Should you buy first or sell first?
Most home sellers are concurrently looking for a new place to live. Before you put your home on the market, the big question to answer is “should you buy first or sell first?” Each route has its own advantages, depending on your situation. If you have plans to sell your home soon, consult a mortgage loan officer to see if you should buy your new home first or sell your current home first.
In today’s tight market, competitive home buyers are vying over fewer listings, so some home sellers are choosing to buy first before their desired property is no longer available. The advantage of buying first means you will have a place to live until you find your new home, but you’re also running the risk of paying for two homes for an undetermined amount of time. Buying a new home before selling your current home makes sense if you are financially solvent enough to carry two mortgages and if you also have to have the assets saved to cover the new down payment and closing costs.
When you buy your new home first, you have a few options:
- Make your offer contingent on the sale and settlement of your current home. This contingency can make your offer less competitive, but it also protects you from having to pay two mortgages at once.
- Use savings and assets or refinance with a HELOC or cash-out refinance. If you are in the position to carry two mortgage loans and also pay for the down payment and closing costs, buying before selling could be your best option. You can also use the equity from your current home when you refinance with a HELOC or cash-out refinance. Be aware that when you refinance you are originating a new loan and that will include closing costs. Consider whether or not you can afford the closing costs on your refinance and your new home purchase before choosing this option.
- Rent out your current home when you move into your new home. Renting your current home is another way to cover the cost of your existing mortgage, but you will still need to have the assets to cover the down payment and closing costs. When a homeowner chooses to rent their home, they can either act as the landlord themselves or hire a property management company. Being the landlord saves the cost of paying a property manager but requires you to respond to the needs of the tenant and works best when the rental property is nearby. Using a property management company will add to the cost of maintaining the home but gives the tenant someone else to call for any maintenance needs. This is a good option if you are moving farther away or out of state.
Choosing to sell first means you will have the profits from your home sale to put toward the down payment and closing costs on your new home. Most home sellers will choose to sell first because it is the more affordable option. When you sell your home first you will need to find another place to live in the interim. You can either move into a short-term rental or even sign a “rent back” agreement with the new owner.
When you sell your current home first, some of your options are:
- Make your offer include a settlement contingency. Start searching for your next home as soon as you’ve listed your current home. Then make your offer contingent on your current home settling by a specific date. This way, if you do not sell your home in time you will not have to proceed with the deal. However, contingencies like this will make your offer less competitive.
- Sign a rent-back agreement with the buyers of your home. If the buyers of your home are not ready to move in right away because they are still in the process of selling their current home or finishing out a lease, you may have the option to sign a rent-back agreement. In this situation, you will be able to keep living in your home for an agreed-upon period of time, giving you a chance to make an offer on a new home. This option could reduce offers on your home, especially from buyers who will need to move in right away.
- Move into a rental home or apartment. If you are unable to stay in your current home and rent, you can find another rental property. Leases can range anywhere from six-month to one-year leases to month-to-month leases depending on the property management company or landlord. Finding a short-term rental will give you more time to search for a new home and negotiate an offer.
Whether you choose to buy first or sell first, the first step before listing your home is to meet with a mortgage loan officer. Discussing your goals and getting prequalified for your next mortgage will help you decide which route to take. A mortgage loan officer will help you evaluate your complete financial picture and set an achievable goal.
Sources: Redfin, Two Cents, Zillow