Buying a new home and selling your current one can seem like a daunting task. The biggest struggle for most people is knowing their options and determining a realistic plan of action. Finances will play the largest role in this decision, but other factors are a consideration including the local real estate market, ease of moving, and the cost/availability of the next home and possibly an intermediate place to stay. So what are the different options?
1) Sell First, then Buy
This is probably the most common option people choose. Most people have the financial requirement to sell their current home in order to purchase another. The benefit of this type of move is you don’t have to worry about carrying two mortgage payments. The negative is you will most likely end up moving twice. An inexpensive interim option is to move in with family while searching for your next home. Others opt for flexible apartment leases. Once your home is under contract, you could start looking and bidding on homes.
You will have to make your offer contingent upon the closing of your current home, which is a big contingency. This will work against you in a multiple offer situation, but the closer you get to the closing, the less of a risk this contingency is for a seller. If you get lucky and find something right away that you like, you may be able to coordinate the timing so you can move from one home to another. It can be a difficult task to coordinate, and that is exacerbated by a lopsided seller's market. You may also feel pressure to compromise on the house you are buying to find something quick and avoid the double move. Be conscious of that and ensure your second home is what you really want. This option works well in any market.
2) Buy first, then Sell, with Bridge Loan
A bridge loan is a great option for someone who has a lot of equity in their home, but doesn't have a lot of extra money saved up for a down payment. Equity is the market value of the house minus the amount owed on the mortgage. This type of loan allows you to use the equity in your current home as down payment on the next. The big advantage of this loan is you can find something to buy first so you do not have to move twice. The negatives are that you may be paying two loans at once for a bit. Bridge loans also have closing costs and the payments are interest only. Often times the positives outweigh the negatives here when you consider the cost of moving twice and the cost of short term housing. Not to mention the hassle. This is a great option for a strong seller’s market, but would be very risky in a buyer’s market.
3) Buy first, then Sell, Qualify for Second Loan Outright
If your income is good relative to your current debt and you have money saved for a down payment, you potentially could qualify to buy a home without selling your current one. This gives you the luxury of buying first, then selling and only moving once. There are no special types of financing required. You would still run the risk of paying on two loans for a time. This would take a large amount of savings to accomplish and may not be an option for most people. Like a bridge loan, this option works well in a seller's market, but would be risky in a buyer's market.
4) Buy and Sell Simultaneous, Purchase Contingent on the Sale of Current Home
This approach sounds good in theory, but is difficult to pull off. In this instance, you make an offer to purchase a home with the contingency that you have to sell your current house first. We are talking sell the house, not just close on it, so there is no contract in place yet. This is a huge risk in the eyes of a seller. It may be difficult to get an offer like this accepted, especially in a strong seller’s market when there are often multiple offers to choose from. A large contingency also gives you less leverage with price negotiation. This strategy generally does not work well in a strong seller's market. However, it could work well if it is not a multiple offer situation, especially if the house has been sitting on the market a while. It also helps if the home you have to sell will appeal to a large amount of buyers in a popular price range (i.e. a 3 bed, 2 bath home, with a garage in the $140-180k range.)
Now that you know your possible options, the next step is talk to a lender to see what you qualify for financially. In our current seller’s market where it is much more difficult to buy, I strongly recommend the bridge loan option to my clients. If you don’t qualify for the bridge loan, you may have to accept the reality of moving twice. As I always say, save, save, save! The more money you have saved to work with, the more options you will have for purchasing your next home.
Great info on everything real estate.