It can creep up or happen all of a sudden. The perfect starter home you adored a few years ago is now too small — or just needs a few more bathrooms. Buying and selling a home is in your future, but where do you start? How does it work when you have a home to sell before you can buy? And how can you make the current real estate market conditions work for you?
“People are having the real estate equivalent of which comes first — the chicken or the egg? They know they want to sell their existing home and they can picture the house they have been dreaming about, but they just don’t know where to begin. They need the funds from their existing home before they can buy their next home,” says Jim Shaffer, owner of Jim Shaffer and Associates in Royal Oak.
Buying and selling a home can be a scary process for people, Shaffer says. They can list their home now, get a great offer — far more than you think it might be worth — and then be rushed into making a decision on a new house they may not love, or be faced with low inventory.
“Other people are just waiting to see what happens, even though they know they want to move,” Shaffer says, adding that this inclination to wait often comes from a lack of clarity on the many options available for buying and selling a home.
While there are far more options than people are typically aware, Shaffer shares three likely options for those who are ready to list and sell their existing home before they can buy their next home.
Refinance, then use the equity
For those who have a fair amount of equity in their existing home, one option is to do a cash-out refinance of their current mortgage, using the cashed-out equity as a down payment to secure their new home.
But not everyone has that level of financial security or enough equity in their home, Shaffer says. “The Achilles’ heel is that you have to qualify for both mortgages and most Americans can’t do that,” he adds.
The power of a contingent sale
Another option is to sell your current home and add verbiage that the sale of your existing home is contingent upon the seller finding their new home of choice. “This means you can go through the process of listing your home, gather your offers, and pick the highest and best offer, just as you’d do otherwise,” Shaffer explains. “This is an ace in the hole for sellers, so to speak.”
A contingency sale allows you to sell your home in today’s very strong market and then write an offer to purchase your next home contingent on the successful closing of the home under contract.
Still, a sale contingent on your next purchase could be a turn-off for some buyers, Shaffer admits. “You might get five offers instead of 10 or 12 offers, but you will get the best of the offers and the buyer is more likely to be patient because you are motivated with money in your pocket, so to speak,” he says.
Compared to a more traditional situation where you sell your home and then are facing a form of homelessness, a contingent sale can make a lot of sense. You are motivated to find your next home, but aren’t desperate — which could compel you to settle for a home you don’t love or even become embroiled in a bidding war, potentially overpaying for your next home. “There’s danger in desperation,” Shaffer says.
“The option of selling contingent is the best financial advice I’d give my brother, cousin or parents,” he says. “You put yourself in the position of getting top dollar for your current home and you also have the option to back out.”
Creative financing
A third option engages one of an emerging set of products designed to “remedy the challenges of the current market situation,” Shaffer says. In this situation, a company will buy your new home for you, allowing you to essentially become a cash buyer under their company name. Then you sell your existing home and apply for a mortgage to pay the company that financed your new home purchase.
The downside is that you may pay a 5%-10% premium for the right to utilize the company’s cash funds for 90 days or the agreed period of time. So, that may or may not be the best financial decision for everyone.
“But good financial decisions and peace of mind don’t always come in the same sentence,” Shaffer says. “You could argue that coming in as a cash buyer would allow you to compete for your new home at a lower price. Cash offers are generally accepted because there’s no need for an appraisal contingency.”
What’s best?
Different scenarios call for different decisions, and no two families’ needs are alike. That’s why it’s so important to have a real estate professional who can present to you a variety of options.
“What most people are doing instead is putting their heads in the sand. They may want to cash in on their current home, which is worth more than it ever has been, or they look around and realize their current home no longer meets their needs. Or they may have taken a new job and now have to commute an hour to work,” Shaffer says. “But they say they are just going to sit because they don’t know how to start.”
When you’re ready to start talking with a real estate professional, choose the person who knows what they are doing and can provide you with a variety of options. “A full-time real estate professional will have myriad options to solve the myriad problems we are facing in today’s market,” Shaffer says.
The great news? Selling your existing home and buying your next home is far easier than you might think.
“The average consumer doesn’t understand their options so they assume there aren’t any. People will say they don’t want to deal with bidding wars and they don’t want to overpay for their next home,” Shaffer says. “But the reality is your house is worth more than it ever has been worth and you can use that equity to your advantage. If the market corrects, you will lose your equity anyway, so why not take advantage of it?”
Learn about all your options when selling your existing home and buying your next home. Contact Jim Shaffer and Associates at soldcalljim.com.
