Laura answers a question about juggling the sale of a home and the purchase of a new one simultaneously.
Laura answers a question about juggling the sale of a home and the purchase of a new one simultaneously.
Find a transcript here.
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Welcome back to Finance Friday, another special edition of Money Girl, where I answer your burning money questions! Today’s topic comes from Kate, who says:
“My husband and I have finally outgrown our starter home and feel like it’s a good time to purchase a larger one. But I’m confused about the best way to buy a new home and sell our existing one at the same time. What options do we have to make the transition as smooth as possible and less stressful on our finances?”
Thanks for your question, Kate! Juggling the sale of an existing home while purchasing a new one is a common stressor for many homeowners. Both are huge transactions with significant financial consequences. While there isn’t one right way to coordinate a simultaneous home purchase and sale, this post will review various options to manage it successfully.
Welcome back to episode 954 of Money Girl–I appreciate you downloading the show! I'm Laura Adams, an award-winning author, on-camera spokesperson, female money speaker, and founder of The Money Stack, a Substack newsletter.
You can learn more, ask questions, and sign up for the Money Stack at LauraDAdams.com. Newsletter subscribers automatically receive my Money Success Toolkit with the exact templates I use to manage money.
Should you sell or buy a new home first?
This post assumes that you want or need to sell your current home before buying a new one. Of course, if you can afford to keep your current home, turning it into a short or long-term rental could be a good investment.
Keeping an existing home is how many people, including me, got started as landlords. But the property needs to be suitable for a rental, with the potential to charge enough rent to cover ongoing expenses. Plus, your finances need to be in good shape with enough savings to cover unexpected costs, like repairs and vacancies.
Since carrying multiple mortgages and managing a tenant can be challenging, I always recommend budgeting for the cost of a property manager. Their knowledge, experience, and local network can help you find good tenants, charge market rent, and reduce expenses.
But let’s assume you’re like Kate, planning on selling your home to upsize, downsize, or relocate to a new city or state. Many homeowners have equity they plan on using for their next home purchase. So, should you sell your home first to have enough cash to put down on the next property? Or should you pounce on your dream home and buy it before someone else does, and worry about selling your current home later?
There are pros and cons for each home-selling option, and we’ll review them. Coordinating two real estate transactions simultaneously takes careful planning and flexibility.
LISTEN ALSO: Should my first home be an investment property?
Selling your home before buying a new one
While the U.S. housing market is slowly cooling off, there are still many markets, particularly in the Northeast, where home prices are rising and buyers are competitively bidding for listings. If you're in a seller’s market where demand for housing is high but there isn’t enough inventory, you may be able to sell your home quickly and for a relatively high price.
The housing market is a patchwork of local conditions that can vary considerably. I recommend working with an experienced real estate agent to understand the average days on the market for listings and whether homes are selling above or below their asking prices in your area.
Knowing if you’re in a fast or slow-moving housing market can help you know how to price your property and whether you’d benefit from selling your existing home before buying another one.
A significant pro for selling first is that you’ll know exactly how much cash you have for your next home purchase. In addition, you eliminate the risk of having two mortgages, which could be extremely stressful. Depending on your financial situation, your mortgage approval could be contingent on selling your existing home.
The downside of selling a home before buying another one is that you may need to move into temporary housing while you find and buy your new home. Moving twice means higher moving costs and more complex logistics.
However, you may be able to push out the closing date so you have more time to find your next home. Or, you may be able to stay in your home with a rent-back agreement from your buyer, where you become their tenant for a predetermined period, such as two or three months, while you shop for a home.
If you plan to buy a home in a hot market, it could take more time and money than you expect to find your ideal property. So, do plenty of research about where you want to move so you avoid making any disappointing compromises.
In general, I recommend selling your current home first because it’s the most conservative and safe option. However, if you can easily buy a new home and carry two mortgages for an unknown amount of time, there are benefits that we’ll discuss next.
RELATED: What’s the cheapest way to sell a home?
Buying a home before selling your current one
If your finances are in good shape and you can qualify for a mortgage or other financing options before selling your home, it’s a great option in a buyer’s market. You’ll know that you’re in a buyer’s market when there are more homes for sale than interested buyers.
That means you can be more selective and even negotiate for a lower price when home shopping. In contrast to a seller’s market, where bidding wars and offers above asking price are the norm, a buyer’s market is a calmer, slower environment.
However, selling your home in a buyer's market could take longer or result in a lower purchase price than expected. In other words, buying first means you could pay two mortgages for longer than you'd like.
When it makes financial sense, the upside of buying a new home before selling your old home is that you get the property of your dreams. You may find the perfect home at an affordable price and feel like it's too good to pass up.
When it makes financial sense, the upside of buying a new home before selling your old home is making sure you get the property of your dreams. You may find the perfect home at an affordable price and feel like it’s too good to pass up.
Another benefit of buying first is being able to move out of your home before listing it. You can make any needed updates and allow home showings without buyers and agents interrupting your life.
The primary con for buying a home before selling one is that you’ll need enough for a down payment and closing costs plus income to pay mortgages, maintenance, and potential repairs on two homes for an unknown length of time. Plus, you may feel rushed to sell your old home and accept less than you should.
If you have enough home equity, there are some financing options to help buy a second home. For example, you might qualify for a bridge loan, which is a short-term loan you repay after selling your first home. Another option is getting a home equity line of credit (HELOC) to fund your next home purchase. A HELOC may come with a lower interest rate and fees compared to a bridge loan.
It’s common for buyers to make an offer on a home that’s contingent on selling their current one. As you can imagine, a seller who’s in a hurry to close or who has many interested buyers may not accept a contingency offer.
However, if you offer a good price, a seller might be willing to let you have 30 days to try and sell your property. But if your home doesn't sell within the allotted time, a seller can accept backup offers from other buyers.
Buying a home before selling an existing one is more convenient than the alternative, but it comes with higher financial risks. Making a purchase offer contingent on selling a home can weaken your buying position; however, it may be worthwhile if you find a great property.
READ ALSO: Selling your home–will you owe taxes?
Tips for buying and selling a home simultaneously
Buying and selling a home at the same time can be challenging, but there are various financing options and professionals who can help you. I recommend leaning on the expertise of a good mortgage lender and real estate agent to find creative solutions. Here are more tips for smooth real estate transactions:
Coordinating a home to sell and buy at the same time really comes down to luck. You can’t control the economy, what’s on the market, or the personalities of sellers and buyers. However, by being as prepared as possible, working with experienced professionals, and understanding the risks, you can set yourself up for smooth closings, perhaps even on the same day.
That's all for now. I'll talk to you soon. Until then, here's to living a richer life!
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