The Buy/Sell Dilemma
You are planning to sell your present home and buy another. Which do you do first? This is a basic but difficult question that most homeowners struggle with. There is no universal correct answer. Rather than a right or wrong answer, it’s about what is right for you. The way you figure that out is to carefully weigh the pros and cons of options in light of your personal circumstances.
One option is a “sell first then buy” strategy. With it, you gain the advantages of knowing when you will need to move and just how much equity you have available to invest in your next home. You also have a stronger financing and negotiating position with cash in hand and no contingency that says you have to sell before you can close the next deal. Selling first can also be in your favor if you are in a buyers’ market – one in which there are more homes for sale than willing buyers. You will feel less stressed about needing to sell your home quickly and possibly having to lower your asking price to do so. Conversely, while a sellers’ market can be good on the sale side, you could find yourself paying more, amid intense competition, when you go to buy.
When you sell first, be prepared to deal with the possibility of living between permanent homes for an unknown period of time. You may even wind up having to move twice. Sometimes you get lucky and your closing date is far enough away that you have adequate time to find your next home. Typically though that’s not the case, so you will want to have a backup plan. One alternative is to see if the new owners of your old home are willing to rent back to you for a short time. This works only if they are not in a hurry to move in. If they are, you could find yourself sharing space with relatives and friends — a situation that has its own unique set of stresses and challenges. Or, you may have the expense of renting an apartment or other temporary quarters as well as storage fees for your household items. With either interim housing option, you could feel pressured to find something quickly and even settle for a home that is not quite right for you.
What about a “buy and sell” strategy? An advantage of this option is the peace of mind that comes from knowing you have a home waiting when your existing one sells. Risks or challenges differ with the timing of your sale. If you try to buy and sell simultaneously, you can weaken your negotiating power when you put a “subject to the sale of your home” clause in your purchase contract. This is especially true in a sellers’ market in which buyers may be lined up with offers that do not have contingencies. If you choose to let a period of time pass before you sell your home, you end up paying more than one mortgage until you close the sale. In a buyers’ market, this could translate into a panic sale if you start to feel the financial pressure.
If you do opt to carry more than one mortgage, even if only temporarily, be sure to have a financial plan in place. Particularly if you need to pull equity out of your existing home for a down payment or to subsidize the two mortgage payments. As part of your plan, investigate alternatives for getting the needed cash while your equity is still tied up in your previous home. Two such options are bridge loans and home equity loans. Both types of loan use the equity in your existing home as collateral. A bridge loan, however, can be much riskier than a second mortgage or equity loan. It is typically funded by private investors and carries a higher interest rate that could become expensive if it takes a while for your home to sell. When looking at either loan, talk honestly with your lender about your financial circumstances and seriously think about your tolerance for risk as well as about what you can really afford to do and for how long.
As you can see, there are many variables that come into play when it comes to selling your present home and moving to the next. In determining what is right for you, first clearly understand your available options. Then evaluate each alternative in terms of the effect it can have on your financial situation, stress level, negotiating position, and moving timetable.