Selling Before Buying

If you currently own a home, consider whether you will sell that existing home or hold on to it. Do you need the accrued equity in your current home in order to buy a new home? Can you extract the equity without selling (e.g., through a home equity line)? What are your circumstances? Are you moving away from the area and have no desire or ability to oversee the rental or maintenance of your current home from a distance? Can your current home garner sufficient rent to cover the carrying expenses (mortgage, taxes, insurance, and maintenance)? Will you have better financing options on your new home if you sell the existing home? Be sure to inform your lender that you own other properties and discuss with him all of your options and implication of retaining or selling existing properties.

If you determine that your circumstances require that you sell your existing home, you must then decide whether it is better to buy or sell first. Can you risk buying a new home while your current one is unsold? What if you cannot quickly find a buyer for your existing home? If you were relying on the sale of your existing home for the down payment on your new home or to otherwise help you qualify for your new home mortgage, you may have to find another source for the down payment or risk having your financing fall apart, losing the new home and, possibly, your earnest money deposit along with it. You may be able to draw equity out of your existing home to use as the down payment on the new home (assuming you have sufficient equity), but consider whether and for long you could afford to pay two mortgages (plus the interest on the equity draw) and the associated taxes, insurance, and utilities required for each home?

Where you must sell your existing home in order to purchase a new home, the risks of buying before selling are more or less serious depending on the state of the current real estate marketplace. In a balanced market or a buyer's market, selling your home may take some time and that time can be further extended if your home is not fully prepared for sale or if your home is not appropriately priced. Also, if you're under extra pressure to sell fast in order to buy your new home, you may put yourself in a position to ask for or accept less than the full market value in exchange for a speedier sale. In a white-hot seller's market, it can be much harder to find and win a new home to purchase than it may be to sell your existing home, so contracting to buy a new home may be a smaller risk since selling your existing home may not take long. In a seller's market, waiting to buy a home only after you have a contract to sell your existing home may create different issues. What happens if you cannot find a new home and close on it in time to move out of your existing home and turn it over to the new buyer? You may have to make temporary living arrangements.

Asking for a "Sale of Home" contingency as part of your purchase offer on your new home may be an option. A "Sale of Home" contingency generally states that the buyer's obligation to purchase the seller's property is contingent on the buyer first selling his existing home within a certain timeframe. However, many sellers would be unwilling to agree to such a provision. Think about it from the seller's perspective: Would you be willing to take your home off of the market for a buyer who must sell his existing home in order to afford to buy yours? It may mean losing valuable marketing time only to have the buyer of your home cancel the contract because he is unable to find a qualified buyer in the requisite timeframe.

As your agent, I will help you to understand the market conditions which may dictate the best sequence of events for your circumstances and I will help you to prepare an overall strategy to help minimize the risks associated with either buying or selling first.

© Nadia Nejaime, 2006