How To Handle Buying and Selling a Home at the Same Time
Buying a home is a huge endeavor. The paperwork, deadlines, and research can all be a little stressful. Couple it with selling a home at the same time, and it can turn into one big, overwhelming headache. Here are a few things to keep in mind when you’re buying and selling a home simultaneously.
To clarify, you can buy and sell a home around the same time, but naturally, you’re not going to close on a new home the exact same day you sell your old home. It would be awesome if everything was timed so perfectly, but the process isn’t that neat—at least not organically. You’re at the mercy of the market and potential buyers. You might find a great home you’re ready to buy, but no one has put an offer on your current home. Or someone might be ready to scoop up your current home, but you haven’t found a new place yet.
There are ways to line up these dates, but chances are, you’ll have to focus more on either buying or selling first, and there are pros and cons to each.
The Pros and Cons of Selling First
When you sell your home before buying a new one, you know how much money you have to work with. Here’s how web site Your Mortgage puts it:
Clearly, you can be in serious dollar trouble if you overestimate the worth of your current home and purchase from an optimistic position. But also, think how you might kick yourself if you buy too conservatively. Sure, your mortgage will get a giant leg-up, but think about what you could have bought instead.
It’s also easier to get a new mortgage when you’ve sold your old home. You won’t have two mortgage payments holding you back. Logistically, selling first is usually the best way to go. But it does come with a few disadvantages, too.
For one, you could sell without having anything lined up. You may have to rent while you look for a new home, or keep some belongings in storage. But there are ways around this, which we’ll get to later.
Finally, if you’re into investing your home equity, there’s that to consider. Let’s say, before you sell your home, you apply for a home equity loan, or a home equity line of credit (HELOC). This loan is based on the amount of home you’ve already paid for—your equity. You can invest this loan to earn a return. But if home prices increase while you’re waiting, you lose the value of that return. Your Mortgage explains:
For example, if you have paid off approximately 20% of the purchase price of your potential property, say $40,000, you could earn a return on this amount while waiting to purchase your new home. If property prices are rising, the total value of an average property (say $200,000) is increasing. If you were earning 5% on your money in a cash management account and the situation dragged on for a year, you would earn $2,000 on your $40,000. If property prices were increasing by 10%, the price tag would increase from $200,000 to $220,000. So you have earned $2,000, but the price of the average property has risen by $20,000, so you will be getting less for your money in the long run.
Of course, there’s a certain amount of risk with this type of investing, and it doesn’t always make sense. You can read more about it here. If you are into this practice, it’s just another reason to familiarize yourself with the market. But we’ll get to that in a bit.
The Pros and Cons of Buying First
If you buy a home before your sell your old one, you have plenty of time to move. This give you more time to get your home ready to sell and ease into the process.
Of course, if your home doesn’t sell for a while, you could possibly be paying two mortgages at once. If your home is already paid off, that’s not a big deal, but most of us would struggle with two mortgage payments. Plus, it’s harder to qualify for a new mortgage if you have two mortgage payments, because you have a much higher debt to income ratio. Home Guides explains how this works:
To buy a house before you sell, your income will have to support both mortgage payments at the same time. If you’re struggling just to have enough income to qualify for the new loan without figuring in your old mortgage, you probably won’t be able to qualify with both unless you can find a lender that will allow a higher debt to income ratio.
Realtor.com suggests a variation of this plan. If you buy first, you can possibly rent your old home out for a while. This would help you cover the mortgage payments while you move into your new home. Of course, now you have the added headache of becoming a landlord.
Research the Real Estate Market
While selling first might seem like the best bet, it also depends on the market. Research prices in the areas where you’re both buying and selling, legal site Nolo explains. You should find out whether the market favors sellers or buyers. That way, you can optimize your stronger role while protecting yourself in the weaker role, as they put it.
As a general rule, you want to sell first in a buyer’s market. In a seller’s market, you might consider buying first, provided that your property can indeed sell quickly. John Smith, CEO of Inspired Finance Group Pty Ltd, explains why:
“In a buyer’s market, I would always suggest you sell first. The last thing you want is to be paying interest costs on two loans, or seeing equity in your properties eaten up, because you can’t sell your own home….” In a seller’s market Smith suggests buying first might be the best option, as you would assume that your property would be sold quite quickly. Again, he warns that it is important not to mix business with any personal feelings about your own property and remain objective – to ensure it is the type of property that would be sought by buyers.
Beyond researching the market, there are a few other ways to prepare.
Coordinate Closing Dates
Ideally, you want the closing date on your old home to come after your new home. You can make the selling and buying dates line up a little better by preparing for one while actively doing the other.
For example, if you’re actively selling your current home first, prepare to buy a new home in the meantime. Research your options, keep your credit score high, and research loans. We have additional tips for preparing for a future home purchase, so be sure to check those out.
If you’re actively buying first, you can prepare your home for sale in the meantime. Address maintenance issues, declutter and clean, research realtors and home stagers, and so on.
Add a Contract Contingency
You can also line dates up by asking to add a contingency to your contract, whether you’re buying or selling. If buying, you can ask the seller to make your purchase contingent upon the sale of your current home. Nolo explains that this might work for sellers who are having a hard time finding a buyer. They add that you should be ready to give them reasons why your home will probably sell quickly.
If selling, you might negotiate with your house’s buyer instead. Ask to add a contingency to the contract that makes the closing date line up with the finding and closing date on a new home. Nolo says:
Although few buyers will agree to an open-ended period, some will be so eager to buy your house that they’ll agree to delay the closing until you close on a new house or until a certain number of days pass, whichever comes first. Also be sure to fully research the market before you sell, so that you’ll be an efficient buyer, able to offer the right price on attractive terms.
Again, this isn’t always possible, and it depends on the market, too. But it’s an option.
Another option is a rent-back arrangement. With a rent-back, the buyer agrees to “rent” out your current home for a short time after you sell it. You negotiate a lower price, or agree to pay the new owner rent. In exchange, you get to stay in your home for, usually, 60 to 90 days while you find a new one. Realtor.com has more about this here, but keep in mind that not all lenders allow it. But it’s more convenient than selling your home, moving into a rental property, and then moving again into your new home.
Consider Bridge Financing
Bridge loans are available specifically for those who are buying and selling a home simultaneously. You get a short-term loan to cover the down payment on your new home before selling your old one. About.com defines it:
Bridge loans are temporary loans that bridge the gap between the sales price of a new home and a home buyer’s new mortgage, in the event the buyer’s home has not yet sold. The bridge loan is secured to the buyer’s existing home. The funds from the bridge loan are then used as a down payment on the move-up home.
Basically, it’s a short-term loan that uses your old home’s equity to help pay for your new home. You use the money to put a down payment on your new house, and then repay the loan when you sell your first home. With a bridge loan you can put your home on the market without any restrictions, according to About.com. You could also get a home equity loan, or HELOC, but you may not be able to list your house right away. Some also opt to get a short-term loan from a family member to cover the down payment and closing costs.
With a little preparation, it’s possible to minimize the stress of buying and selling a home at the same time. Know the market, know your options, and come up with a plan for making it as seamless as possible.
Thank you for taking the time to read this email. If you would like any further explanation, or need any real estate assistance, please do not hesitate to let me know!
A very special thank you to Kristin Wong for this awesome, and informative article!