You are not going to like me. I am about to ruin your day. Here is a link to the classic theme song for that famous 70’s sitcom that inspired the title to this post. (“...Movin on up to the East Side, A Deluxe Apartment in the Sky…” Now it will be stuck in your head all day.
Well, it may have been easier to move up to the East Side in the 70’s than it is to move up in Fairfax County VA in 2017. In any market, though, it can be done but the same question exists – sell first or buy first? Let’s explore the pros and cons of each.
Buy First/Sell Second
To do this you must
a) be able to carry two mortgages and
b) have enough cash to put down on the new home without selling the old home.
Many people may think they don’t have the resources to go this route but there are ways to work it out. If you can make it work, I believe it is the better way to go.
Buying a home is a huge undertaking both emotionally and financially. Many people moving into a larger home plan to stay for a longer period of time than their 1st home. Making the right decision is critical and buying first allows you to take as much time as needed to find the right home.
Of course, the down side is the possibility of having a double mortgage and being responsible for maintaining 2 homes for an undetermined period of time. Executed properly, we can minimize the overlap but it is still an unknown.
In our current Northern Virginia market, with inventory extremely low, this option has less risk than in a strong buyer’s market. Closely analyze the time it takes to sell a home in your neighborhood, double that time for safety reasons and if you can cover it, this may be a good strategy.
However, you also must know your psychological make-up. I have seen people make poor contract decisions on their existing home when using this strategy. Sometimes, they take less for the house than they wanted because they are worried about carrying costs.
The two issues stopping buyers from going this route are having enough income and having enough cash. Let’s discuss a few ways to work around those roadblocks.
Overcoming the Income Issue
If you are close to being able to carry two mortgages but the issue is other outstanding debt, it may be worthwhile to restructure or retire that debt. For instance, if there is a relatively high car payment yet the remaining balance is low, it may be wise to pay off the car even if it cuts into your down payment for the home. Removing a $500 car payment can get you another $100,000 in mortgage.
Some loans allow a non-occupying relative to be a co-signer so you could use their income to get over the hump. For many obvious reasons, this may not be the best way to go but sometimes it can fall into place. I have seen cases where families are about to expand, and the current home will no longer work so parents have jumped in to help the young couple.
Overcoming the Down Payment Issue
The lack of cash is a little easier to work with.
If there is equity in the current home and you have an untapped home equity line, that money could be used for the down payment. If there is no existing home equity line, check with your bank about opening one. For reasons too complicated to go into here, it may be difficult to open an equity line once you are deep into the home purchase process but doing so before starting should not be a problem. Check with your bank for their guidelines.
I have seen buyers get loans from their 401Ks or IRAs to get over this hump. This is a little riskier as there are payback requirements on 401Ks (but interestingly, many lenders do not count that in your debt ratio). If an IRA withdraw is not paid back within a certain time frame, there are tax consequences. Certainly check with your 401K or IRA administrator and a tax professional to determine if this makes sense for you.
And last, there are gifts. How much you can receive as a gift depends upon the loan type and your down payment but gifts are quite common. They must be documented as the lender wants to ensure the source of funds is a gift and did not come from new debt. However, if gift money has been sitting in your bank account for 2 statement cycles, no source of funds is required. From a lender’s perspective after 2 months it is no longer a gift but your money.
Sell First/Buy Second
For those who are very conservative, this option allows a good night of sleep. The current home is sold and there are no worries about leaking pipes in the old, vacant home or concerns about funds leaking from your bank account to cover that old mortgage. Plus, you can qualify for a larger mortgage without the mortgage from the old home.
However, the logistics here can be problematic. This strategy works best for those buyers who
a) have a place to hang out for an extended period – a relative’s home perhaps. or
b) are willing to rent for a short period and
c) are not looking for a very “specific” type of home but have a more open ended home search.
Why do I say this? Let walk through this process.
Say, you get the perfect contract on your existing home. Maybe you have a bidding war and get more than you expected but that buyer needs occupancy in 30 days. It is very unlikely you will find a suitable home in that time. Even if you do, can your seller allow quick occupancy? You need to have a temporary housing option available. Most buyers will not demand a quick close but some situations require quick move-ins.
The ideal buyer has some flexibility on occupancy. If so, my favorite way to work this is to use the “seller continued occupancy addendum.” In essence what happens is that your current home settles in 30 to 60 days. You get your proceeds and don’t have to move quite yet. You have the right to stay in the home up to 60 days after settlement and pay “rent” to the new owners equal to the new owner’s mortgage payment or some other agreed to number.
Immediately after the contract on the current home is ratified, you can start to look for a new home. If you find one that can settle the same day as the old home, fantastic. If enough notice can be given, the rent back is not needed. But if more time is needed, it is available then you avoid a double move. Now if you cannot settle on your new home before the end of the rent back, a double move will be required. The buyer’s lender will only allow a 60 day rent back.
Not every buyer can work with sellers on a continued occupancy arrangement. It works best when the buyer is currently renting. If that buyer is also moving up, the deal may get too complicated for this strategy. Also, there have been times when, based on the personalities involved or the tone of the negotiations, a landlord/tenant style relationship is not advised.
Again, know yourself psychologically. If you are looking for very specific features in a very specific location, this may not work as that home may not be available when your current home goes under contract. For those types of searches it is really best to buy first. If you need a home that is hard to find, the time pressure can cause undesirable compromises to be made (unless temporary housing is available.)
Some buyers have a very wide open home search and are searching for a type of home commonly available without many geographic restrictions. This strategy tends to work best in that situation.
So, no right or wrong answer here. Deciding whether to buy first or sell first is very situational. Financial parameters, psychological parameters, your dreams and goals all come into play.
Some of you may ask why not write a contract contingent on the sale of the current home or a contract contingent on a home of choice for a seller? Yes, they are possibilities. However, in this market, they are not desirable for reasons I will save for another post. Most sellers and buyers will not work with these, thus it really limits your housing choices and negotiating power.
Thoughts or comments? If you have done a move up, how did it work out? Was it stressful? Would you do it in the same order again?