Buying and Selling Property at the Same Time
In a perfect world, you would coordinate the closings for both properties on the same day, providing a seamless transition from your old home to the new one. But the real world tends to be messier than that. The fear of selling your home before you’ve purchased a new one is obvious: You’re homeless. But experts agree that this scenario is more attractive than the alternative, which is to buy a new home before your current one has sold. The disadvantage of buying before selling is that you have the cash to buy your new house. Depending on the type of market we are in — buyers or sellers market — you may make a different choice. The decision also depends primarily on your risk tolerance.
These are the choices:
1. Sell first, then buy. This is perhaps the safest plan, but it calls for multiple moves. In this scenario, you list your home and complete the transaction before purchasing another home. When you sell your home, you put the bulk of your belongings in storage and live in a temporary rental or, if possible, enter into a rent-back deal with your home’s new owner. The advantage of this method is that you know exactly how much you can spend on a new home, and you don’t have to worry about temporary financing. Also, without another home waiting in the wings, you’ll be less tempted to drop the price or to take the first offer that is below the asking price. The disadvantage is that it is a disruptive experience, and you could be displaced for a while if you are home-shopping for a long time.
2. Buy first, then sell. This strategy minimizes disruption. You can move into your new place at your leisure and then take time to prepare your home for sale. The major disadvantage is that, depending on how fast your old home sells, you could be shouldering the burden of two mortgages for some time. You are also responsible for maintenance and security on the vacant home. This scenario works best if your first home is already paid off.
A variation of this plan is to buy a new home with the plan to rent out the old one for a year. This buys you some time with money coming in, but being a landlord comes with its own stresses and responsibilities. You may also need to repair or renovate the home after it has served as a rental.
3. Buy and sell simultaneously. To execute this plan, you need to prepare for all contingencies and to know that if your timing is off, you will face one of the two scenarios listed above. The trickiest bit can be timing the financial burden. One option is bridge financing. This enables you to own two homes for a short amount of time. To do this, you need to either borrow money from family or obtain a short-term loan from a bank or other lending institution to span the time period between when you close on your new home and sell your old one. In essence, you are getting a short-term home-equity loan, also known as a HELOC, a Home Equity Line of Credit, on your present house and using it as a down payment on your new house. You then repay the loan when you sell your first home. It is not easy to qualify for a conventional bridge loan, since you have to demonstrate that you have enough money to pay for both mortgages for an indefinite period of time.
Here are some options if you want to buy before you sell:
1. Tap your home equity
The cheapest way to come up with a down payment for your new home is to borrow money via a home-equity line of credit. Depending on your credit score, your interest rate should be anywhere from half a point to one percentage point above the prime rate. Even better, the interest is tax-deductible up to $100,000. Once you sell the home, you simply pay off the loan.
Keep in mind that this is something you need to line up well before you put your home on the market. Once it’s clear you’re aiming to sell, no bank will give you a line of credit, warns Keith Gumbinger of HSH Associates, a Pompton Plains, N.J.-based financial publisher of mortgage information. That’s because, given the low fees, lenders don’t make any money when they’re paid off quickly.
2. Consider a bridge loan
If you can’t tap the equity in your home, you could take out a bridge loan, also known as gap financing. It allows you to borrow money for a down payment on the new home based on the amount of equity you have in your first house. The trouble with bridge loans is that they’re not widely available — at least for now — and that they’re expensive, warns E-Loan’s Bonnikson. “This is a fairly risky way of financing, especially now,” he says. The interest rate is often at least one to two percentage points above the prime rate, he says, and there are a whole host of fees, including an origination fee of more than 1% and other closing costs.
You may, however, be able to avoid some of those fees if you get the bridge loan from the same bank that is underwriting the mortgage for the new home, says Tony Meola, executive vice president of mortgage banking production for Washington Mutual.
3. Borrow from your 401(k)
If you need only a little bit of money for a down payment, or want to supplement a home-equity line of credit, you could borrow from your 401(k). Most employers allow workers to borrow either 50% of their vested balance or $50,000, whichever is less. You then have the next five to 10 years, depending on your company’s rules, to repay the loan plus interest (which you pay into your account), which typically runs one to two percentage points above the prime rate.
But be warned: If you leave your job for any reason, you’ll have to return the money immediately or pay the taxes and a 10% penalty. And since this is your nest egg, we would recommend paying off the loan as soon as you get the proceeds from your first home’s sale.
There are also ways you can work this with the sales contract – contingencies like a home sale contingency and a home purchase contingency.
But, as the folks at Zillow say, if you’re thinking of a move and currently own a home, it’s likely best to get ready to make the move. That way, when the time comes, you will be prepared.
1. Know your finances inside and out. This is a no brainer. You need to know not only what you can afford to buy, but also, what your house is worth before you even get started. Talk to your real estate agent and consult a mortgage banker or broker for loan pre-approval.
2. Start packing. Start boxing up stuff you don’t need easy access to. Get rid of all the things you won’t need until you’ve moved into your new home. This will help make your home show better and starting the packing process now will make it that much easier to move later. You may need to rent a storage unit temporarily for your stuff.
3. Do whatever quick fixes you need to do to sell your home. Do you have a toilet that constantly runs? Is your kitchen right out of the 1950s? If so, get busy fixing those things that could cause your home to sit on the market longer than necessary or affect your home’s value.
4. Start home shopping and learning the market. Start going to open houses and seeing what’s out there. Begin the process of elimination: What are the must-haves and the deal killers?
5. When you’re ready, list it. Depending upon your situation, you might want to list your property toward the higher end of its value range, once you’re actively in the market. This can buy you time while you shop for your next home. And who knows? You might get more money than you thought possible.
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