If you thought that buying that first house was scary, wait until you gear up to buy the second.
It doesn't matter whether it is a buyers' market or a sellers' market a homeowner who needs to relocate or wants to "trade up" is never in the catbird seat. Why? Because he has realized the American dream, he owns a house. And so the huge question looms: does one buy the new house first? Or sell the old one?
A first time homeowner does not have this problem. Maybe there is an apartment lease to consider or timing issues involving kids and school, but first time buyers are relatively footloose and fancy free. Not so the second-or third-time buyer. There is the matter of an existing house, ongoing mortgage payments, and the cash needed for the down payment needed to close on the new house. You have the money of course, there is real equity in your current home, but until that home is sold that cash is locked up securely in your current mortgage bank's vault.
So, what we have is a conundrum. What comes first, the chicken or the egg? Sell first, and, particularly in a sellers market, risk becoming homeless, or perhaps worse, moving in with the in-laws while furniture, clothes, kids toys, and the files requested yesterday by that nice IRS auditor languish on a pallet deep in the climate controlled, fireproof walls of a moving and storage company.
Or, in a buyers market, one finds the perfect house and is unable to make an offer because that less than perfect house you already own has a mortgage payment due next week and there is no way anyone is going to take it off your hands the way the furnace is acting. How long might it take to find a buyer and actually close on the sale?
If the market is tough enough, maybe the owner of your next house will be willing to work with you. If the market is strong enough, maybe selling your existing home is only a weekend away. But who knows? And how courageous must you be to bet the ranch on either scenario?
When I was a real estate agent, I worked with a lot of customers who froze in place because of the buy first or sell first decision. In one memorable case, Karen was frantic to move to a town with a better school system but David was terrified that they might have to move twice and that the intervening accommodations might lack the comforts of his existing home. They did make offers on two homes which did not come close to being accepted, not because there was anything wrong with the price, just with David's insistence on a contingency allowing them to first sell their home in a rather unappealing town. Since there were other competitive offers without such restrictions, they never got a second glance. I gave up on them after four years and some 125 house showings. They passed on some real gems, and as far as I know they are still looking. I do know that they had invested close to $20,000 in private school tuition for two of their three kids by the time I bid them goodbye.
What should they have done? There are options. Granted, none of them are ideal, but would you rather spend the rest of your life in that two bedroom one bath condo with your husband and four kids? I didn't think so.
- Do your homework. This is the same drill you went through when you bought your first house. Get pre-approved for a mortgage, line up a hardworking and responsive real estate agent to help you find the new house and, if geographically appropriate, to list your current home.
- Get your house ready to sell. Clean out the closets, paint the front door, pick up the yard, and fix the furnace if it needs it. Talk with a real estate agent, get an approximate listing price and discuss timing the listing, how long might a sale really take at each of several price points.
- Pick your poison. As stated above, none of your options are perfect, but is your financial and emotional situation better able to handle owning two houses for a (hopefully) brief period, or moving into short term housing should your old house sell before you are able to locate and secure a new one.
- If you opt for the possibility of owning two homes, get your financial situation in order. Look into a bridge loan (which will give you the funds for the new down payment and maybe even enough to subsidize a second mortgage for a while) or arrange for a home equity loan.
A bridge loan might cost a little money for an origination fee and an appraisal, but you will not owe any payments or interest unless you close on the loan, and you will not do that until you actually purchase your new house.
Home equity loans are like a big MasterCard (and equally dangerous if you are not disciplined in their use) but banks are eager to grant them and most are financed at the lender's expense. Again, there are no fees until you actually draw down the funds. However, you must put that loan in place before listing your house. The bank will send out an appraiser and he will probably notice and report the Century 21 sign on your front lawn.
You need also to be honest with the bank financing your new mortgage. It may be very nervous at the prospect of your carrying two mortgages and maybe a bridge loan as well. Find out what its lending requirements will be in such a situation. That may well automatically eliminate the "buy first" option.
- If you must sell before you buy, get your plans in place. Are there family members who can put you up short term? What other options are available in your community? Residence hotels are suitable for really short terms. Many large apartment complexes maintain furnished apartments for their corporate customers. These are usually much more expensive that other units in the complex but won't require a lease and may be available for as little as a month. Check out the cost of household storage and the timing. Some moving companies are very inflexible about when and how they will release and deliver goods in storage.
What about your pets? Most short term rentals do not allow them. Can you afford (or stand) to board them for an extended period? Maybe you have a friend who loves Fluffy and would be willing to care for her for a while.
- Be creative. I generally discourage unusual contingencies in listing contracts or offers to buy, but no rule is hard and fast. If you are caught up in a market where houses are selling in a heartbeat, making an offer to buy contingent on selling your own home just won't fly. However, in such a market, you could insert a provision in the listing contract making the sale of your existing home dependent on reasonable time to locate and arrange the purchase of the new one. First time buyers are flexible and might actually appreciate extra time to give notice and avoid a penalty on their lease or even sock away more money toward the purchase. Maybe another homeowner will appreciate the leeway to resolve their own chicken and egg situation.
Since the real estate market is seldom in equilibrium - when there is a balance between the number of active buyers and the number of homes available to them - you are probably going to encounter the chicken and egg decision any time you want to buy or sell. Just don't freeze (or sit on the nest). Recognize the situation, evaluate your options and get moving in one direction or the other.