Selling a home is stressful. Buying a home is stressful. Doing both? There should be a new word for that.
But somehow people do it, every day in every part of the country and in every market condition imaginable. So you can do this. And knowing what you’re in for and how to coordinate the sale and purchase aspects will make it more manageable.
Buy or sell first? Chicken or egg?
Like the proverbial poultry conundrum, there is no easy answer to which comes first, the buying or the selling. Whichever comes first will put additional pressure on the other side of the equation. But there is an order that will make sense for you. The first step is to take a good look at your finances, your willingness to move twice and the market conditions where you are buying and selling. Let’s look at three scenarios: Sell first, buy first or turn your existing home into a rental.
• You’ll have cash for a down payment
• No risk of having to juggle two mortgages at once
• No pressure to lower the price to sell quickly
• May need to move twice
• Takes your investment out of the real estate market
• Puts pressure on you to find a new house quickly
If you’re like most of us, you don’t have cash to make a down payment on your new house and enough income to make two mortgage payments indefinitely. So it may seem like selling first is the smart, if not only, choice. But selling first leads to one major question: Where will you live in the time between selling and buying?
If you sell your home before you buy a new one you will almost certainly have a gap of time, whether it’s days or months, between needing to be out of the old house and when you can take possession of your new one. Do you mind moving twice, first into a rental or in with extremely hospitable friends or family? Can you find a rental that offers month-to-month leasing?
Even if you plan to sell first, it makes sense to start shopping for your new home right away. If you find one you want, you can be ready to make an offer as soon as your home sells. If nothing else, it gives you a head start and something to do while you’re vacating your home for showings.
It might seem less stressful to sell your home, rent an apartment and give yourself some time to take a breath and look around. But first look at the housing market. In a rising market, time is money. Once you’ve sold your home, you’re out of that market and the longer you wait to get back in, the more it will rise without you. Watching the value of the home you sold soar, along with the prices of potential new homes while you sit out a six-month lease is no fun. If you’re in a slow, or “buyers’ market,” you can probably afford to sit out for a while. But don’t wait too long or the market may turn around on you.
Wouldn’t it be nice if you could sell your house but stay in it until you buy a new one? You can, with the right sales contract. It’s called a rent-back provision. Essentially, when you sell your house you negotiate a deal to become a tenant for a period of time until you can buy and move into a new house. You’ll pay at least enough to cover their mortgage payment but you can stay put until your new home is ready, which can be priceless. There’s a hitch, of course. If you sell with a rent-back requirement, you’ll likely get fewer offers. You’ll also have a relatively short window of time to find a new home because buyers probably won’t want to wait for months to get into their new home.
• Only have to move once
• No pressure to pick a house that may not be exactly what you want
• Pressure to sell quickly
• Financing can be hard to find – and expensive
If you want to be assured of moving directly into your new home without a pit stop as a renter, you’ll have to buy first. But unless you’re sitting on piles of cash that may seem impossible. It’s not. There are a couple of ways to make this work.
The first and probably most appealing option from your standpoint is to make a “contingent” offer on your new home. What that means is that you enter into a contract to buy the new home when and if you sell your current one. (The contract will include an expiration date, so it’s not like you can promise to buy your new place and then lollygag about selling your old one.) But nothing in life is as easy as that, so of course there’s a downside. In a seller’s market, a contingent offer probably won’t be considered too seriously.
Sellers are already stressed about selling their own home, now you’re asking them to stress about you selling yours as well. A contingent offer also eats up most if not all of your negotiating room. So unless the house is seriously overpriced, the asking price will be the floor, not the ceiling of your offer. Talk to your agent about whether a contingent offer makes sense given local market conditions.
Borrow what you need
If the conditions aren’t right for a contingent offer, all is not lost. You may not have cash to make a down payment and keep up two mortgages. But you do have an asset that you didn’t have when you were a first-time home buyer: Your home.
Assuming you’ve got some equity built up, you can use it to finance your next move. You may have heard about bridge loans. These are short-term loans to help “bridge” the gap between selling and buying. You can either get a bridge loan to completely pay off your existing mortgage and provide a down payment on your new home or you can get one that just provides a down payment. But beware. These are considered high-risk loans, so they come with a higher interest rate than a typical mortgage loan. They’re also trickier to get than they were a few years ago.
Today more people use a HELOC or Home Equity Line of Credit to finance a purchase before a sale. Essentially, it allows you to borrow against the equity in your home. You can draw money out as you need it to make your down payment and cover the extra mortgage. Like a bridge loan, it’s a short-term solution. (And lenders probably won’t offer you a HELOC if your existing home is already on the market.)
Even if borrowing gives you some breathing room, there is no way around it. If you buy first, you’re going to be under more pressure to sell your existing home.
Become a landlord
• Skip the stress of selling
• Add to your real estate portfolio
• Don’t get cash out to make down payment
• Stress of being a landlord/finding tenants
• Potential tax consequences
If you can cobble together a down payment without selling your house, either through a HELOC or stellar saving habits, you might want to forgo selling altogether and rent out your existing home. If you can get enough rent to cover mortgage and maintenance costs, it could be a good investment. However, there are tax implications as well as stress implications. So check with a tax adviser about your particular circumstances before committing to this option.
Bottom line: It depends
There are options and which one works for you probably depends upon market conditions. In a buyer’s market, you have more leverage on the buying-side of the deal so you may be able to make an offer to purchase contingent on the sale of your home. In a seller’s market, you may be better able to negotiate a rent-back of your current home. And in either case, invest in some stress balls or a gym membership to get you through.