Sell Your Current Home Before Buying A New One?
Should you sell your home before buying a new one?
Should you sell your current home before buying a new one, or vice-versa? There are pros and cons to either strategy. Buying and selling a home can both be trying undertakings on their own. Buying a home when you already own home naturally presents its own unique set of challenges. If you’re considering purchasing a home when you’re already paying on an existing mortgage, plan carefully. It’s imperative that you have your strategy together and all your ducks in a row.
Know your market
What's the current market like? Is there a lack of inventory? In a seller’s market, you’ll probably be able to sell your existing home without much trouble, but it may be challenging to find suitable replacement home. Conversely, buyer’s markets make offloading your old home a chore, but landing your new digs should be relatively trouble-free. Speak with your real estate agent to get an accurate breakdown of your area's market trends. There isn't a more qualified person to assess the everyday ebbs and flows of supply and demand regarding 'like-properties' in the vicinity. They are your advocate.
Financials
Most likely, your decision to buy or sell first is going to be heavily influenced by your finances. Do you need money from the equity in your present home to buy another? Will you be paying cash for your new home or will you need to secure some type of financing?
If you need a mortgage loan to purchase a new home then your top priority should be to speak with your lender before you do anything else. They'll be able to walk you through what your options are and help you formulate a plan.
Your debt-to-income ratio should look pretty appetizing to potential lenders in a scenario where you sell your current home first. Unfortunately, you’ll still need to find a place to live until you can close on a new home. The lender will also be able to evaluate your ability to qualify for a new mortgage while still paying the mortgage on your current home. If you can buy a new home without having to sell your current home, you won’t have to find a place to live while you’re between homes. The downside is that you run the risk of possibly having to pay two mortgages at the same time until your old home sells. Ouch!
You may qualify for bridge financing, which can provide access to capital without having to wait on the proceeds from selling your current home. Bridge loans enable you to use tap your equity towards a down payment on the new home. Think of it as a short-term loan that you’ll repay once your old house sells.
Sell your home, while buying a home at the same time
In some cases, buying and selling at the same time, known as concurrent transactions, is an option but along with it comes a greater level of risk. One real estate transaction can involve over 20 individuals, including real estate professionals, buyers, sellers, attorneys, escrow officers, escrow technicians, title officers, loan officers, loan processors, loan underwriters, transaction coordinators, home inspectors, termite inspectors, insurance agent, home warranty representative, contractor, roofer, plumber, pool service, and so on. That's a whole lot of moving parts. Needless to say, navigating your way through two escrows at the same time is challenging. Problems, or delays, often present themselves. If one transaction starts to go sideways, chances are the other one is right behind it.
Contingencies
Contingencies are one of the only ways to mitigate risk when buying and selling at the same time. As the seller, you may make the sale of your home contingent on closing concurrently with your new purchase. This could potentially decrease the number of interest buyers, however. Less interest most often leads to lower offers. The contingency is essentially telling potential buyers that if you can't find a home you want to buy, you're under no obligation to sell to them and you can cancel.
Increased risk often leads to increased pressure. Concurrent transactions leave little room for error and a lot of synchronicity. As the Seller, it's possible to get caught in a desperate situation and take a bad offer simply because you need the money to make sure the purchase goes through on your new home.
As the buyer, you may include a contingency to close concurrently with the sale of your current home. If the market's competitive, your offer won't look nearly as desirable if it's contingent on the sale of your current home. Sellers don't want to deal with the risk that your offer brings to the table. They're looking for as little risk in their potential buyers as possible.
Leaseback strategy
Some sellers will only accept an offer if it includes some type of leaseback agreement. A leaseback is when the seller rents back the property from the buyer immediately after the close of escrow. If the buyer doesn't require immediate occupancy they may be open to this. Typically, the terms of the lease are negotiated and agreed upon before the purchase agreement is signed and escrow is opened. This can provide sellers with any additional time they think they may need to find and purchase a replacement home. This can be an effective strategy for both buyers and sellers.
Buy first, sell first, or buy and sell at the same time?
Should you sell your current home before buying another? There isn't one right answer. Everyone's situation is different. Personally, I always advise my clients that if they are financially in a position to do so, separate both the purchase and sale transactions. It isn’t worth the risk if it isn’t necessary. If you don’t need the equity in your current home to buy a new one, don’t sell your current home first. If you already have the cash to buy a new home, definitely wait to sell after.
Now, if you do need the money from your current home to buy a new one, then absolutely sell your current home first! Finding a short-term rental, somewhere to live, while you look for your new home will remove a lot of pressure. It's still a much better option than one transaction being contingent on the other.
Finances will most likely play a huge role in deciding whether to buy first, sell first, or buy and sell at the same time. Getting clarity from your lender around what your options are is a top priority in this process. Your real estate agent will be able to give you an analysis of the current market trends. They can help evaluate the pros and cons of each option. Work together to find the best fit for your specific needs.
Buying a home when you own a home can feel overwhelming. It's complex. Your home is likely one of the largest investments of your lifetime, and you'll thank yourself for giving this process the attention it deserves. It's time to maximize the equity you've worked so hard to build.
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