The Chicken-or-Egg Dilema
Homeowners who decide they’re ready to become move-up buyers face a chicken-or-egg dilemma: Should they sell their current home first and then buy another, or buy a new one and then sell? The answer depends on several factors, including your local market conditions, your financing options and your feelings about potentially moving twice if you sell your home before your next residence is available….
Before you blithely assume that your real estate market is a buyer’s market or a seller’s market, you need to realize that you must be very specific about the market for your particular neighborhood, the style of home you own, and the price range for your property. In addition, you need to assess the availability of homes that meet your criteria. You’ll need to work with a knowledgeable, professional REALTOR® who can talk to you about how quickly homes that are similar to yours are selling and for how much.
Market Conditions and the Buy-First Option
On the buying side, you should do some advance shopping to get an idea of what you want and how easy it is to find it. For example, if you must live in a particular popular school area you may want to consider buying a home first so that you’re sure you have the location you want. Here again, you will need some good advice. Is the home you want to purchase a more generic property that will be in demand by a wider range of buyers, or is it more unique and/or not in great showing condition? The latter will be a better target for a conditional offer. In the case of a more generic well-priced home you will have to be able to carry two homes for a while or be prepared to pay more for the home you want. If you are not able to carry two homes, then in order to have a better chance at securing the home you want, you will have to ward off other potential buyers by locking in a higher purchase price in the offer conditional to the sale of your home. The reason for this is that most sellers will not accept offers conditional to the sale of another home unless they are able to accept a better offer and have the option to “bump your offer.” The sellers will take into consideration the salability of your home and of course the price and other differences between the two offers. It’s a case of “survival of the fittest.” In this scenario, and even in the current buyer’s market in Cranbrook, you are less likely to purchase the property you want at a good discount. However, each case is unique and much also depends on whether you are moving up or down. For eg. you have a much better chance of success with a conditional offer moving from a $280,000 home to a $520,000 home than the other way around, for the obvious reason that there are more buyers for the average-priced Cranbrook home of $250,000.
In an ideal world, everyone would have the funds to pay cash for their next home, but the reality is that most people need the equity from the sale of their current home for the down payment on the next house. One option is to sell your home and then negotiate to rent it back from your buyers, but remember that you’ll need to pay them for the rental. Also, lenders will limit the rent-back term to a maximum of 60 days because a rental lasting longer than that would be considered an investment property.
Alternatively, you can temporarily live with friends or family or in a short-term rental while you’re between homes. In that case, you might need to pay for a storage facility for your possessions.
A drawback to selling your home first is that you may be unable to find a home to buy, or you may feel rushed into taking a place that doesn’t meet your expectations.
If you can qualify for the mortgage loan on both your current home and the next home, you can access the equity in your current home with a line of credit. You’ll need to take out the line of credit before you put your home on the market and then you can pay it back at settlement.
You may also be able to borrow money for a down payment from relatives that you can repay after your home sells.
Some lenders also offer bridge loans for transitioning homeowners as long as they have excellent credit and sufficient equity in their current home. A lender can help you evaluate your options.
Risk Aversion and a Plan B:
You’ll have to ask yourself what scares you most: selling first and having nowhere to live or buying first and being stuck with two mortgage payments. The answer depends on your finances and the estimated time in Cranbrook to market your home. Your REALTOR® will be able to provide you with a reasonable estimate of how long it will take to sell your home. But in either case you should have a back-up plan to deal with the worst case scenario – either another source of income for those mortgage payments or an identified place to live for a few weeks or months while you shop for a home.
Case Study: One Buyer’s Experience with having to “Sell First”
I was representing a young couple wanting to move from a 3 bedroom south side home to an acreage. A well-priced property that met most of their criteria came on the market. As soon as they became aware of it, they made an appointment to view it. However, as they were viewing the property another family was writing an offer on it. Their offer was conditional to the sale of a higher-priced acreage. The conditional offer of the “first buyers” was accepted by the seller. My clients could not carry two properties and so were left with the only option, which was sell their home first and hope that the acreage would still be available.
My clients had a very salable home. It was clean, mostly updated, fully developed, and had a carport, a large shed, and a walk-out basement. I advised them to put their home on the market as soon as possible. They had a much better chance of selling their home than the first buyers had of selling their higher priced acreage. Normally homes are listed at an estimated market value plus $10,000 (more or less) to leave some negotiating room. On November 26th we listed their home at the top end of market value without the negotiating cushion to get a quicker sale. “Time was of essence” because the acreage they wanted was one-of-a-kind and was attracting a lot of interest. Similarly there was lot of interest in their listing with ten showings within the first 10 days. However, six weeks went by and no one made an offer. Their anxiety began to mount with each passing week. On January 9th, they decided to reduce the asking price on their home by $6000. Finally, on February 17th, they received an offer. It was $17,000 below their asking price and much lower than their target price. They countered the offer at $5000 below their asking price. The buyer for their home made a “final” counter offer which was still below their target selling price.
During this time there was a third buyer, a “cash” buyer, wanting to write an offer on the acreage. The pressure was on!
However, despite their keen interest in the acreage, they backed away from the offer on their home deciding not to sell their home below their target price. Early the next day I helped them look at their options. I asked them, “How will you feel a few months from now if you miss out on this property because of a couple of thousand dollars?” With this encouragement and the same encouragement from parents, they decided to accept the buyer’s last offer. On February the 18th I helped them negotiate an accepted offer on the acreage. Their offer, which was conditional to the finalization of their sale, “bumped” the first buyers’ offer and they were finally clear to purchase the acreage.
This story illustrates the added stress involved when you have to “sell first” and the property that you really want is already being actively marketed. Would my clients have been better advised to sell first (well before the right property became available), move into temporary accommodations, and then buy? I believe they would have saved approximately $15,000 in that event. However, because of a number of circumstances they were not able to do that. They did the best that they could, and in the end, and despite the stress involved, they survived the process and got what they wanted.
Not being able to carry two properties adds a major level of complexity to the process of buying and selling. Working with your REALTOR®, your trusted advisor with years of experience helping people in similar circumstances, can be your greatest asset.
For your “no obligation” free consultation on how to best achieve your Real Estate goals, call Ken Wellington – Royal LePage – 250-420-1236.