I NEED TO SELL MY HOUSE IN ORDER TO BUY A NEW ONE – WHAT DO I DO FIRST?

Having been in this position, I can empathize with anyone facing this sometimes-tricky scenario.

The first thing to realize is that there is no “perfect answer.”  Variables include the market conditions (Do they favor the buyer or the seller?), motivation (Do you need to move by a certain date – or does the seller?) money (Can you afford to pay two mortgages at the same time?) and availability of alternate housing, if needed (Can you live with friends, family, at a hotel or at a second home while you wait?).

The first thing to accept is that you are both buyer and seller at the same time, and one role will typically have a stronger position than the other.  They are often inversely proportional:  If you can sell at a higher price, you will also be paying relatively more for the new home – a seller’s market.  If you can buy at an attractive price, you probably will be getting less than you might like for your existing home – a buyer’s market.  These are just general observations and they don’t take into account all the possibilities unique to your situation, such as downsizing, upgrading, relocating and so forth.

In my opinion – and in the opinion of most of my colleagues – the preferred situation is that you list your home first and work for a quick, acceptable offer.  If you get a buyer quickly, you would ask the buyer to accept a reasonable contingency that you will find suitable housing by a certain date.  If a buyer loves your home and has no pressing need to leave wherever they are – and if they have no home of their own to sell – this will often be an acceptable contingency.

The alternative is to actively look for a home first.  Once you find the right one, your offer would include a contingency that says your offer is subject to you selling your home.  This is not always an easy proposition.  While a buyer for your home might agree to wait for a while because they really want your home, a seller might not want to wait, not want to assume the risk that you will not sell your home in a timely fashion.  They might worry about the sale being dragged out – or even worse - falling apart.

Here is an illustration of why listing your home first is the best course of action:

We visit a home and you decide that you love the home and want to make an offer.  We make the offer with the contingency that you need to sell your existing home.  The first question from the listing agent, who is representing the buyer’s best interests, will likely be:  “Is the home you need to sell already on the market?”  If the answer is “Yes”, then the next question will be:  “Is it priced right?”  If the price reflects a reasonable number based on current market conditions, the answer will be “Yes.”

The listing agent can easily verify both of these answers by simply viewing the MLS listing.  If each of these questions has a satisfactory answer, your offer might be accepted, but might also include the stipulation for a 48- or 72-hour kick-out clause.  A “kick-out” clause means that the seller will continue to market the property while the buyer (you) tries to sell the existing home.  If the seller finds another suitable buyer, then the seller will give the original buyer (you) 48 or 72 hours to remove the contingency and keep the deal alive – otherwise, the seller will “kick out” the original offer and go with the new purchaser, who will typically be offering better terms (no house to sell, better offer price, a cash offer, etc.)

Why a kick-out clause?  The seller does not want to take the house off the market for an indefinite period of time, losing out on other potential buyers who might offer better terms, while the buyer tries to sell a home.

A seller will be much more likely to agree to such a contingency if they see that your home is actively listed and being shown.  Your agent should be able to articulate why it will sell in a reasonable amount of time (favorable market, limited inventory, unique property features, aggressive price – whatever applies).  Explaining the marketing plan might be convincing enough to put the seller at ease and to get the seller to agree to a reasonable time frame for you to sell your home.  If this occurs, you need to be ready to actively hunt for your new home and to be realistic in your expectations.

I went through this situation in 2004.  I had a nice home and it was listed as we looked for the new home.  The home was located on a rather steep lot.  Many people loved the home but couldn't get past the lack of a level lot.  In the meantime, we had identified a new house that was perfect for our needs.  We did not want to lose the new house.  It was a seller’s market and the seller knew he had the advantage over us.  He would not agree to a contingency for selling the other home.  So what to do?

We were able to demonstrate to the bank that we could afford both mortgages for a few months.  They allowed us to move forward with the new purchase, but we still owned the other home and had to pay the mortgage (and taxes and insurance) on that as well.  The good news:  The existing home sold within 45 days and we were done paying two mortgages very quickly.

In 2014, lending guidelines are stricter than they were in 2004, so any “two-home” scenarios will be subject to close scrutiny by your lender – and might not be allowed at all.

Owning no houses for a while might also be an option.  If you have a place to go – family, friends, a hotel – you could sell your home first and then concentrate all your efforts on finding the perfect home.  This also comes at a cost, because you will have to move twice, store items in a storage facility, potentially pay rent or lodging of some kind and possibly strain personal relationships if the duration of the stay with family or friends becomes extended.

There are still other possibilities.  So-called “bridge loans” might be an option, but are harder to find these days, involve more costs and higher interest rates, and might only be available from “hard money” lenders – you can Google that term for more information.  You might also be able to borrow from relatives or friends.  However, everything has to be formalized, with the proper documents, a payment schedule, a promissory note and so forth.  The days of “informal lending” are gone as far as the lenders and the IRS are concerned.  Maybe a relative is willing to gift you the money – check with an accountant or real estate attorney as well as your lender for the rules governing gifts.  You might also be able to borrow from your retirement plan – check with your plan administrator.  As an example, I have a self-directed 401K and was able to borrow the down payment for a retirement home from that account.  I needed to have all the documents in order and I had to pay the IRA account back each month – both principal and interest – just like a “real” loan.  However, I would much rather pay my retirement account interest than give it to a lender.  The interest goes into the 401K account each month and, in the future, will be treated like any other gain that the account might realize.

At times, people have sold their home and then rented it back from the new owners until a new home is found.  However, new homeowners are often eager to get into their new home, so this might have limited appeal.  Additionally, your attorney might advise against it due to potential liability issues.

So what’s the best option?  Ideally, you list your home for a reasonable price, and then start looking at new homes.  We list your home and actively market it.  Simultaneously, we conduct an aggressive search for the new home.  If you get an acceptable offer from a buyer, your terms will include a contingency stating that, by a certain date, you will have found suitable housing.  (Like the seller of your desired home, the purchaser for your home will not want to wait indefinitely.)  If you can show a seller that you are actively marketing, or that the house has an offer, you are more likely to get the seller to accept a contingency that your home must sell.  The ultimate, ideal goal is to close on both houses on the same day – you close on the home you are selling in the morning and then close on the home you are buying later that same day.

STRATEGY

Here is a good strategy that we can work on together to help define the process and to build reasonable expectations:

First, make sure you have a current pre-approval from a lender.

Next, we review your desired criteria for your new home:  style of home, amenities, commuting distance, location, price range and so forth.  If you start with the end in mind, it is easier to get there.

Then I do a market analysis for you on your current home.  We look at current market conditions, past sales and a host of other things to determine a reasonable expectation of how much you will get for your home.  It is not uncommon for sellers to expect to get more for their home than what it will actually sell for.  Sellers have an emotional attachment and might have invested a lot of time and money into upgrading the home.  However, the only opinion that really counts is what the market says the home is worth.  This is often best determined by looking at recent sales of similar homes.  You, as the seller, will set the price.  I will provide resources to assist you.

Once we have the marketing plan in place for the home to be sold, we list the home and we actively look for the new home.  We look at the inventory of homes that is currently available and that closely matches your desired criteria.  The reality is that every single feature that you desire in a home will probably not be available, unless you have unlimited funds.  So being realistic with expectations is very important.

The alternative is to delay the listing of your current home while we identify the list of potential homes.  Once we have that list, we start looking at the homes with the goal of identifying the top three choices.  When you are satisfied that there are at least a few homes out there that you would be willing to put an offer on, we list your home.  Now this is a dynamic situation because homes come and go all the time.  We have to be persistent in watching the inventory so that we are still checking newly listed homes while keeping an eye on the original “top three” in case they go under agreement.

In the meantime, we work hard to get a speedy and acceptable offer on your current home.  Once you accept an offer, you then make your offer on one of your current “top three” homes.  It’s kind of like getting the choreography of a dance down just right.  The steps – such as agreeing on offers, getting the inspections done and getting the contracts signed - are finessed and timed to make things work to everyone’s satisfaction.

To summarize:  The best choice:  List your property and simultaneously look for the new home.  Sell and buy on the same day – that’s the ideal goal.  A reasonable second choice:  Identify your “top three” available properties that you would be willing to make an offer on and then list your existing home. 

Take comfort in the knowledge that millions of people have successfully worked the process simultaneously – it involves planning, strategy, patience and luck, but it’s certainly workable.  I know – I have done it four times so far!