Read, don’t riot – How sellers get what’s coming (their money), and then some
Following my initial blog entry in October discussing the basics as to why it typically takes a few business days following possession date for a seller to receive their sale proceeds, I thought at this point it would be prudent to now calm all of those current and prospective sellers who read my post and felt that this is a raw deal for them (hopefully my last post did not incite seller riots); before I can finish explaining the entire selling process to my seller clients, they have been known to quip: “If the buyer gets to move in on the possession date without me having my sale money, what do I get out of this?” The answer: Interest.
Clause 4.1 of the Saskatchewan Real Estate Commission’s standard form “Residential Contract of Purchase and Sale” used by Saskatoon’s Realtors states the following:
The Buyer agrees to pay to the Seller interest at the Bank of Canada Overnight Rate Target at the Completion Date plus 4% per annum, on any portion of the Purchase Price, less mortgages or other encumbrances assumed, not received by the Seller, his/her solicitors or his/her Brokerage as at the Completion Day, until monies are received by the Seller or his/her solicitor….
Thus, this clause creates a contractual obligation on the part of the buyer to pay interest to the seller. As it provides, part of the interest rate is static (four percent) while part of the interest rate is dynamic, fluctuating in accordance with the bank of Canada Overnight interest rate (which is currently one percent). If anyone is struggling to come up with what the total current interest rate is, you may borrow my calculator once I am done double checking my arithmetic. 
As a matter of practicality, in order to ensure that the buyer will actually pay the interest to the seller, most lawyers acting for a buyer will collect about ten days of interest up front from them (along with the rest of their down payment and closing costs) on the outstanding mortgage amount. Following registration at Land Titles, the buyer’s lawyer will send the mortgage proceeds to the seller’s lawyer along with the extra interest that has accrued thereon. Any residual interest money that was collected by the buyer’s lawyer and not paid to the seller will be reimbursed to the buyer.
Ideally, each and every buyer and/or seller that comes to see me is well versed with the particulars of the contract that they have signed to buy/sell their property. This is not always the case, however, most clients understand and appreciate why interest must be paid following a good explanation of ‘the process.’
Please feel free to provide your comments and/or questions.
Mike Derbowka
306-477-7227
4 comments so far. We'd love to hear your thoughts.
November 10th, 2010 at 7:10 AM
Excellent post Mike. It’s amazing to me that lots of sellers come to you unfamiliar with the process, having not read or understood the agreement. As Realtors, we do our best to ensure that our clients know what’s coming but I’m sure things can get lost in the excitement of a sale when lots of paper is being pushed around. It occurs to me, as I’m reading your thoughts that it would probably be good practice to deliver a copy of the “Residential Contract of Purchase and Sale” to each of our seller clients at the time of listing so that they can read it entirely before an actual offer is produced. This would provide them with a little time to review it without the pressures that they naturally feel when a transaction is in progress.
Thanks again Mike.
November 10th, 2010 at 9:12 AM
Thanks Norm. I think for many purchasers or sellers, there is so much going on in a relatively tight timeline that smaller details (such as the ‘interest adjustment’) are quickly glossed over or missed. In some jurisdictions (in the states), there is a condition precedent to the formation of the contract that the purchaser or seller have a 24 hour period to review the contract (usually with a lawyer I believe). Perhaps not a bad idea, but would make the buying/seller process even more cumbersome.
November 10th, 2010 at 11:46 AM
It is also important to point out that the buyers are not paying a whole lot extra out of their pockets either. While they will be paying interest to the vendor during the time they are waiting for the title to register and the mortgage to fund, they are not paying interest to their bank. As such the net result to the buyer is only the difference in the interest rate as set out in the offer to purchase and their actual mortgage rate. Which in most case is a couple percent.
November 11th, 2010 at 1:15 PM
Brad,
That’s a great point. Thanks for raising it.
For complete clarity, it’s probably also worth mentioning that while the interest charge doesn’t substantially increase the total cost to the buyer it does increase the initial outlay of cash. This is an up-front, out of pocket expense that you’ll pay at closing.