People are always buying, selling and moving. There are a myriad of reasons: downsizing, upgrading to a nicer home, looking for more space or a better yard, etc. Despite the upheaval of a global pandemic and subsequent recession, people are still buying, selling and moving homes. The reasons just look a little different now.
Values are changing as homeowners realize they might be homebound for longer than originally anticipated. As working from home and regular quarantining become a part of normal life, people are realizing they need more from their homes than just a home office or more space. Home security has become essential in a changing world and if you’re going to be stuck at home, it might as well be in a home you love.
Historically low interest rates and rising home values have only strengthened the argument for buying and selling in this market. Combined with rapidly shrinking inventory, the housing market has become a seller’s market as buyers struggle to find available homes to buy and sellers can virtually name their price. Unfortunately, sellers face the same challenges as they search for new homes to move into.
A lack of available homes for purchase is making it difficult for sellers who want to move to list their homes.
Typically, people want to move because they’ve found a new home that suits their changing needs and the needs of their families. But these market conditions are making would-be sellers afraid to list their homes because they can’t find another home to buy. However, the people living in the home sellers want to buy are also afraid to list for the same reason- they can’t find anything to buy! This is creating a bottleneck of inventory and a cycle of paralysis that can only be broken with strategic movement.
How Do I Buy and Sell at the Same Time in a Low-Inventory Market?
Should I buy a new home first or sell my old house first? It’s a common question most sellers have to ask themselves. But in a low-inventory market, there is additional complexity in answering this question. How do you move while maximizing your sale price, finding and buying a new home and making the move as convenient as possible for you? This is a complicated question because the answer isn’t the same for everyone.
There is no right or wrong way to buy and sell at the same time, just the strategy that works best for you. We’ll outline the two ways you can buy and sell at the same time: buy a new home first and then sell your old house, or sell your house first then find a new home.
We’ll deep dive into both of these strategies and outline the choices and challenges you’ll face. You can use this information to strategically overcome any obstacles you encounter along the way so you have the best selling experience possible.
1. How to Buy a New Home Before You Sell Your House
If you value finding a new home and being able to house hunt without the stress of trying to sell your old home first, you may choose to buy a new home first. This is a good strategy for you if you need the security of staying in your home until you’ve found a house to buy. It also gives you more time to find something to buy without the pressure of a deadline.
However, this is an option that requires you to be financially flexible. It’s not impossible to buy a new home without selling your old one first, but there are some factors you should consider. We’ll outline your financing options, how to make an offer that is subject to sale and what that means for you, what to do once you find a home you want to buy and the pros and cons of buying a new home before selling your old one.
Can I Afford to Buy a House Before I Sell Mine?
Ahh, the million-dollar question. It is possible to buy a new home before you have the proceeds from the sale of your current house. The three main ways to do this are: you have to qualify for a bridge loan, take on a second mortgage or have the cash to purchase a new house outright. If none of those options are available, you may have to make an offer “subject to sale”.
Can you get a bridge loan?
A bridge loan is a short-term loan that allows you to borrow against the equity in your current home to provide the funds for a new house. Bridge loans typically have higher interest rates than conventional mortgages and the term is typically six to 12 months. Borrowers need to have good credit scores and a low debt-to-income ratio to qualify. A bridge loan can be issued in one of two ways:
1. You borrow against the equity in your current home and those funds are used as the downpayment on the new home you want to buy. Once you sell your home, you can use the proceeds to pay off your mortgage balance and cover the bridge loan.
2. Your lender will roll your old mortgage into your new mortgage which can typically allow you to borrow up to 80 percent of your home’s value. You use this to pay off your mortgage balance and then put the rest into the downpayment for your new home.
A bridge loan can seem complicated but talk to your lender about using this to fund the purchase of your new home. The main advantage? You don’t have to wait to sell your house before purchasing a new one.
Can you carry a second mortgage?
If you don’t want to use a bridge loan to fund your purchase, talk to your lender about qualifying for a second mortgage before you’ve paid off the first. Prepare to evaluate your financial situation with your lender to determine if you can afford to make two mortgage payments and if you’ll qualify. Most people wait to sell their houses first so they can use the proceeds to settle the mortgage balance, but it’s not always required.
If your income is high enough that you can carry two mortgages at once, you can talk to your lender about how to qualify for another loan. Remember when you first applied for a home loan, your lender evaluated your debt-to-income ratio. They’ll do it again when you apply for a second loan, but now your current monthly mortgage payments will count against you as debt.
Many lenders typically use 43 percent as the maximum debt-to-income ratio they’ll accept. If two monthly mortgage payments in combination with any other debt you carry compared to your gross monthly income exceed 43 percent, you may not be approved for a second mortgage. Don’t forget your lender will also check your credit score and income!
If you can afford and qualify for a second mortgage, this option allows you to make offers on homes without waiting for the proceeds from the sale of your current house.
Do you have the cash to purchase a house?
Cash is king! If you have the funds on hand to purchase a new home outright, then you don’t have to worry about applying for a bridge loan or qualifying for a second mortgage.
Cash offers are strong, especially in a low-inventory market that can be rife with multiple offer situations. Closing doesn’t take as long with cash purchases, buyers are able to move in quickly and sellers are usually more than happy to accept cash and skip dealing with lenders and appraisers. It is also possible to pay with cash upfront and then get a mortgage later on, as this article from Forbes outlines.
If you don’t have the wherewithal for these options, talk to family members. Are you able to secure a loan from family members that can be paid back as soon as your home sells? If conventional methods and cash aren’t viable options for you then you might have to find creative alternatives for financing.
How Does ‘Subject to Sale’ Work?
If you’ve considered the three financing options above and they don’t work for you or you’re not able to qualify, you will have to make offers with a subject to sale contingency.
Subject to sale is an addendum to your purchase agreement (offer) that states you, the buyer, have to sell your home before you can finance the purchase of a new home. Your agent will negotiate a few essential elements of a subject to sale contingency for you, including time to sell your home and first right of refusal.
Time to sell your home.
Your subject to sale offer will specify the amount of time you have to get an accepted offer on your house. The time will vary by market, but in Iowa, your agent will likely recommend 30-90 days. After 90 days, if you have not sold your home, your offer will be considered null and void. This means you and the seller part ways and they can return your earnest money.
If you do sell your home within the negotiated timeframe, you will notify the seller immediately which removes the subject to sale contingency from your purchase agreement. Once this happens, the inspection, closing and possession dates can all be set.
Sound confusing? Your agent can help keep the timelines straight and navigate the complication of closing on your old house in time to close on your new home.
First right of refusal.
The first right of refusal means you are essentially first in line to purchase someone’s home when you make an offer subject to sale. If the seller receives another offer during your 30-90 day timeframe, they can notify you that they’ve received another offer and give you time to decide if you can make your offer better by removing your subject to sale contingency. Your agent will negotiate the amount of time you get to respond to this, typically this could be anywhere from 12 to 72 hours (which may or may not include holidays and weekends).
If you are notified by the seller that they have received another offer, you can respond in one of four ways:
1. You can show proof that you are able to provide financing via a bridge loan or second mortgage and remove the subject to sale contingency.
2. You can show proof that you are able to purchase the home with cash and remove the subject to sale contingency.
3. If your home is under contract, you can provide proof of the sale to show the sellers you will have the proceeds and you can proceed.
4. If the financing options listed previously aren’t available to you and your home hasn’t sold, you can withdraw your offer, request the return of your earnest money and resume house hunting.
Is it good or bad to make an offer subject to sale?
Making an offer subject to sale is not an inherently bad strategy but it can harm your position in negotiations with another seller. In this low-inventory market, you might encounter multiple offer situations at certain price points. A subject to sale contingency hurts your bargaining power because sellers don’t want to be beholden to your selling timeline if another buyer is making an offer without subject to sale restricting them. Even if you’re not in a multiple offer situation, some sellers won’t accept offers with a subject to sale contingency to avoid the complications that come with waiting for you to sell. In the end, it really just depends on the seller.
Subject to sale might be the most useful tactic you use if you really need the proceeds from the sale of your house to make the purchase. Your agent can help you navigate the complexities of subject to sale while ensuring you have enough time to sell your house and maintain the first right of refusal.
Once I Decide to Buy First, What Do I Do?
While you house hunt, find a home and make an offer, you should be working with your agent to get your house ready to list. This includes touch-ups, repairs, maintenance and any renovations your agent might recommend to get your home ready to sell. They may also recommend you stage your home, even before you put it on the market. Why?
Regardless of which financing option you choose, once you find a home to purchase you’ll have to move quickly. The data above from Altos Research shows how much less time houses are spending on the market compared to the last three years. Your home will probably sell more quickly than you expect and you should be ready to list the day your offer on a new home is accepted.
The Pros and Cons of Buying First
Now that we’ve outlined everything you need to know about buying a new home before you sell your old one, we can compare the pros and cons of this strategy.
Pros
- You have the freedom to house hunt and negotiate without dealing with the sale of your home at the same time.
- You only have to move once.
- There is certainty about where you’ll live.
- There is no pressure to buy a home you don’t love.
Cons
- If you make offers subject to sale, you lose negotiating power when you buy a new home.
- If you make offers subject to sale, you can also lose negotiating power when you sell.
- Costs of financing are higher than selling first because you have to either qualify for a bridge loan, carry two mortgages or find creative alternative options.
The strategy of buying a new home before selling your old one is a good one for anyone who values finding the home you want and the comfort of moving directly from one house to the next without the potential discomfort of short-term living in between. This option is also good for anyone who has the financial ability to purchase a new home outright or qualifies for alternative financing, such as a bridge loan.
How to Sell Your House Before You Buy a New One
If your priority is maximizing your sale price and managing the sale of your home without worrying about buying, then you might consider selling your old house before buying a new one. The upside to this strategy is that you’re freeing up inventory for the market, making it easier for someone else to buy. As we said before, it’s a seller’s market right now. As low supply and high demand drive home values and prices up, sellers are reaping the reward of higher purchase prices.
The data from Altos Research shows list prices for 2020 climbing well above the benchmarks set by previous years. While many sellers may not feel confident enough to list, those who do benefit from increasing list prices.
Selling your house before buying a new one is a good strategy but uses different tactics than buying first. We’ll outline the three major factors you need to consider, how to set a timeline for selling your home and the pros and cons of selling your home before buying.
The 3 Tactics You Should Consider When Selling Your Home First
Once you decide to list your home, you and your agent will work on pricing and getting your home ready to show. As the seller in this market, you have the upper hand in negotiations with buyers but you still have to work with your agent to navigate the complexities of fielding offers while managing your own timeline for finding a new home.
This strategy doesn’t require you to be as financially flexible (no bridge loans needed here!) and you don’t have to worry about making offers that are subject to sale. Once you sell your home, you can use the proceeds to fund the purchase of a new home which minimizes the need to figure out alternative financing.
But that doesn’t mean this strategy is without its own complexities! You will have to negotiate with your buyers to allow you time to find a new home, which may require using several tactics we will explain here. These are the three tactics you should consider before listing your home: accepting offers that are subject to finding your home of choice, finding short-term housing and negotiating late possession.
1. Accepting offers subject to ‘finding home of choice.’
Once a buyer makes an offer on your home, your agent can counter-offer with your non-negotiables. If you are selling in order to buy, you should include a “finding a home of choice” clause to your counter-offer. Home of choice means you accept a buyer’s offer but you need time to find a home to buy before you can move forward.
Your agent will ask for a predetermined number of days for you to find and make an offer on another home. The amount of time varies by market, but generally can be about 14 days. During that time, you will start house hunting. Your agent should advise you to move quickly- don’t wait until the end of your time to start looking! Don’t feel pressured to make an offer on the first home you see, but take full advantage of your time to find a home that suits your needs.
Once you make an offer on a new home and it’s accepted, you will let your buyers know so both parties can move forward with the closing process on your old house.
What happens if I can’t find a home I want to buy?
If you can’t find a new home to make an offer on, either because there’s little available or you can’t find something that fits your needs, your agent can return to the negotiating table with your prospective buyers. At this point, you can ask for an extension to keep house hunting or your buyers can say they won’t wait anymore and move on. If they’re willing to wait longer, you can ask for another 30 days or however many days you and your agent think you will need).
If your buyers decide to move on, it’s good practice to return their earnest money. Your agent will then put your home back on the market and you can start the process over again.
How does using home of choice affect my bargaining power?
When you use a home of choice clause, you might deter buyers who are working on a tight deadline. They might be in the process of selling their home too or coming to the end of a lease and don’t have the flexibility to wait months for you to find a new home. They may also be trying to lock in their interest rates and won’t want to wait too long in case they go up.
However, you have an advantage in a low-inventory market. With little available housing to shop around for, many buyers don’t have the bargaining power to push back against the extended timeline that comes as a result of finding your home of choice. You may find that buyers won’t argue with you needing time to house hunt before you can close.
2. Finding short-term housing.
One of the biggest stressors that sellers experience is the gap between closing on their old house and closing on their new home. Depending on both transactions that gap could be as short as a couple of days or as long as several months! As you work with your agent to navigate these timelines, you may suddenly think, “I’m going to be homeless!”
You have two options to consider here: short-term housing or late possession (which we’ll talk about next). Short-term housing is a good solution if there are several months between closings. It might seem like the most ideal option because no one wants to move twice! But if you’re not able to negotiate a late possession date, then it’s your best option. If it makes sense financially, you can use some of the proceeds from the sale of your house to fund the short-term housing and storage space.
Your agent can be a great resource here. He or she can help you find a house or apartment for rent that will allow you to rent month-to-month, can help you find storage space for your belongings and can even put you in touch with local movers.
Depending on the length of time between closings and your budget, you can also consider staying with family or friends, an extended stay hotel, an executive rental or even an Airbnb. In fact, if you can afford it and don’t mind short-term housing, you could sell your home without using home of choice and move into short-term housing while you search for a new home to buy.
3. Negotiating a late possession date.
If short-term housing is not your first choice, you and your agent can negotiate a late possession date. This would ask the buyer to let you stay in the house until a set date and time after closing, which means the buyer would technically own the house.
Late possession can be tricky for both buyers and sellers. It technically means you are living in a house you don’t own after the closing date which puts you in a gray area for liability. Can the buyers claim you changed something about the house after they saw it? Whose homeowner’s insurance should cover any accidents or unexpected damage? What happens if someone is hurt, who is liable?
There are a lot of questions that can pop up in a late possession situation, which is why your agent should write a clear late possession agreement that clarifies exactly which party is responsible for anything that might come up. This may include, but is not limited to:
- You will still pay the utilities and maintain the property.
- You will keep your homeowner’s insurance current and effective and will change it once you have vacated the home.
- You assume responsibility for any damage or injury that occurs at the home while you still live there.
- You will maintain the home in the condition it’s in and won’t make any changes such as decorating or alterations. If something needs to be repaired, you should let the buyers know.
Additionally, you could offer to pay rent or make a damage deposit to sweeten the deal for buyers, especially since they will technically own the home. This would be further outlined in the late possession agreement your agent writes. These tactics are all negotiable and may vary by market.
Buyers don’t typically want a late possession date. It prevents them from moving into their new home after closing which means they too have to figure out a short-term housing solution or negotiate a late closing date on the sale of their home. Plus if you’ve already negotiated an extended timeline for home of choice, they may be tired of waiting on you!
But you’re working in a low-inventory market with buyers competing for the few homes that are available to purchase. You may find that buyers, while not excited about late possession, might be more willing to accept it than they would in a balanced market.
The Pros and Cons of Selling First
Now that you know everything you should about selling your home before purchasing a new one, let’s look at the pros and cons of this strategy.
Pros
- If you sell your house first, you can use the proceeds to purchase your new home.
- You can take the time to focus on selling to maximize your purchase price.
- Your budget is set from the proceeds of your sale.
- You are house hunting with a strong negotiating position.
Cons
- You may have to move twice.
- If you don’t find a new home right away, you’ll have to secure short-term housing.
- You may have to use “find a home of choice” to give yourself time to find a new home, which prospective buyers might not like.
- There is emotional uncertainty in not knowing where you will live.
The strategy of selling your house before you buy a new one is a good one if you value maximizing your sale price and don’t mind having to figure out a stop-gap housing solution. If your home is likely to sell quickly, you can use a “home of choice” clause. This isn’t always ideal but shouldn’t hurt your bargaining power with buyers in this market. Many sellers find themselves using this strategy because they need the proceeds from the sale of their old house to fund the purchase of the new home.
Which Strategy Works Best for You?
As we said before, there is no one right answer when it comes to buying and selling at the same time. The situation becomes more complex when you consider the market factors at play: low inventory, low interest rates, rising home values and competitive buyers who are ready to move.
If you want to sell your home but you’re hesitant to because there just doesn’t seem to be anything on the market, consider the strategies listed here. Think through which options will maximize your sale potential while prioritizing the factors that matter most to you (time to house hunt, financial flexibility, moving once, etc.). Work with your agent to figure out a timeline that works for you but also won’t deter potential buyers.
We’ve compiled the information here in a free guide you can download and use to help you as you buy and sell at the same time.
The cycle of seller paralysis that contributes to falling inventory in the market can be broken using the strategies and tactics laid out here. Now that you know what to expect, choose the option that works best for you and use your agent as a guide for navigating the complexities of buying and selling at the same time in a low-inventory market.