A Southcentral homeowner’s dilemma: Should we buy first or sell first?
Realtor.com recently asked homebuyers what is standing in their way of purchasing a home. Most claimed that they couldn’t find a home to fit their needs, but 10 percent say they’re concerned about selling their current home. That brings up the age-old “chicken-and-egg” real estate conundrum: What comes first, buying or selling? The answer to that depends on several factors:
The amount of equity you have in the home will help determine the sequence ? whether you should sell first or buy first. If you need the proceeds from the sale of your current home for the down payment and closing costs on the new one, you may need to sell first. Or, take advantage of some of the alternative solutions that we’ll explain below.
Can you afford to make two house payments? If so, and you can qualify for a mortgage on the new home while still making payments on the current one, then buying first won’t be a problem for you.
Your stress tolerance
Even if you can afford to make two mortgage payments every month, if the notion makes your palms sweat and your heart beat double-time, perhaps your stress tolerance is too low to buy first.
Current market dynamics
One of the most important considerations is the state of the current Southcentral real estate market. In a sellers’ market you’ll have no problem selling your current home. After it sells, however, you’ll become a buyer, competing against other buyers in this tight-inventory housing market.
Let’s take a brief look at some solutions for homeowners who are faced with the “should I sell first or buy first” question.
Short for “home equity line of credit,” a HELOC allows you tap into the equity in your current home to use to purchase the new home. Since lenders aren’t in the market to make short-term deals (the longer the loan or line of credit, the more money they make), the best time to pursue this solution is before you list the home for sale. This isn’t to say you can’t get a HELOC if the home is on the market, but there may be fees attached that wouldn’t otherwise exist, such as a cancellation charge.
If you decide to look into obtaining a HELOC, remember that it will affect your debt-to-income ratio and, therefore, your ability to qualify for a loan for the new home. The lender will want to see that you can afford both mortgage payments as well as the payments for the HELOC, regardless of your plans to pay off the HELOC when the home sells.
Borrow against your 401(k)
One of the worst decisions you can make, according to many financial experts, is to liquidate your retirement accounts to come up with the cash needed to buy a home. Borrowing against your 401(k), however, may be a smart move. Sure, you’ll lose the compounding benefits of that money, but you won’t rack up the taxes and penalties you would were you to liquidate the account.
Most employers permit 401(k) loans to purchase a home but please speak with your financial planner before deciding on this option.
Negotiate the terms
While these strategies work best under buyer-friendly market conditions, they’re worth considering under all conditions when you decide to sell your current home before buying the new one. Negotiate a longer escrow on your home sale, for instance, 90 days. This gives you a full three months to find the new home. Another option is to ask the buyer of your current home for a short-term rent-back. Make the situation more attractive by offering a hefty security deposit and rent payments that will cover their mortgage payments. You’ll want to discuss the ramifications of a rent-back with your attorney and your insurance agent to ensure both parties are protected.
If all else fails, look into performing a simultaneous close ? timing the close of the sale of your current home with that of the home you’re buying. I must warn you, this is a delicate balancing act and it doesn’t always work. If, for some reason, the first close doesn't occur you won't have the funds to close on the second home.
A successful simultaneous closing requires careful planning and diligence in keeping track of the myriad of details involved in closing on two real estate transactions. Your choice of real estate teams is critical if you hope to be successful with this process. Ensure that the team you choose has experience with the detailed planning and coordination required when attempting a simultaneous closing.
Before our clients consider pursuing the simultaneous close we advise them to examine their buyers' motivation. Are they in a hurry or do they have the luxury of taking their time during the home purchase? How badly do they want the home?
Should you decide to use the Unity Home Group Team to pursue the simultaneous close, here is what we will do to facilitate it:
- Make the purchase of the new home contingent on the successful sale of your current home. This type of contingency isn't attractive to sellers, so we'll need to analyze the current market to ensure this is the right move.
- We will select a realistic closing date.During the time it takes to close on your home, we will follow up with you to ensure that you are paying attention to your duties -- finalizing the financing of the new home, repairs, scheduling inspections and reading HOA documents, if they apply. This way we'll have all our ducks in a row on closing day.
Whether to buy or sell first is a common dilemma and both have their plusses and minuses.
We’re happy to discuss this with you in more detail. Give us a call at 907-360-1600!