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 from Rebeca of Cullman, AL: Hi Brian. Well, the family has grown from only two of us to four of us and our first house is feeling a little cramped. We’ve been in it for more than five years and have more income (and more expenses with kids). We think it’s time to move up. What trials and tribulations should we expect the second time around?
Answer: Hello Rebeca. The second time around has a different set of trials and tribulations compared to first time buyers. On the positive side, having bought before, you should mostly know what to expect from the process. In fact, you probably know how to do a better job of selecting your next house, an agent, make offers, etc. On the other hand, there are differences. Most second time buyers need to both sell their existing home and find their next home. The big advantage you have the second time around is not having to come up with a down payment from scratch. You can use the equity in your current home. But turning the equity into cash is a common challenge.
Rebeca, you could sell your current home first to cash out the equity for a down payment. But that leaves the big question of where your family will live until you buy a new home in this tight market. You could rent an apartment or house but you should first consider other options. Something you cannot do is withdraw penalty free IRA money. That’s only for first time buyers. However, if you have a 401k retirement account, you can borrow up to $50,000 (or 50%) from it. No credit check required but you do have to pay interest – to yourself. Another down payment option is taking out a home equity line of credit.
You can also make a purchase offer contingent on selling your existing house. This can get complicated. In a tight market, the seller will probably have other offers without that contingency. And what if the seller has also made a contingency offer on the house they are moving to? Someone in these multi-layer deals needs to break free some cash to start closing out the contingencies.
But there are many options. If the seller is willing, you could rent the home you are purchasing for a couple of months until your old house sells. But if your old house is sitting empty, you’ll be making that mortgage payment plus a rent payment. You could also rent out your old home until that deal closes. Assuming you rent/sell to a first time buyer, they wouldn’t have a sale contingency issue. But there are at least two things to give serious thought about when renting houses that are planned to be purchased. First is the earnest money. It wouldn’t be wise to rent your house to a buyer without an accepted purchase offer that includes earnest money. That means if the deal falls through, the renter is going to forfeit the earnest money. That brings up the second issue, a renter that has to both move out of the house they were going to buy and just moved in to, as well as losing a chunk of money. Not a happy renter.
Rebeca, if you want to stay in better control of your destiny, it can be a better idea for you to complete the sale of your first house with a contingency that the new owner rent it back to you for two or three months until you close on the sale of your new home. There are plenty of options but what is important is that you have a plan for where you will live if your current home sells before you can move into your new home. A plan B is also a good idea.
As a second time buyer, there are also several things working to your advantage. You can choose to look for a new home both at your leisure and during slow times in the market when fewer offers are being made. You are also in a position to be flexible with your closing terms now that you know some of the options you have. Getting your offer on a new home accepted doesn’t always meaning making the highest offer. Your ability to be flexible could be what gets your offer accepted. One thing you should be prepared for as a second time buyer is a lot of paperwork. You’re going to be closing on both the house you are buying and the house that you are selling. That makes for a lot of fine print.
Certainly, there are many more creative ways to sell a first home and buy another using equity. Please comment with your thoughts and experiences for second time homebuyers. 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].