Ask Brian is a weekly column by Real Estate Expert Brian Kline. If you have questions on real estate investing, DIY, home buying/selling, or other housing inquiries please email your questions to [email protected].
Question. Jan from Boring, Oregon asks: Hey Brian, my husband and I knew four years ago when we bought our first home that it wouldn’t be our last. It was too small even then. However, it’s what we could afford at the time. Now that we have some equity, we want to sell this house and buy bigger. Of course, having equity doesn’t mean we have a pile of cash in the bank. We need to sell this home and buy our bigger home relying almost entirely on the equity we’ve built up as owners. How do you suggest that we sell and buy at the same time? One more note: This is a small town. We are planning to move to a larger town but although house sales are good in Oregon, houses in this small town seem to languish on the market for several months.
Answer. Really Jan? Someone named your town Boring? I hope you’ve enjoyed life there. But now that you want to move on, there are several ways you can sell and buy a home at close to the same point in time. You certainly aren’t the first homeowners to face this dilemma.
Since you are expecting your current home to take some time to sell, I suggest that you start the process by talking with a few real estate agents and getting it ready to sale. You know the basic things, a fresh coat of paint on the inside, making sure all doors and windows work properly, maybe sprucing up the curb appeal a little. The good news is that you have a starter home, which are the ones in most demand – even if it is in Boring. You don’t want to start looking and find the home that you want to buy before you have your current home ready to sell or you’ll have too much going on at the same time.
When your current home is ready to sell, you can start looking for what you want. Several of your options when selling and buying simultaneously are in the contract contingencies for either the house you are selling, the one you are buying, or both. For instance, if you do receive an offer to buy your current house, you can counter the offer with a “rent-back” clause to stay in the house until you close on your next house. This isn’t always possible for several reasons such the buyer also being in a pickle requiring they also move ASAP. Or a first time buyer excited to move into their first home. But it’s all a negotiation. You could offer to pay an above market rent as a financial incentive or maybe what the buyer needs is an absolute day you’ll move out.
Ultimately, you need a plan B. It’s mostly about your imagination and personal circumstances. First, you could ask for a closing date on your sale that works for moving into your new home. This works if you’ve found your next house and have a decent idea of when you’ll close that deal. You could offer to take 1% (or some number) off the sales price to set a closing date not too far in the future. There is always the less desirable Plan C. You could move to a short-term rental (which are usually expensive). Or stay at a rent-by-the week hotel. Couch surfing might be Plan D.
If you buy before you sell, your options are different and you have a few more. You can also work this process with a contingency clause. The difference this time is you want a closing date on your new home a little after or on the same day as the closing date of the home you still need to sell. Of course, not having a buyer yet is a tough position to be in when you are negotiating to buy. Someone without that contingency could get the home.
You could look into a bridge loan to get you from one house to the next. However, if your finances are tight this might not be your best answer. There are different ways bridge loans can be structured but none of them is a substitute for a long term mortgage. One thing in common is these are all secured by your current home as collateral. Most loans are for six months but longer ones are possible. You can expect to pay a higher interest rate and you’re going to have the financial burden of another loan closing costs. Some lenders also require that you finance your new home through them. Tread carefully here.
Here’s an example of how a bridge loan might work. Your current home is worth $100,000 and the outstanding mortgage is $50,000. A bridge loan could provide $70,000 in financing. The first $50,000 pays off the old mortgage on your existing home. That leaves you with $20,000 for a down payment on your next home but part of it goes towards the bridge loan origination fees and closing costs. What you have remaining for your down payment will be closer to $17,900 (or less). But you get to move into your new home now. When your old home sells, the first $70,000 plus any other fees and/or interest goes to repay the bridge loan. If all goes well, what was your $50,000 in equity becomes the $17,900 down payment less closing costs on your new home and something less than $30,000 in cash. By the time the dust settles, you’ll hope you have $35,000 of your $50,000 profit still belonging to you. Bridge loans are an expensive way to go.
Jan, ultimately, your best solution is having both closing dates as close together as possible. Ideal is selling your existing home in the morning and closing on your new home the same afternoon. You may still spend one or two days in a motel but you should be in your new home within a week. It’s all a negotiation. If matching the closing date is important to you, you may have to give up something else. Or your buyers and sellers could be in a position similar to you. Maybe the most important thing is all of you work towards a simultaneous closing date.
It's always important to remember that writing an offer or counter offer is a negotiation. If having matching settlement dates is important to you, you may want to be flexible in other areas as a gesture of good faith.
There are many possible solutions to the sell-buy dilemma. I look forward to readers sharing some of their more imaginative solutions. Our weekly Ask Brian column welcomes questions from readers of all experience levels with residential real estate. Please email your questions or inquiries to [email protected].