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On
the other hand, what happens if you buy before selling your current
home? Buying first allows
you to know exactly what the cost will be, where you're moving and
when, and if you need to take along your refrigerator or not, etc.
However, as great as it sounds, buying first may be a real
gamble.
No
Price Guarantee
Buying first can be risky
because once you sign a contract with a seller, you are locked into
paying a certain price no matter what you end up selling your home
for. Since there are
no guarantees, what you think you can sell your home for may not
actually be what a buyer is willing to pay for it.
If your home sells for less than you anticipate, do you have
the additional cash (often thousands of dollars) you'll need to
close the sale on the new house?
Real estate markets are
notoriously fickle. If
you buy in an up market, you may be unpleasantly surprised to find
that in the time it takes to prepare your home for sale, the market
has taken a downward turn.
This may mean that it will take longer for your home to sell,
and you may have to accept a lower price just to get it sold.
It's unlikely that the sellers of the home you're buying
will take less just because you miscalculated your net.
Can
You Afford to Buy First?
Another consideration
is, what happens if your existing house doesn't sell before you close escrow on the new house.
If your down payment is coming from the equity in your present
home, you might have to borrow in order to close escrow on the new
house. You could end
up with two or three housing payments, making it extremely difficult
to qualify for the loan on the new home.
One solution to this problem
is to make the purchase of the new house "subject to"
the sale of your present home.
This is called a contingent sale.
In your contract to purchase the new house, have your agent
include a clause making the contract subject to the sale of your
present home. However,
be aware that sellers may be less inclined to accept a contingent
offer. If you can afford
it, another option is to ask the sellers to consider carrying back
a second mortgage. This
allows you to use their equity until your home sells.
A
Conservative Approach
In his book, Sonny
Bloch's Inside Real Estate, author Sonny Bloch advocates taking
the most conservative approach to buying and selling at the same
time. He says, "Sell
your house first, but have a clause in your contract that does not
give possession of the house to your buyer for as long as it takes
YOU to find your next house."
This "seller rent-back" would require you to pay
the buyers a prorated, per diem cost.
However, it eliminates your risk by allowing you to continue
to live in the property for an agreed-upon time frame after it's
sold. You'll know exactly
how much cash you'll have available for your new purchase, giving
you greater negotiating power and you won't be stuck with an extra
mortgage payment.
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