Selling your existing home while buying a new one
Ryan recently wrote with a question:
What things should you consider when you're buying a new house while trying to sell the one you own? What's the best way to coordinate closing dates to allow yourself a comfortable time to prepare for the move but while also minimizing financial impact? How can you calculate what sort of house you can buy outright (or nearly outright) elsewhere for what you can sell your house for now?
Kris and I had been in our first house for ten years when our dream home fell in our lap one day. Until then, we had no plans to move. We were completely unprepared to sell our existing home while buying a new one. Eventually we made it happen, but we violated a number home-buying best practices as we scrambled to make our dream a reality.
We were particularly worried about how to time things financially. We couldn't afford to carry two mortgages — how would we possibly make ends meet? Ultimately, we were saved by the rise of the housing bubble and a friendly banker. Our home sold in one day, and we were able to close on it soon after closing on the new house. Meanwhile, a home equity loan floated us the cash we needed to get by.
I don't recommend following our example. I think it's better to be prepared, to make your move in a sensible fashion.
Selling Your House Before Buying a New One
If you sell your home first, you'll have the cash needed to make the transition, but you'll be homeless until you're able to close on the new property.
- In some cases, you may be able to stay in your existing home by renting it back from the new owners.
- If this isn't an option, you'll need to find temporary quarters: rent an apartment, stay in a hotel, move in with friends or family.
Neither option is ideal, especially since you'll likely have to move your stuff twice. But financially, this is by far the smartest choice.
Buying a New House Before Selling the Previous
If you buy your new home first, you can end up in a cash crunch, especially in this current market. If you don't have enough in savings, you'll need to borrow money until you can sell your existing home. You can tap into your home equity, take out a “bridge loan”, or (as a last resort) borrow from your retirement savings. Run the numbers through your own spreadsheets or mortgage calculators and understand what you might be getting yourself into.
How We Did It
Kris and I faced a similar situation three years ago. We hadn't been planning to move, but when we found our dream house, we sprung into action. We were fortunate that:
- Our social network was able to put us in touch with smart, competent people to guide us through the process.
- We were selling near the start of the housing bubble.
- Everything, absolutely everything fell smoothly into place.
First of all, my bank allowed me to take out a home equity loan to get money for a down payment despite the fact I intended to repay the loan in only two months. The bank's lending rules prohibited this maneuver, but my loan officer processed the loan anyhow, and told me not to mention my intentions to anyone else.
After our offer was made and accepted, we rushed to prepare our home for market. Because we hadn't been intending to buy, we were not ready to sell. With advice and help from friends, we made immediate cosmetic repairs. (The bones of the house were very solid — it was a thirty-year-old ranch.) I had just repainted a couple of rooms the previous fall. Kris' gardening hobby paid dividends as her flowers helped add curb appeal.
Next we tackled financing. We had scraped together enough for the required down payment. We qualified easily for the new mortgage, but there was no way that we could carry payments on both houses at once. Our mortgage broker explained the various options. For a long time we believed we would need to access a bridge loan.
Ultimately we were saved by the housing bubble, which was still growing. We also priced our home a little low. It sold within 24 hours. We never had to mess with a bridge loan, or two mortgages, or waiting months for our house to sell. It was easy. (Whether or not it was financially smart is a topic for a future entry.)
How My Brother Did It
My brother, however, has not been as fortunate. When Tony found a job in Central Oregon last summer, he packed up his family and moved. He bought a house in Bend, fully expecting his old home would sell within a reasonable amount of time. Six months later the old home still hasn't sold. Based on his experience he writes:
I would advise against buying a new home before selling an existing one unless the house you are selling has such a good price that it will sell quickly. If you can afford to make two house payments for several months then you might be fine, otherwise it will more than likely spell financial disaster.
There are several people besides myself in the Bend area that have bought a new house before they sold their other one, and not a single one of them is very happy right now. If I could do it again, I would rent an apartment first and wait for my other house to sell. This also would have helped a little with the price I paid for my house. The market in Bend softened a little just before we bought and them some more after we bought. This means that our new house might not be worth what we paid for it.
There are several factors that come into play, but I would say that the most important is that the person must be prepared and financially able to make two house payments for six months or longer. One more important thing is that maybe the person loves the house they are thinking of buying and does not want to see anyone else buy it before them. But there are plenty of houses to go around, and they will probably find another one that they like just as well later.
These two stories really only address a part of Ryan's question. Maybe you folks can fill in the blanks (and provide anecdotes of your own).
Your best option, of course, is to plan your move, and to save up enough cash to be able to buy your new home first. This isn't always possible. And in the current real estate market, it's difficult to know just how much you'll need to save.