Welcome to the Big Top! It may seem like juggling skills would come in handy when you have two real estate transactions to take care of, but there are a number of different ways to manage the finances and the risks involved with a purchase and sale happening concurrently.
The first option is to use a contingency. Shop for your new home first and once you find it, write an offer contingent upon your ability to sell your current home within a short period of time. In our market, this means that you’ll need to list your home within 5 days, so the trick is to get your home ready to list before you start shopping. In a contingency, the risk is borne primarily by the seller of the home you want to buy, though they are free to accept other offers and “bump” you in favor of another one. If bumped, you typically have 1-5 days to remove the contingency or lose the new home. In a tight real estate market like ours, a seller who is willing to accept a contingent offer is rare, so other financing options are often considered first.
The next option is a bridge loan. There are several varieties of bridge loans, but all allow you to close on the purchase of a new property before selling your current one, through a second mortgage, cross-collateralization, or a bridge that completely pays off the departing home loan balance. Fees and penalties can be significant, so bridge loans should be carefully shopped and researched with a trusted lender who can talk through your options. Risks in this scenario are typically borne by you, so they are a hassle-free and attractive option for the seller of the home you would like to buy.
Another idea is to begin shopping for your new home and then list your current home for sale, asking for a long closing or rent-back. In this scenario, you are asking the buyer of your current home to wait for you to find the right place before taking ownership (or possession) of your current home. This can work out, especially if you are not a picky buyer and you expect to price the home you are selling aggressively in order to get a quick sale on your terms. The timing can be tricky, and any hiccups in the process of closing your purchase can lead to difficulties with the other parties, so talk with your broker about the pros and cons.
You may also be able to close a purchase without selling your home. Fortunately, creative loan options, including 'departing residence' programs now exist. Your income may need to support the new mortgage payment as well as your old mortgage payment, but a good lender may have some flexibility with debt ratios in these situations. In a sellers' market, it’s unlikely that you’d have a month in which you have a new mortgage payment and still have the old mortgage in place, but pricing in these situations is critical.
Two final ideas involve no juggling at all: One is to sell your current home and move into a short-term rental while you look for a new place to buy. The downside of needing to move twice in this scenario is obvious, but it removes risk by giving you known (rather than estimated) selling proceeds to work with for your purchase and it does not require you to rely on the grace of the other party to accommodate your timing.
Then there’s the investment idea of buying a new home to move into, and keeping your “old” home as a rental. If you can handle the stress of being a landlord, the financial benefits of owning investment property can really add up. There may be significant capital gains benefits to being a landlord for even a couple of years, and a skilled property manager can minimize the potential headaches and hassles.
Need to juggle real estate transactions? I can help! I've worked with clients in all of these scenarios and would love to help you with yours.
