So you want to buy a new home, but you also need to sell your house, and you don’t want to move twice… or settle for a home that you’re not crazy about.
Where to Start
We get this spiel all of the time, and I promise — we really do understand.
As the market continues to bounce back and home values recover, we see more and more clients with this same situation. Unfortunately, successfully executing the simultaneous sale/buy is much more difficult than it sounds… and it is not getting any easier. Likewise, the best method of execution for one person may not be the best for another. This is not a one-size-fits-all situation.
There are a number of factors to consider.
No One is the Same
There is no simple answer for this type of transaction.
Everyone has a different perspective on financial risk.
I have yet to meet anyone with a single, go-to way of handling this scenario. Every situation is unique and everyone has a different perspective on financial risk. What feels comfortable to one buyer may be extremely unsettling to another. There are too many different factors (income, timing, location, value, interest rates, etc.) to responsibly recommend a single step-by-step approach.
At the end of the day, there are numerous factors to consider. Recognizing these components and their effects will provide structure for a creating a plan that meets YOUR needs.
A Framework for Understanding
Recognize the implications that a decision on one side will have on another…
Selling a home and subsequently purchasing another is a portfolio decision — think of it as essentially rebalancing your overall financial affairs. But instead of viewing the two transactions separately, you must recognize the implications that a decision on one side will have on another. They are directly correlated.
That means (aside from a few cases) you should not be surprised to see similar market conditions on both sides of the transaction. If it is a buyer’s market when you buy, it will be when you sell, and vice versa.
Pick a Side
Although both sides have their own weight, it is inevitable that one side of the transaction will be more important than the other.
When downsizing from the family home to the 2 bedroom waterfront home that will take you into your golden years, the property you want to buy is more important than the one you want to sell.
Take the time to understand which side is more important to you and proceed accordingly.
Time is of the Essence
The simultaneous sale/buy is all about timing. In order to successfully execute the sale/buy, one must successfully execute a number of other complex things — closing, appraisals, payoffs, movers (you get the idea). The best way to do this is by assembling a team of pros who have experience working with one another.
Any fumble in a sale/buy can increase expenses significantly, and YOU are the one at risk.
Contingent? First Right?
In accelerating markets, no seller wants to hear ‘Contingent Contracts’ and contracts with a ‘Right of First Refusal.’ Being a buyer in either situation typically means overpaying and is not a good strategy.
We’ll elaborate in a bit.
Liquidity is Power
Embrace your liquid assets. Whether it’s your 401(k) or home equity loans, each asset can be used as collateral for a loan or turned into cash.
Recognize what the impact of using these assets will be (penalties, taxes, borrowing rates) before simply refusing to access them. It is not uncommon for a financial advisor to scare their client due to lack of understanding. Reaching out to your financial advisor is wise, but be sure to filter the advice they give you.
Use Your Math Skills
Don’t forget — this is really a math problem.
Don’t cost yourself $3,000 on one side while trying to save $1,000 on another side…
Many clients believe that it is too expensive to borrow against their 401(k), but in reality, the cost of using assets like this is much cheaper than the alternative. Don’t cost yourself $3,000 on one side while trying to save $1,000 on another side. If liquidating a stock position will help you as a buyer, give it serious consideration.
Use Your Strength
Similarly, having more strength as a buyer will also help you drive a better deal.
Don’t forget — an offer is made up of both price AND terms. If you want to be a good buyer, you cannot focus on price alone. From down payments to closing dates, these are important aspects of the contract that can make or break your offer. If the property you want to buy is a really great one, the more likely it is to turn into a competitive offer situation.
Vet Your Lender
Having a good lender is not something you can compromise on. And the use of a non-local lender always costs more in the long run…
Using an internet lender or one who is linked to your stock portfolio will only create a headache for you and a hole in your wallet. I REPEAT, using a non-local lender will be significantly more expensive in the long run. No matter how great their incentives sound, nothing can make up for the cost of missing the closing date on a simultaneous sale/buy.
If you are already talking to one, stop right now. Non-local lenders DO NOT work out. They just don’t. And when it comes to a simultaneous transaction, you are the one at risk — not them.
If there is one thing you take away from this post, let it be this point.
It is not uncommon for a seller to put their own sale at risk over a minor inspection detail. Remember, buyers are skittish. If you come off as too aggressive over a small item, it could cost you the entire deal and you will immediately regret it. A lot of your time and money goes into the simultaneous transaction, so be careful. You do not want to accidentally give your buyer an out.
Do NOT Procrastinate
Timing is everything, and so is market knowledge.
Do your homework, get prepared and rehearse!
The less time it takes to find your next home, get it under contract, and get yours on the market, the better. Understanding market conditions will help you identify good deals, and being ready to act on one will give you an even greater recipe for success.
- Make sure your home is ‘show ready’ at all times.
- Get pre-approved and stay pre-approved
- Have the flexibility to visit a newly listed home within 24 hours
- Be ready to make an offer and negotiate at once
- Make sure your team is primed and accessible
Prepare for Competition
Expect the greatest listings to have more than one offer and act accordingly…
The value of a buyer in a market starved for inventory is particularly low.
Don’t be surprised if a new listing along the perfect creek won’t negotiate price, and don’t think that there won’t be multiple offers. You should expect the greatest listings to have more than one offer and act accordingly. Be prepared to make an offer quickly, or you will be faced with more competitive offers.
To Wait or Not to Wait?
Waiting makes ‘Trading Up’ more expensive. The long term prognosis for both interest rates and home pricing is heading up. If you are moving up, then waiting until the home you are selling appreciates some more (probably) means buying a more expensive home at a higher interest rate. Yes, your $200,000 home might go up by 5%, but so did the $500,000 home you want to buy. Do the math.
The Double Move
Be willing to move twice.
Although it is frustrating and inconvenient, spending a month in a rental is worth the sacrifice for your next 10–20 years. Refusing to move twice from the get-go will limit your options and weaken your bargaining position. Settling on a home that you don’t absolutely love for the sake of not having to move twice will not be a happy ending… You may even end up going through the entire process again. Do not dismiss the idea of moving twice. If it is going to help you in the long run, do it.
The Sale/Buy is Harder than Ever!
The implementation of the CFPB’s mandated new closing protocol occurred in 2015 and changed how closings are handled. Many of the changes created timing issues that have impacted the ability to close consecutively. The built-in protections for the buyer take away much of the flexibility to effectively execute the simultaneous buy/sell. Transactions that use highly leveraged mortgages, or closings where multiple people are trying to execute the simultaneous buy/sell, are even harder than they used to be.
Make sure you have a backup plan.
The best way to lose big in a negotiation is by not having an alternative. It gets difficult to play chicken with a lender or builder without a backup plan. And remember, these guys are pros. They play the negotiation game every single day, which means they are more practiced and better at it. You will not be able to compete without a plan B.
Be Wary of Contingent and First Right Contracts
Earlier, we mentioned the ‘Contingent Contract’ and ‘Right of First Refusal’ (ROFR). On paper, they seem pretty legitimate. But in practice, they don’t actually get you what you’re looking for. In fact, Contingent Contracts and ROFR are rarely successful.
A contingent contract essentially says to the seller, ‘I’ll buy your home when I sell mine.’ So the seller decides to take their home off the market and wait. Rarely do we recommend that a seller accepts a contingent contract — and when we do, it includes stringent restrictions and penalties if the purchaser does not hold up their end of the deal.
Taking a perfectly good home off of the market is a foolish mistake without using proper protection.
In a ROFR, the buyer still tells the seller ‘I’ll buy your home when I sell mine’ but with an added ‘you can keep the home on the market and if someone else makes an offer, then I’ll step up and buy it or step down and let the other group buy it.’ It is extremely rare that we would advise a seller to accept a ROFR.
It is difficult to make these contracts work in a market that is stout. Typically, a seller does not want to sit around and wait on a buyer. In any case, if you are absolutely set on a home and want to convince the seller to agree to a contingent contract, you will have to dish out extra money.
You may also find yourself pricing your home aggressively so as not to lose the property you want to buy. At the end of the day, that means you have to overpay for the purchase and undersell on the sale. It’s foolish.
Regardless, in both the contingent contract and the ROFR, the buyer is usually the loser… I urge you to not use this tactic.
You should always try to buy without using a contingent contract or ROFR. In today’s market, these contract structures almost always come with much greater risk than reward. Trust us, it’s not worth it.
If you can’t avoid the simultaneous sale/buy, we strongly urge that you sell first and stay open to the idea of moving twice. This will greatly increase your strength as a buyer, and the long-term reward will significantly outweigh the short-term inconvenience. If you are lucky enough to get the timing right, hats off to you — but if you can’t, don’t be discouraged. A temporary move will play in your favor.
Finally, if you are dead set on only moving once, be prepared to act quickly at a moment’s notice and have a backup plan ready in case things go south. Acknowledge that you are limiting your options and taking on additional risk in the process. Changes to closing practices have slowed the system and created disorder, while financial penalties to lenders have made them cautious.
At Bay Properties we understand the risks and hurdles that come with this type of transaction. Let one of our Realtors help navigate you through the simultaneous buy/sell.