Selling your current home?
If you need to sell your current home in order to buy your next one, you may find yourself contemplating whether you should buy or sell first, or try to do both simultaneously. What works best for you will depend on your financial situation, your comfort level with risk, and market conditions.
The good news is that this scenario is not uncommon, and I've helped many people through this exact scenario. It is, however, more complicated than the typical stand-alone purchase or sale, so be sure to discuss with me well ahead of time. Below are some factors to consider.
1. Evaluate market conditions
In a hot seller’s market, you can expect to find a buyer for your current home relatively quickly, as long as you don’t overprice. Some properties even find a buyer in under a week. When you go to find your new home, however, you might have a more challenging time. Sellers' markets are characterized by a limited selection of homes on the market, and the most attractive listings often attract multiple buyers, forcing you into a bidding war. Under those conditions, many people prefer to get the home they wish to buy under contract first, and only then list the home they wish to sell. That way, at least you’ll know you have someplace to go. Of course, there are no guarantees that your current home will sell before the closing date on your new home, so you risk owning both properties (and having two mortgages) for an overlap period.
In a buyer’s market, on the other hand, a buyer can expect the luxury of there being many listings from which to choose, and less competition from other buyers. However, the home you are selling may take more time to sell. Under those conditions, most people prefer to sell their home first, so as to minimize the risk of owning both homes for a long overlap period. Only once their current home has a buyer under contract, do they go and make an offer on a house.
2. Aim for, but do not rely, on savvy timing
Whether you buy or sell first, during the offer negotiation your agent can negotiate a further out closing date on the first transaction to give you more time to complete the second transaction. With luck and skill, you may even be able to have both transactions close on the same day in the end.
For example, if you sell first, request a closing date as far off as the buyers will accept. If the average closing date is eight weeks out, then request ten or twelve weeks instead. Then, once you are past the Purchase & Sale (usually about two weeks later) and are confident that the transaction will proceed, go make an offer on the home you wish to purchase, and request a closing date just after the first closing date.
Although this can work perfectly, you will need a backup plan. There are just too many factors outside your control, which could delay either sale. For example, what if the lender for the person buying your home needs an extra three days? In that case, you will have to own both homes for three more days than you expected.
3. Explore financing options
If you decide to buy first, you might consider a loan to help you finance owning two homes simultaneously. There are a number of options, which you should discuss with your lender or financial planner. Remember to factor in closing costs on the loan when calculating if it is worth it for you.
One such option is a Bridge Loan, which is a short-term loan that wraps the payments for both homes into one. This type of financing is relatively rare, and requires excellent credit, a low debt-to-income ratio, and home equity.
Another option is to take a home equity loan on your current home, or do a cash-out refinance, and use the proceeds. Lenders generally won’t make those loans on a home that is already listed for sale, so you would have to take the money out prior to listing. Other options include taking a loan from your retirement accounts (talk to your financial planner first!), or borrowing money from family. Regardless of which option you choose, make sure you understand the risks and any penalties if your home sale takes longer than expected.
4. Sale-leaseback & short-term arrangements
If you sell first, a feasible option is to negotiate a sale-leaseback with your buyer. The buyer may be open to considering this if they are not planning to move in immediately, if it’s a seller’s market, or if you are selling an investment property. Under this arrangement, you continue to live in your home after the sale, and you pay rent to the new owner. A big advantage of this is that you get the cash from your sale before entering into a purchase, and it takes off some of the time pressure. Something to keep in mind, however, is that many residential mortgages require the new owner to move in within a certain amount of time, usually 60-days, so that may be the upper limit of how long the seller can agree to this arrangement.
I also recommend having a backup option in mind, in case you have to leave your current home before your next home is ready. For example, put some money away for a short-term rental, or, if you have family nearby, put them on notice that you may be visiting for a while. Also, talk to your moving company about storage options for your stuff, or scout out self-storage facilities.
5. Negotiate a home sale or purchase contingency
It is possible, albeit challenging, to negotiate a contingency in one of the offers that makes the sale contingent on the other sale. For example, if you are buying first, then in your offer to purchase your next home you would include a home-sale contingency. This would specify that your offer to purchase is contingent on your selling your home, usually by a certain date. Then, if you fail to find a buyer for your home, you have the option to back out of your purchase and get your deposits back.
If you have a contract in-hand already for your home, then the seller of the home you are buying might consider allowing this contingency. The farther along your sale is, the less risky it is, and the more likely the seller is to consider it. If you have not accepted an offer yet, though, then expect the seller to reject this, unless they are very desperate.
If you are selling first, then you might negotiate a home-purchase contingency. This lets you accept an offer on your house, contingent on you finding and purchasing your next home, usually by a certain date. If you fail to secure housing, then you would have the option to cancel the sale of your home. This makes your home less attractive to buyers, since it introduces much uncertainty to your buyers, but if it is a hot seller’s market, and you are receiving multiple bids, the buyers may feel compelled to accept this.
Questions? Email me and let's set up a time to discuss your real estate needs.
AVI KAUFMAN is a top Realtor who lives and works in Brookline, Massachusetts, assisting buyers and sellers of residential property. He is building a unique practice dedicated to serving the best interest of his clients - see how he's different.