Forty percent of Americans say buying a home is the most stressful life event according to a 2018 HousingWire survey. But do you know what’s even harder? Buying a new home while you’re selling your old one. Especially lately.
“The competition is through the roof,” says Brian Gubernick, Homeward's Chief Real Estate Officer. “That is the greatest challenge for homebuyers to deal with right now. You’ll have to be able to move quickly when you find the home you want to buy.”
"Buying a home should be fun and exciting, but many of my buyers were anxious," says Tim Heyl, who was a nationally recognized real estate agent before starting Homeward.
According to the Realtors Confidence Index from the National Association of Realtors, the average number of offers received on “most recent sale” was 3.7 in January 2022. This competitive market is largely the result of overwhelming demand, low inventory, and historically low-interest rates.
So how do you win? “Sellers are being inundated with offers. You can make yourself stand out by being ready to make a competitive bid,” says said Brett Bivenour, Chief Technology Officer at Nationwide Mortgage Bankers. “Have your financing ready while others find themselves knee-deep in the loan application process.”
Get your financial ducks in a row now by familiarizing yourself with all of your options, and considering the pros and cons of each.
Sell your old home, then buy a new one
This is the traditional list-buy transaction. Your agent lists, markets, and sells your old home and then you buy the new one.
- This is definitely the safest choice. There are fewer financial risks when you wait to buy.
- You don’t have to include a home sale contingency when you make an offer on your new home.
- You’ll know exactly how much equity you have and what your budget is.
- You’ll be living in the home while it’s on the market. That means keeping it clean and vacating it for open housings and showings — often on short notice.
- If you can’t find a new home right away, you’ll have to rent from the seller or put your stuff in storage while you live in temporary housing. The latter would also mean paying for two moves: from the old house to storage, and then from storage to the new home.
- You may have to rush to find a new home as soon as you sell the old one. “You also risk missing out on your dream home if it comes on the market before your old home sells,” says Sarah Lopez, vice president of Homeward Mortgage. “You can, of course, make an offer before your old home sells, but you’ll have to include a home sale contingency, which makes it less likely to win.”
Sell to an iBuyer
Instant buyers or iBuyers use technology and algorithms to quickly buy and flip houses. The national market share of home purchases by instant buyers or iBuyers hit an all-time high of 1.3 percent -- around 70,000 houses -- in 2021. But in some metros, that number was as high as 6%.
- iBuyers optimize for speed — the process will be fast.
- You don’t have to fix up and stage your house to put it on the market. The iBuyer will take care of any issues they find when they do an inspection. (That said, iBuyers will deduct the necessary repairs and updates from the offer price.)
- You often get to choose the close date, which allows you to continue to live there while you shop for your new home. Then, when you’re ready, you can quickly make an offer without a home sale contingency because you can choose to have the iBuyer close on the old home right before you close on the new home.
- You’re leaving equity on the table when you use an iBuyer. A 2019 Marketwatch study found that once fees and other costs are included, people who sold to iBuyers netted 11% less than people who sold their home on the open market.
- iBuyers aren’t great for neighborhoods either. iBuyers grab inventory before it hits the market, make superficial updates to the home, and then put these homes back on the market at a higher price.
- Selling a home can be an emotional experience. Many people lean on their agents during the process. But iBuyers rely on tech, not trusted real estate professionals, so you’ll navigate the journey without a guide.
Use a bridge loan
A bridge loan acts as a link between the purchase of one property and the sale of another. These are a short-term solution that leverages the equity in your home as collateral. “If you’re selling your home but haven’t finished the process before you agree to buy a new one, a bridge loan could be right for you,” says Bivenour.
- Bridge loans give you access to funds quickly and let you buy a new home before you sell your old one.
- Bridge loans give you the ability to skip temporary housing between selling and buying and help you avoid moving twice.
- Bridge loans can eliminate the need for a home sale contingency.
- Lenders charge higher interest rates for these very short-term loans. You should expect to pay more than you would for a conventional loan.
- Lenders also typically charge higher origination fees for bridge loans. “These fees vary quite a bit,” says Lopez. “But I have seen as high as 5% in origination fees.”
- You will need to make two mortgage payments — one for the new home and one for your old home — until the old home sells. You might even have to make bridge loan payments (essentially a third mortgage) until the old home sells. This means the lender will have much higher income requirements.
A new option: buy before you sell
The traditional list-buy transaction is backward according to Heyl. “Buyers can’t confidently make an offer on a new home until they sell the old one,” he explains. “But they do.” And in the process, they sometimes make very bad decisions — or miss out on a home they love. Heyl got sick of running into this same problem over and over with clients.
So, In December of 2018, he bought the home his clients wanted with his own money and let them move into it — before they sold their old home, creating the ability for them to buy before they sold. “That cash unlocked the home equity my clients had tied up in their house,” he explains. Then they sold their old house and got a mortgage to buy the new house back from him. Homeward’s first service, Buy before you sell, was born. “My cash made the process easier, calmer, and more certain,”
When you buy before you sell, you can skip the open houses and showings. Your agent will put your old home on the market after you move into the new one. Avoid putting your stuff in storage, moving twice, or paying two mortgages — and spend zero days bunking with your in-laws.
“[Buy before you sell] made the process of buying a new house stress-free,” says Chris, a Homeward customer. “We were able to make a cash offer, which was very important in this seller’s market. This allowed us to take our time getting our home ready to sell and put it on the market at a convenient time for us.” Jennifer, another Homeward customer, points out a few other advantages: “Because we used Homeward, we were able to spare our children the many disruptions inherent in listing our house while still living there. And we were able to complete renovations and get top dollar for our old house.”
You will pay a convenience fee for the ability to become a cash buyer and buy before you sell. You’ll also pay rent to cover the carrying costs between the time Homeward buys the home and you buy it back. But according to a recent article on Realtor.com, “The cost of obtaining a cash-backed offer or cash offers is not much higher than the 3.7% to 4.4% average percent above the list price that buyers have already been offering to sweeten their offer.”