When Purchasing a New Home, Should You Buy or Sell First?
For existing homeowners, selling their home and buying a new one is probably one of the most exhausting challenges most will face. It’s a daunting task filled with paperwork, pitfalls, and difficult choices – chief among them being the question of whether to sell their old home first and then buy a new one or to buy their dream home and then sell the old one.
It’s a classic case of chicken-or-the-egg: which comes first? Do you sell your existing home before you sign a contract on a new house or do you buy that new place first and then put your old house on the market? Obviously, the each option carries its own set of risks. If you sell first and can’t find a new house that fits your bill, you could be homeless. On the flip side, if you buy your new home before you sell your current one, you could be stuck with two mortgages. These are each real possibilities and there’s always bound to be a bit of nervousness no matter which option you choose. Still, there doesn’t have to be a lot of anxiety if you plot out your course of action. You need to consider two important things when deciding on the timing of the sale of your old home relative to the purchase of your new one: the market and your mortgage.
The Market
There are always exceptions, of course, but conventional wisdom among real estate professionals is generally that it’s most practical to sell first and then buy. This tends to make sense from a market perspective, but how much sense it makes generally depends on the condition of the real estate market as a whole and that of the area in which your old home – the one you want to sell – is located. If nothing else, selling first puts you in a position with the most control, both coming and going. For one thing, you won’t be facing any self-imposed deadlines. You can hold tight for the best possible price for your current home for as long as you want. If, on the other hand, you’ve already bought that new house, you could be forced to accept less than you need to make the next deal work, and that’s worth keeping in mind.
It could cost you thousands if you buy before you sell, because you’re a lot more likely to take less for your house, especially given the fear that you might lose the new house to another buyer. Sellers are also more likely to negotiate with a solid buyer who doesn’t have another house to sell or one who doesn’t have enough cash on hand to go to settlement unless he or she sells their current house. It’s pretty well established that most sellers don’t like taking their homes off the market for a “maybe.” Some won’t even consider a contract that’s contingent on the would-be buyer selling his or her current house.
All of these things depend on the robustness and condition of the local real estate market in your area. If, for example, home values are rising or at least holding steady, then it’s probably okay to buy first and then sell, since those conditions indicate reasonably high demand. In other words, if houses are selling briskly, you should be in good shape as long as you price your old home realistically. On the other hand, if nothing is moving, then you might end up having to sell for less than you want or need in order to make the deal work. Remember, though, buying first and then selling not only carries the risk of having to lower your asking price at the last minute in order to more your old property, but it also may cause you to wind up with two mortgages, even temporarily, and that carries its own set of challenges.
The Mortgage
If market conditions push you to buy first and then sell, you’ll have to deal with qualifying for a mortgage on the new house while still paying the mortgage on your old one. This isn’t quite as menacing as it sounds, but it has its own unique set of challenges. If your old house isn’t yet under contract by the time you apply for a loan to buy the new house, both the existing house payment and the projected payment on the new place must be included in your debt-to-income calculation. Obviously, having that second mortgage payment factors in nearly doubles the debt side of the ratio, and it may affect the terms at which a lender will give you a loan.
There are workarounds, though, if you know where to find them. In some cases, some lenders may accept reserve assets equal to six months of your existing house payment, provided your old house is at least listed for sale with a qualified real estate agent. Remember though, in nearly all cases these reserve assets would have to be added to the liquid assets you’d need for a down payment and closing costs on the new home. Alternatively, you can span the gap between two mortgage payments with an aptly named bridge loan (also called gap financing), which generally run anywhere from 90 to 180 days. In most cases, lenders will advance 76 percent to 90 percent of the value of your present house, depending on your financial situation, so you can complete the purchase of the new one. This is a little more common of a solution to buying first and selling later, but timing is crucial and you can’t afford to spend too much time in negotiating on the price of your new home, unfortunately.
It’s always possible to wait to apply for the new mortgage until after you’ve closed on the sale of your old house, or at least until after you’ve accepted a contract. But as we said a moment ago, you may be rushed to purchase and close on a new home in that case and may not have as much time or leverage to negotiate a lower price on it.
While the question of whether the chicken came before the egg is a complex philosophical one, the question of whether to buy or sell first when looking to move to a new home doesn’t have to be; in real estate, methods, planning, and market data are the key to success, whether you’re an investor, a realtor, or a homeowner. By factoring in your tolerance for risk – especially regarding mortgages – and the conditions of the market, you can more easily make a better decision that works for you and takes local economic conditions into account. For more information and an insider’s look at the real estate market, sign up for our email list and don’t forget to follow us on Facebook and Twitter!
– Get It Right Solutions, LLC