiting for mortgage funds
Most buyers need a mortgage to buy a new property. But getting funds from your lender can be tricky. Sometimes, lenders don’t get us the mortgage proceeds until quite late in the day.
They might be late getting funds because:
- the buyer didn’t meet all of the lender conditions
- the buyer didn’t get their property insurance organized
- the lender had a high volume of deals for that particular day, or they were short-staffed
- the lender decided they wanted more conditions, or more documents
- the lender changed their minds about lending to the buyer
- the lender refuses to fund the mortgage until after the property is registered
- the lender changes how they get the funds to the buyer’s notary or lawyer
Someone further back in the chain had a failure
Imagine you are the 4th or 5th person in the property chain. Imagine then that the second person’s sale failed for some reason.
When this happens, it is usually something you have absolutely no control over. You simply cannot fix a problem in someone else’s transaction.
If you are one of the unlucky people at the wrong end of a failed chain, you might have a potential breach of contract. You could also be responsible for costs others have incurred because you were unable to meet the terms of your contract.
If you are the one who causes all the failed transactions, then you will likely have to pay for the costs of the other transactions that were delayed or lost because yours failed. Imagine having to pay for movers, storage fees, hotels, or food for the people in the transactions after you just because yours failed, even though you did nothing wrong!
What does a failed property chain mean for me?
A failed property chain could mean:
- you may be facing a breach of contract situation for your transactions
- you might not be able to get possession of the property when you expected it
- you might have additional costs for movers, hotels, storage, eating out, etc.
- you might have to try to find additional financing, such as bridge loan financing, to replace the sales proceeds
- you will have increased legal costs
- if you cause other transactions to fail, you might have to pay for those costs and damages as well as your own
Can I avoid property chains?
Absolutely. You can take some very simple steps that will immediately make your transaction much, much safer.
The simplest step is to make sure to schedule your sale and your purchase for different days. Try to keep at least one day between the sale of your old place and the purchase of your new place.
Other ways to make chains go more smoothly include:
- having all of the closing funds in the hands of your lawyer or notary 1-2 days before the completion date
- making sure you have met all of your lender’s conditions for funding as soon as you possibly can
- not making any major changes to your transaction once the deal has been struck (switching lenders, adding new buyers or sellers, adding new terms to the contract, etc.)
- notify your lawyer or notary as soon as you know you are in a chain, so they can escalate your file
- getting bridge loan financing for a few days, so even if your sale fails to go through, we can still complete on your purchase on time
If you find yourself in a property chain, please make sure you let us know as soon as possible so we can have a conversation around what you should expect, and ways we can help carry out your transactions. Because these transactions require an extra level of attention paid to them, your legal costs will generally be higher as well.
In a perfect world, you will never find yourself in a property chain, and everything will close on time and as expected.
Have questions? Contact us – we’d be happy to chat.