While selling or buying a home can be stressful, doing both at the same time can become almost overwhelming. Although a simultaneous sale and purchase can occur, it is more likely that a choice will have to be made regarding buying or selling first. Let’s look at both options.
Buying First
This is often the first option considered as it is seen as a way to make certain that a family will have a place to transition to upon the sale of their current home and keep them from euphemistically “being on the street or homeless” or having to temporarily rent or move twice. On the other hand, buying first may allow one to take all the time necessary to find the perfect home.
Finances often determine if this is a viable option. Unless one has cash resources, from a lending perspective, buying before selling could result in having two mortgages. In turn, the question will be the ability to qualify with the two mortgage payments. There is also the question of acquiring the necessary down payment for the new purchase in the absence of a sale. In the absence of cash for the down payment, two possible finance options are often explored:
Equity loan on current home – When there is sufficient equity in the existing home, an equity line loan for the needed down payment for the new purchase might be available? Remember, there will be the additional payment for the new equity loan which will be calculated in one’s qualifying ratios when seeking a purchase mortgage – in other words, one will be qualifying for three mortgages, the current existing loan, the equity loan and the new purchase loan.
A bridge or gap loan for the necessary down payment – This is similar to an equity line loan and the result is the same wherein one must usually qualify for all of the borrowed funds when acquiring the new purchase loan.
Some of the additional issues with buying first include:
Buying first usually involves purchasing with a contingency to sell one’s current residence. If the housing market is fairly brisk, most sellers may be reluctant to accept a contingency offer in which their home is off the market waiting for you to sell your home. A contingency offer will usually prohibit the buyer’s ability to negotiate much else with the seller, including the price of the home.
A seller MAY accept a contingency offer with a “a 24 or 48 hour first right of refusal”. This means that the seller intends to continue to market their home for sale and should they receive another acceptable offer, the contingent buyer will be provided an opportunity to release their contingency regarding their home sale or cancel their offer.
Most potential buyers will be unable to remove the home sale contingency resulting in the loss of the potential purchase and having to decide if they wish to go through the same process again.
In the meantime, their home is now probably on the market for sale – is it best to continue with the marketing or is it best to take their home off the market?
There is another aspect of the contingency sale that is often overlooked by both buyer and seller. The seller who accepts the contingency sale typically accepts with the idea that they will continue to keep their home on the market for sale. Unless the home is unique, special or one of a kind, the acceptance of the contingency sale effectively takes the property off the market. Think about it – if I am a real estate licensee I want to show property that I know I can sell to my prospective buyer. I could conceivably have a buyer become very excited about purchasing the home already purchased on contingency, only to find the contingency removed and my buyer disappointed. Preferring not to take that chance, I am likely to show the contingency property only as a last resort upon finding nothing else that interests my buyer. This fact, if explained to sellers, usually persuades them to not accept a contingency offer.
Selling First
Most real estate licensees suggest this is the better course of action. This option usually requires arranging an interim housing plan assuming that a sale does occur prior to having purchased a replacement family home in an effort to alleviate the accompanying anxiety regarding “what if we don’t find an acceptable home to purchase or “find ourselves homeless”? Depending upon the new buyer’s need for possession, a solution might be to negotiate a 60 to 90 day “rent back” arrangement. Acquire guidance regarding issues that can accompany a rent back such as having a binding agreement, adequate insurance coverage, etc.
Selling first provides the seller the advantage of being able to take their time in accepting offers rather than having to accept a sale in order to meet a contingency requirement. One will also know for sure the amount of financial resources available for the expected new home purchase.
Other considerations include:
A would be seller/purchaser is urged, prior to offering their home for sale, to determine that the present home inventory provides a sufficient number of acceptable, affordably priced home purchases that would satisfy the family’s needs. The following should also be considered:
Determine one’s ability to qualify for the purchase of a replacement home. Do not, in this process, over anticipate the sale proceeds that will be available in a purchase.
Make the necessary improvements and/or repairs in preparation for a sale.
Acquire appropriate information allowing the home to be priced for a reasonably quick sale.
The decision to sell or buy first is never easy. You may be well served by consulting real estate and mortgage professionals for guidance.