Imagine this scenario: you decide that your current home has outlived its usefulness. You contact your real estate agent who tells you that your home should sell for about $1 million in the current market. You’re thinking of trading down to a smaller home for a cost of around $700,000. You’ve calculated your closing costs and capital gains tax liability to the penny.
Armed with this information and with a pre-approval letter from your mortgage broker, you start shopping for your new home. You’re well qualified and you’d prefer to buy before selling. You don’t want to be left homeless.
The perfect replacement home comes on the market. You waste no time getting the property under contract. Then you put your home on the market, confident of a quick sale.
Unfortunately, after months of marketing, your home hasn’t sold. At your agent’s advice, you lower your price. This increases the showing traffic. Finally, an offer is presented.
The offer is for much less than you were expecting. Reluctantly, you negotiate a sale with this buyer in order to be done with the ordeal. To close the sale, you need to dip in to savings.
Situations like this are becoming more common. In fact, some buyers who would have gladly bought before selling in last year’s strong seller’s market are now rethinking their strategy.
There are several other strategies for making a trade from one home to another that are less risky than buying before selling. Whether or not they will be viable for your situation will depend in part of your local market conditions.
The ideal is to buy contingent on selling your home. However, contingent sale offers still are not popular in some markets. If the inventory of homes for sale is low and there are eager buyers who are qualified to buy without first selling, you’ll have a hard time competing. Cash in hand, not tied up in a house that has not yet sold, can be a powerful bargaining chip in a low inventory market.
Selling your home first contingent upon finding a replacement home can work in a market that is very low on inventory. However, this approach usually guarantees a lower selling price. Most serious buyers want to buy a home that’s definitely for sale, with no strings attached.
HOME SELLER TIP: The best way to maximize the sale price of your home is to sell first without a contingency for finding a replacement home. A huge benefit of this strategy is that you know for sure how much money you have to work with before you commit to buying the next property.
Most sellers would prefer to move from their current home to the next one without making an interim move. One way to accomplish this is to negotiate a rent back. A rent back agreement allows the sellers to rent their home back from the buyers for a period of time after closing.
There are drawbacks to a rent back. The seller typically covers the buyer’s ownership cost during the rent back period, which is often more than it would cost to live in a rental. Also, you can’t rent back indefinitely, so you could end up in an interim rental even if you do rent back for a while.
THE CLOSING: Although moving to an interim rental is inconvenient, it might be the best strategy. A benefit of this approach is that you don’t have to rush to buy, so you won’t feel pressured to buy a house that’s not right for you.
Dian Hymer is author of “House Hunting, The Take-Along Workbook for Home Buyers,” and “Starting Out, The Complete Home Buyer’s Guide,” Chronicle Books.
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