Moving Up: Selling Your Home and Buying Another
Avoid getting stuck paying two mortgages when buying your next house.
If you plan to sell your home and buy another, which should you do first? If you sell first, you'll be under time pressure to find another house quickly and may end up settling for less than you wanted, overpaying, or stuffing yourself and all your possessions into a hotel room until you can buy a new place. But, if you buy first, you'll have to scramble to sell your old house a particular problem if you need to get top dollar on your old house in order to make the down payment on the new one. And owning two houses at once is no treat either, even if it's for a short time. You'll have to worry about two mortgages in the unlikely event that a lender is even willing to offer you a mortgage for a second house before you've sold the first as well as twice the maintenance, and the security issues around leaving one house empty.
Here are some ways to minimize the financial and psychological downsides of selling one house while buying another.
Take the Housing Market's Temperature
Before putting your house on the market or committing to buying a new one, investigate the prices of houses in the areas where you'll be both selling and buying. In order to figure out how to sell high and buy low, you'll need a realistic idea of how much comparable houses are going for.
Also focus on whether the local real estate market is "hot" (favors sellers) or "cold" (favors buyers). Since you're both a buyer and a seller, you'll need to protect yourself in your weaker role while making the most of your stronger role.
Strategies in a Buyer's Market
When the market is cold, you're in a stronger position as a buyer than as a seller. You've got your pick of lots of houses for sale, at reasonable prices. But you may have trouble selling yours. To protect yourself, you might start by buying a second house, but ask the seller to make your purchase contract contingent upon your selling your current home. A seller having a hard time finding a buyer is likely to accept this contingency, even though it means waiting for you to find a buyer. Be ready to give the seller plausible reasons why your home will likely sell quickly.
In case no seller is willing to accept this contingency, however, at least make sure you can arrange financing. Talk to a mortgage broker about what you'll qualify for. Then be ready to act quickly to put your first home on the market after going ahead with buying a second one. There's a lot you can do ahead of time taking care of maintenance issues, going through files for the appliance manuals and other documents you'll give the buyer, choosing a real estate agent and possibly a home stager, and so forth.
Strategies in a Seller's Market
In a hot market, selling your house will likely be easier than buying a new one. To make sure you don't end up house-less, you may want to start by looking for a house to buy, then line up enough cash using the strategies described below to tide you over during the presumably short period where you own two houses at once.
If you can't swing such an arrangement, however, you can negotiate with your house's buyer to have the sale contract include a provision making the closing contingent on your finding and closing on a new house. Although few buyers will agree to an open-ended period, some will be so eager to buy your house that they'll agree to delay the closing until you close on a new house or until a certain number of days pass, whichever comes first. Also be sure to fully research the market before you sell, so that you'll be an efficient buyer, able to offer the right price on attractive terms.
Bridge Financing: How to Own Two Houses Briefly
What if you're unable to perfectly dovetail the sale of one house with the purchase of another? You may own no houses for a time, in which case you'll have money in the bank and will need a temporary place to live. Or you may own two houses at once. The following suggestions should help you deal with such juggling acts:
Borrow down payment money for the second house from family or friends. Point out that you need help for only a short period, and offer a competitive interest rate. Give the person making the loan a promissory note, secured by a second mortgage (deed of trust) on your new house. Try to arrange it so that no monthly payments are due until your first house sells. Be warned, however, that depending on your financial situation, institutional mortgage lenders may refuse to approve a loan where the down payment doesn't come from your own resources.
Get a bridge loan from a financial institution. If you have no other choice, it may be possible to borrow money from a bank or other lender to bridge the period between when you close on your new house and when you get your money from the sale of your old one. This idea is that you take out a short-term loan on your existing house, using it toward the down payment and closing costs on your new house, and repaying it when your first house sells.
Bridge loans can, however, be far more expensive than regular mortgage or home equity loans (higher upfront payments as well as interest rates), and they're not easy to qualify for you have to have plenty of equity in your current home and enough income to pay both mortgage payments indefinitely. The requirements all-but negate the benefits of the loan!
For an all-in-one guide to selling your home for the best price in any market, get Selling Your House in a Tough Market, by Ilona Bray and Alayna Schroeder (Nolo).