We’ve likely all been there. You’re ready to buy a new home and excited to start looking but then are hit with the realization that you probably need to sell your existing home first to qualify for a new mortgage. Everyone believes their home will sell quickly, but depending on your city’s current real estate market and the sales price you’re asking, it’s a huge unknown that no one can accurately predict. The average listing in 2018 sold in 68 days, from listing until close, but every local market is different.
Even those who think they’re being smart by selling first before they buy their next home may be in a bind. They may have to pay to move twice if they can’t find their next home before they have to move out of their old home. It comes down to a timing game few enjoy playing.
So what is a buyer to do and how can you stay off the roller coaster? Let’s go through some of the reasons why you should consider buying a house before selling.
The Balance believes there are three reasons to buy a house before selling:
It’s a seller’s market.
A seller’s market means there are fewer houses on the market from which to choose, driving up demand. With reduced inventory, houses typically sell quickly and if you don’t act fast, you risk losing it to another buyer. In this situation, you may have more optimism that your current home will also sell quickly, making a buy-before-you-sell scenario more appealing.
The deal is too good to wait.
There are times when the stars align and the house of your dreams has an asking price you can’t believe. Real estate “deals” aren’t too common, particularly in a hot market in a hot neighborhood, so you know that if you wait, the house will be gone. If the price is right, you might be able to afford two mortgage payments for a short period of time and you’re willing to bet on it.
It’s your dream home.
You can’t imagine losing it so you buy and hope you can sell your existing home quickly. This is a purely emotional purchase, so you have to be careful not to overpay. In this situation, you may be carrying two mortgages until you sell your current home and need to watch how much you’re spending on the next home.
And I’d like to add one more to the list, namely:
You have liquidity.
Perhaps you’re among the lucky few who have plenty of reserves to potentially pay for two mortgages at the same time. Not only can you afford to carry both mortgages, but you’re also in a position where you can make improvements to the new home while still living in your existing home. This can save you money on having to move twice and renting a place until your renovations are complete.
Time to look at the cons. I’ve alluded to these already but want to break them down a bit more. The risks of buying a house before selling:
Pressure and stress
The home selling/buying process is stressful, to say the least. The effects of stress may be less tangible, but it’s one of the biggest cons of trying to buy a house before you sell your existing one. In fact, at least one survey found that a large percentage of adults consider buying a house more stressful than bankruptcy, divorce or even the death of a loved one. It also found selling a house ranked higher on the list of stressors than losing a job, becoming a parent or planning a wedding. That doesn’t bode well if you’re buying a selling a house at the same time. Add to that the pressure to sell so you can afford the next house, possibly forcing you to sell your home at a lesser value in order to sell quickly.
Of course, it all comes down to money and most of us want to reduce expenses, not increase them. You may end up paying for two mortgages at once for an unknown period of time. Carrying two mortgages, plus all of the bills and taxes on both homes, can quickly drain savings, particularly if your current home doesn’t sell quickly.
Many banks are unwilling to approve a mortgage if they see you’re going to need to cover two mortgages for a period of time. You’ll have to prove you have plenty of reserves and/or a hefty income to cover your mortgage should your existing home take longer to sell. If you do get a mortgage approval, you may have to settle for a higher rate because of the risk to the bank. You can always refinance later, but you’ll incur fees to do so.
The first thing you need to do to determine if you can buy a house before selling is to take a good look at your finances, particularly your liquidity. You don’t necessarily want to tap into investments and 401Ks if you can avoid it as these are interest-bearing accounts. How many months could you carry both mortgages and home expenses if you had to?
Also, be sure to look at the housing market in your area. How long are similar houses taking to sell and what is the average price per square foot? This will help give you an idea of where to price your home and how long you may need to anticipate paying two mortgages. Of course, no two home sales are the same, so even if your neighbor with a similar home sold theirs in 45 days, there’s no guarantee your home will sell in the same timeframe.
Finally, consider whether you’re willing to lower the price of your home to a point where it will attract buyers. Any house will sell if it’s offered at the right price. Lowering yours just below market average could help you be more competitive and sell quickly, even if you have to sacrifice some money on the front-end to save money on the backend.
If you are considering buying a house before selling your existing home, here are some of the options to consider:
Unless you are paying cash for the new home, you’ll likely need to make a contingent offer. Home contingencies may be based on funding approval or existing home sale. Contingent offers tell the seller that you will buy their home when and if you obtain financing or sell yours. The seller has the option to decline or accept your offer, or stipulate the contingency will only be valid for a certain period of time. If you are unable to gain financing or if your home doesn’t sell within that time period, they will cancel the contract and return your earnest money.
Some sellers may accept a contingency offer if there is a right of first refusal clause. The seller will give you a period of time they will give you, typically no more than 48 hours, to have the chance to purchase the home should another, non-contingent offer come in. In this way, you are basically at the top of the list unless a better offer comes in and you are still unable to buy.
Most home sellers prefer not to accept a contingent offer because there is too much risk involved for them. There are several disadvantages for the buyer, too:
Contingent offers don’t have much appeal to sellers and it’s not too difficult to see why. You have to put yourself in the seller’s shoes. Would you be willing to pull your house off of the market and wait for a stranger to sell theirs? Would you want to take on the risk that the buyer’s home won’t sell or they are unable to secure financing?
Home sellers may also not want to show their home as being under contract as it can scare away prospective buyers and they likely are needing to sell their home before they purchase their next home, too. The longer they wait to close, the more risk that they’ll lose the home they wanted or they’ll have to delay their purchase. Even if their house has been on the market for a while and you believe them to be a bit more open to a contingent offer, they probably don’t want to now wait on your house to sell before they can sell theirs.
According to Investopedia, sellers who are willing to accept a contingent have to jump through some hoops, making the process more stressful for them. They will likely check to see if your home is already on the market, if it is priced to sell, how long it has been on the market and how long most houses in that area take to sell – then gamble on you. More attractive, non-contingent offers eliminate the need for them to go through this evaluation process.
Cash offers mean you need to have access to enough cash to cover the entire purchase price of the home, not an easy endeavor for most considering the average home price in the U.S. is $240,000. You may have savings set aside, investments you are willing to cash out or lender options. Another source of cash is with a company that enables you to use their funds to secure your home. In essence, they make the all-cash offer on your behalf and you pay them back when your existing home sells, then secure your own mortgage on your new home. This gives you the ability to get the home you want on your own timing, move once, move quickly, and not worry so much about selling first.
If you are considering tapping into your savings, your investments or your 401K, be sure to assess the consequences. You are not only reducing the amount of those interest-bearing accounts and halting the interest earned on those funds, but you may also incur penalties and fees. Bridge loans are an option, however, many banks are hesitant to loan money if you can’t prove you have the liquid assets to pay and these loans have a high interest rate. Finally, there is the option of securing a home equity line of credit (HELOC) with a bank. There will be credit limits, similar to a credit card, so be sure your line of credit covers all of your costs and you pay it back in full as soon as your existing home sells, otherwise the bank may foreclose on your property.
For sellers, cash offers allow them to sell, close and move more quickly. It’s the best kind of deal because it carries the least amount of risk. There are fewer potential roadblocks as well, especially with bank appraisals that can force them to reduce the asking price of their home if the appraisal is lower than they expected.
The Balance says, “Sellers will often accept an all-cash purchase offer over a higher-priced offer with conventional or FHA loan financing. That’s because they know the cash offer is more likely to close. It involves fewer stumbling blocks, and sometimes a bird in the hand is worth two in the bush, so to speak.” Even with mortgage pre-approvals, cash often wins because so many things can happen during the loan process. Plus, a buyer with cash doesn’t have to endure bank appraisals and wait the typical 30-45 days to close on a loan. Closing can happen as soon as the home inspection and negotiated repairs are complete, often in a week or so.
Cash is king, particularly in the real estate market, even if it is less common than financing. According to the National Association of Realtors, 30 percent of residential sales are cash transactions and Zillow’s Consumer Housing Trends Report 2018 puts that number at 23 percent. They also say 29 percent of buyers include financing contingencies in their offer and 13 percent include the contingency of the sale of their current home.
Home buyers who can purchase without contingencies show they are ready to buy now. When buyers can show they are not only ready, but pre-approved for a mortgage or, better yet, have cash in hand, they are much more likely to have their offer accepted. Even if you can prove you are well-financed, you may not win a bid over an all-cash offer. Cash offers are simply less risky and less stressful for both buyers and sellers. With 41 percent of home sellers reporting they had an offer fall through before their home sold, you can see why.
The advantages of all cash offers are many, including:
Cash gives the buyer power. Power to buy with confidence. Whether the housing market is hot or slow, buyers with cash in hand have the advantage. A slow market means cash buyers have their pick of the litter and can likely negotiate a better deal. A buyer with cash in a hot market has a competitive advantage to win a bidding war. Even if you don’t have the reserves, securing cash for an all-cash offer may be easier than you think. Do your research. Buying a home isn’t what it used to be and you have options. Put yourself in a position to ditch the contingencies, reduce your stress and make an offer no one can refuse.