Buy First or Sell First?Kiplinger.com
Financially, move-up home buyers have a much easier time than first-timers, who are trying to scrape up enough cash to cover a 5% down payment and closing costs. But trade-up buyers face a whole new complication: Buy first or sell first?Buy first:
This strategy makes the most sense if you're in a hot market where you're likely to encounter a bidding war over prime real estate.
The main risk here is that you could get stuck making payments on two houses if your old home doesn't sell fast enough. Plus, you will have to come up with the cash for a down payment.
Many people use their home-equity line of credit as a "bridge" or "swing" loan to supply the new down payment. But you need a robust income to qualify for payments on three mortgages: the old mortgage, the bridge loan and the new home mortgage.
The lender will probably turn you down for the new mortgage if the payments on all three (plus any other outstanding debt) total more than 36% of your gross income. The burden of three mortgages could force you to jump at a low-ball offer -- and you can expect such offers once buyers tour your empty house and realize you're under the gun to sell.
Renting out the old home is another option, and maybe a better financial move if the rent checks more than cover the mortgage and the expense of upkeep. Tax deductions could even put you ahead of the game.
If you end up renting out your old house, most lenders will consider up to 75% of rent payments as income, as long as you have a signed lease.
Keep the rental temporary, though, and keep trying to sell the house if the sale will produce a profit. You'll need to sell within three years of the time you move out in order to claim that profit tax-free.Sell first:
Why not just make your offer to buy a new home contingent on selling your old one? Because in a strong market, sellers won't even consider such a deal. It ties them up with an offer that is by no means a sure thing.
Real estate agents prefer that you sell first and put off serious shopping until after you've accepted an offer on your current home. That's safer for them: There's more risk that an offer encumbered by a home-sale contingency will fall through -- and take the agent's paycheck with it.
Trouble is, if you've already agreed to vacate your home in 60 days, you could feel tremendous pressure to settle for a house that falls short of your ideal. And if the sellers of the house you want know you need to find a home quickly, it can be all that much harder to negotiate a good price.
If you sell first, you can take some of the heat off by negotiating better terms for your home sale.
Aim for a longer period until closing -- say, 90 days instead of 60 -- or ask the buyers if they would consider a short-term rent-back to you for another month or two after closing. (If it's a seller's market, they may agree to your terms.) Offer a security deposit -- say, a couple of thousand dollars -- and a daily rent that covers their new mortgage costs. Both parties should check with their homeowners insurance company to make sure their homes and possessions are covered during a temporary rent-back.