STRATEGY SESSION: I need to buy and sell at the same time. It sounds like a nightmare. How do I make it happen without dying from stress?
One of the most common problems we help our clients solve is the “Sell/Buy” dilemma. They own a house, and want to buy another one. For most of our clients, this is driven by two scenarios. They either need to move up to a larger house because their family has grown, or they are downsizing and moving to a smaller home.
There is no perfect answer here for everyone, but this month we are going to discuss the strategy we think is the most advantageous from a financial perspective, which we call “Sell first, buy later.” Not surprisingly by this, we mean put the home on the market, get it into contract, and then put your offer in on the replacement property.
The advantages to this are numerous.
1.You’ll get maximum value from your house on your terms. You can sell your home on your timeframe, and negotiate the best price without having to worry about timing on the other end of the transaction.
2. You’ll know exactly how much cash you are working with to purchase the replacement property. This is especially critical for move up buyers, who often need the equity from their home sale to make the down payment on the new purchase. Assuming a 20% down payment, every $10,000 of cash used for a down payment translates into $50,000, with mortgage, that can be spent on the new home. So an extra $20,000 for your home can give you the ability to spend an additional $100,000 on the replacement property, assuming you wish to do so and can qualify for the mortgage.
3. The offer you make on the new property will be stronger, and you will get better value. If you put the offer in after the contingency period is lifted by the buyers of your home, you’ll have the option of writing the offer on your new home without a contingency on sale of your existing property. This makes your offer cleaner, less risky, and consequently means the Seller should, in theory, be willing to take less money. Not all sellers will take a contingent on sale offer- and those that do typically want an offer that is at or close to asking price.
Inherent in this approach is some risk. The biggest one is that you, the Seller, can’t find the perfect home to move into once you’ve gotten your home into contract. And the worst case scenario here would be that you can’t find a home you like enough to buy, and end up moving twice, usually into some kind of temporary housing. This can be mitigated in two ways.
First, when the offer is being negotiated, we can negotiate a longer close of escrow, say 45 or 60 days, to give you more time. We can also negotiate a rentback, so that you pay the buyer’s principal, interest, tax and insurance cost for one month to stay in the house an additional 30 days. Combine a 60 day close with a 30 day rentback and suddenly, you’ve got 90 days to find and negotiate for a replacement property. Even in Marin County, this is a lot of time.
The second way is to make the sale of your home contingent on you finding a replacement property. This makes your home sale slightly less attractive, as now the buyers of your home are not certain they will be able to buy your home, so it may cost you a little on the buy end. But if you have already identified a replacement property, this can be a very short contingency period, say seven days, to let you get into contract on the new property.
Is it possible to buy the replacement property, and then sell? Yes, it is, and we’ll discuss that approach in a future post.
Questions about listing your home in Southern or Central Marin County? Call Bob at 415-945-2482.