Ah, to be a first-time homebuyer again. How easy it was to buy a home when you weren’t carrying another mortgage on your back.
If you’re looking to upgrade from your first-time starter home to something more appropriate for your life stage, the process of upgrading can get a little tricky.
In an ideal world, you’ll buy a new home, move, then deal with the turmoil of selling your old home after the dust settles. But for most people, that’s financially unrealistic. Unless your pockets run deep, you’ll probably need to sell your existing home in order to buy something new—and tackling both transactions at once can add a whole new dimension of anxiety to a process you already know to be stressful.
Since Bay Area buyers typically don’t have the budget for two mortgages, it’s become commonplace to sell homes with a rent back agreement. This gives the seller the right to continue living in the house for up to 60 days while searching for a new home.
Alternately, purchase offers can be made contingent on the sale of an existing home. This type of offer carries more risk for the seller, so it’s a less popular option in the high-stakes Bay Area real estate market. While it can be a viable choice for those who need it, sellers appreciate—and will prioritize—the lowest-risk offers they receive. So, make your offer as attractive as you can by attaching the fewest strings possible.
If simultaneous transactions are your best option, here’s how to make sure the process goes as smoothly as possible:
Know the Market
Before you put your current home on the market, make sure you have a solid understanding of the fiscal landscape in your area—and in the area where you’re planning to buy. Knowing whether you’re transacting in a buyer’s or seller’s market will allow you to strategize effectively and maximize the power of your property value.
To know the true value of your home, hire a licensed appraiser in your area and take his or her assessment seriously. Pricing your home fairly—based on real value, not desired value—is the key to bringing solid offers in quickly.
Plan Carefully
Should you buy first, then sell, or vice versa?
Both have inherent risks and rewards. Selling first makes a mortgage easier to get, but it requires you to find (and pay for) a temporary place to live. Conversely, buying first makes your move easier, but it skews your debt-to-income ratio, making it harder to qualify for a new mortgage (and it leaves you stuck with two monthly house payments).
Whichever option you choose, make sure you’re prepared to accept the consequences: storing your stuff and paying a little extra rent, or undergoing the financial burden of dual mortgages.
Don’t Rely on Timing
When buying and selling homes simultaneously, there are several external circumstances playing out in the background. Recognizing that you’re not the only party in either transaction will help you keep an open mind and prepare yourself for snags.
As they say, it takes two to tango. While things might appear to be working smoothly from your end, they might not be so rosy on the other side. Closings are rife with delays, and some common problems could crop up: the buyer has difficulty securing a mortgage, a home inspector brings up issues that need to be fixed before you can move forward, or the seller has second thoughts about letting go of their family home.
So even if you’ve planned to sell your existing home first—and are prepared to rent back—know that things can go wrong, even when you’ve done everything right on your end. Preparing yourself for this (however remote) possibility ahead of time can help keep your stress levels down and ensure a smooth experience from your first offer all the way through move-in day.
Know Your Financial Options
If you’re buying before you sell (and you don’t already have a renter lined up) there are ways to decrease your financial burden and risk. Here are the two most popular options for buyers:
Contract contingency: As a buyer, you can request that your new home purchase be dependent on the successful sale of your old home. If you’re buying in a competitive market, this may not be the most attractive option for sellers; however, if a seller has had difficulty attracting interest, this may be the right answer for both parties. Just be sure to price your existing home sensibly to increase the odds of a quick sale.
Bridge loans: Bridge financing allows you to simultaneously own two homes on a temporary basis. This option is attractive if you’re on a tight budget or if you’ve planned to sell your existing home first and use the proceeds to buy your next home. It functions as a short-term loan, intended to be repaid immediately upon the sale of your existing home.
Don’t Let Fear Rush You
If your home sells before you’ve found a new place to live, don’t let anxiety push you into a bad decision. If you’ve followed our advice, you’ve pre-emptively planned on (and budgeted for) a short-term rental, so you shouldn’t feel pushed into buying something that doesn’t suit you.
Conversely, if you do find the perfect house before selling your existing home, don’t feel compelled to dramatically reduce your asking price out of fear of the financial strain of two mortgages.
In either case, talk to an experienced agent like Julie who can advise you on the best options available to make your homeownership goals a reality.
