Buying and Selling a Home at the Same Time
It's time for another Q&A session with Brandon Cornett, the publisher of the Home Buying Institute. In this lesson, we will talk about the different options you have for selling your current home and buying a new one. This question came from John in Cincinnati.
Question: "My wife and I plan to sell our home and buy a new one later this summer. As first-time homeowners, we have never sold a house before. We're not sure what the best strategy would be for buying and selling a home at the same time. My biggest fear is being stuck with to mortgage payments for a long period of time. Can you offer us any guidance in this area?"
You're not alone with your concerns. This is one of the most common questions among home sellers, especially those who have never sold a home before. Buying and selling a home can be done in several ways. I'll explain the three ways you could go about it, and you can choose the path that makes the most sense for you.
Three Strategies for Buying and Selling
As I mentioned above, there are basically three ways you can go about selling your current home and buying a new one.
- You can try to buy the new home before selling your current house.
- You could sell your current house first, and then buy the second house.
- You could try to coordinate it so you move from your current house directly into the new home.
There are pros and cons with each of these strategies. As we discuss these three strategies, you will probably start to zero in on the one that makes the most sense for you.
Option #1 -- Buy the new home before selling the current one.
This is one approach to buying and selling a home, but it has certain risks associated with it. The process itself is fairly straightforward. Basically, you would proceed with the purchase of the new home while your current house is listed for sale.
You can already see the disadvantage of this strategy. Actually, there are two key disadvantages. You could end up with two mortgage payments for an unknown period of time. You might also have a lack of funds for the down payment on the new house. If you have equity in your current home, then you will make a profit when you sell it. (If you waited to buy the new home until after you sold the current one, you could use those profits for the down payment on the new house.) But not with strategy #1. If you close on the new home before selling your existing one, you obviously won't have any proceeds from the sale to put toward the down payment.
Of course, if you don't have a lot of equity in your current home (or even negative equity), then this becomes less of a factor. Negative equity presents a whole different set of challenges. If you owe more on your mortgage loan than your home is worth, you're going to have a hard time selling. You'll probably need the lender's approval in some way, because they will be accepting less than what you owe. Or you could sell your current home for less than the mortgage balance and pay the remainder out of pocket. Either way, a negative equity situation complicates the process of buying and selling a home.
So strategy #1 comes down to three things:
- Will you eventually be able to sell your current home?
- Do you have equity in the property, to the point that you'll make a profit?
- And if you do decide to purchase the new home before selling the old one, how would you come up with your down payment and closing costs? Do you have enough funds set aside for this purpose?
If you choose this approach to buying and selling a home, there's a financing tool you should know about. Many people who buy a new house before selling their current home use bridge loans to cover their down-payment expense. Whether or not you can qualify for a bridge loan will largely depend on the amount of equity you have in your house. Your credit score and debt-to-income ratio will also play a role. But equity is the most important factor when applying for this type of financing.
Here's how a bridge loan works: The lender gives you a certain amount of money based on the amount of equity you have in your current home. For example, they might offer you a loan for 75% of your equity. You would put this money toward the down payment (and possibly the closing costs) when buying the new home. You are "bridging" the money gap between the equity in your current home and the down payment on the new one. And when you sell the old one, you could pay off the bridge loan.
Of course, this is assuming you can sell your current house. You've already stated that you are worried about ending up with two mortgage payments. If you use the buy-before-selling strategy, this is exactly what can happen. If the current house doesn't sell, you'll have to cover two mortgage payments until it does sell. If you use a bridge loan to cover the expenses of buying a new house, you would also have those payments to deal with. Do you have the financial capacity to cover all of these monthly payments? If not, then this strategy is not for you. It sounds like you may realize this already, based on your comment about being strapped with mortgage loans.
So let's move on to option #2, which is selling your current house first and then buying the new home.
Option #2 -- Sell your current home first, and then buy the new one.
I can sum up the pros and cons of this strategy in a single sentence. There is less financial risk, but more logistical hurdles.
If you take this approach to buying and selling a home, you won't run the risk of ending up with two mortgage payments. You will sell off the current house and extricate yourself from that mortgage obligation, before moving on to buy the second home. So there is less financial risk involved.
There's another benefit to buying and selling a home in this manner. If you stand to make a profit on the sale of your existing home, you could put that money toward the down payment and closing costs on the new home. But a low-equity or no-equity situation would negate this benefit.
The downside is that you may have to move twice. After all, you'll have to live somewhere between the time you sell the old home and buy the new one. For example, you might move into an apartment after selling your house, and then move again later after buying the new one. If you find a furnished apartment, you could move your furniture into temporary storage. After you close on the new house, you could simply move your furniture from storage into the new home. This may cut down on the amount of packing and unpacking you have to do.
With this strategy, you obviously have to consider your living arrangements between the time you sell the old house and buy the new one. We talked about the apartment option already. There are other options as well. Depending on the length of your stay and the size of your family, you might be able to move in with some relatives. The benefit of staying with relatives is that you're not paying rent (unless you've got some business-minded relatives). By taking the monthly rent payment out of the equation, you'll have even more money to put toward a down payment and closing costs.
Option #3 -- Move from the old house straight into the new one.
Here are the pros and cons of the strategy. It's the most convenient option for you, but it's also the hardest to pull off. Timing is the challenge here. Buying and selling a house at the same time will require you to have certain contingencies in your real estate contracts. For one thing, you won't be able to move out of your current home until you are ready to move into the new one.
This can get even more challenging if you're buying an existing home from a homeowner (as opposed to a new construction that's currently unoccupied). So you would need to have an agreement with the person buying your current house regarding the closing date. You would want the closing to occur around the same time as your expected move-in date for the new house. If the closing for your existing home happened before you were ready to move into the new place, you would essentially be homeless for the interim.
You would also need certain contingencies in the contract for the new house. For example, if you were buying an existing home from a homeowner, you would need it to be contingent upon the successful sale of your current home. I can tell you right now that most sellers will not go for this in the current economy. They know firsthand how hard it can be to sell a house in a slow real estate market, which is the national trend in 2011. So they probably won't be inclined to accept your offer if it includes such contingencies.
Like I said, this is probably the hardest of the three options to coordinate. It sure would be convenient though, wouldn't it? Imagine moving from your current home straight into the new one. But the timing on both ends can make it hard to pull off.
If you're considering this strategy for buying and selling a house, I recommend that you discuss it with your real estate agent. I'm talking about the listing agent who is helping you sell your current house. He or she can probably tell you if this is an option, based on the state of your current real estate market. If you're in a slow market where homes are listed for a long period of time, the seller of the new house probably won't agree to this contingency. But if they have no other offers and are therefore desperate to sell, they might accept your contingency regarding the current home.
I know it can get confusing, and that is precisely the disadvantage with this approach. You need contingencies on both sides of the deal to make it work. With the person buying your current home, you need a contingency regarding the closing date. With the new home you're buying, you need a contingency regarding the sale of your old house.
Where to Go Next
Despite the length of this article, there's still more to learn on the subject. An entire book could be written about buying and selling a home at the same time (and it probably already has). My primary goal in this lesson was to present the three options you have when selling your current home and buying a new one.
It sounds to me like you're already leaning toward one of these options. You said that being stuck with two mortgage payments is not an option for you. In that case, you would want to use option #2 or #3 above. And if you don't think you can pull off the double-contingency situation we talked about in option #3, you're left with one strategy -- option #2. So think about selling your current house first, before buying the new home. It might be the best strategy based on your financial situation.
If you decide to go with option #3, you've got a lot of homework to do. From a contractual standpoint, it's the most complex strategy. So you really need understand how real estate contracts and contingencies work.
Whatever strategy you choose, I wish you the best of luck in your home buying and selling process. If you would like to learn more about any of the topics discussed in this article, you can use the search tool located at the top of this website. Good luck!