You have decided to begin looking for a new home and are faced with the decision of when you should put your existing home on the market. Controversy and debate always surround this question! At first glance, people who are faced with this question think that they should first locate their future home and put it securely under contract. There is rationale for this choice, although it is often the least prudent option of the two choices that are available. On the plus side, by first locating the new home, you will:
- Know how much equity you will need to take out of your existing house in order to afford the new one
- Know when you will need to finalize the sale of your existing house in order to move into the new house
- Know that you will have a place to live when you move out of your existing house.
Although the logic behind these reasons is sound, most people who are experienced in "moving up" to another home will argue that it makes more financial sense to list your home first, and then begin the house hunting process.
The following scenario will help to demonstrate the serious consequences that can occur when you commit to buying a property without either having a financial resources you can fall back on or first having initiated the sale of your present home.
Case Study
Using logic similar to that listed above, the Smiths decide to first select their new home and then, once they know what it will cost, put their existing home on the market. They fall in love with a home that meets all of their needs and they make an offer. The offer is accepted, but they are not allowed to make the offer contingent upon the sale of their first house (most sellers will not allow these contingencies). They push the closing date out as far as the seller will allow them, which they believe will give them ample time to sell their home. They have three months to find a buyer and close on the sale of their existing home.
They scurry to complete the upgrades that had long been planned for their existing home, managing to put the home on the market the following weekend. They price it where they have seen other similar homes sell, and where they can reasonably expect to attract some interest. And they wait.
The first week there are a good number of showings, but then the activity drops off. The market seems to have softened a little, and the Smiths begin to think they should lower their price. This is a bit of a concern, since they were counting on selling very near the current sales price and rolling the proceeds into the purchase of the new property.
Three more weeks pass. There have been intermittent showings and a few people have come back to see the house again. Even though the real estate sales agent feels the market is soft for the moment he or she is doing everything possible to market the house so it will sell quickly. One offer comes in, but this buyer has a home they have to sell in order to close. The Smiths can't risk accepting this offer since it would mean taking their home off the market while they wait for the buyer to sell in a slow market. The sales agent knows they are feeling the time pressure, and suggests another price reduction. Now the Smiths are concerned that if an offer comes in much below this new price they might be hard pressed to come up with the down payment on the new house.
The Smiths are facing a closing on their new home within six weeks, and they still don't have a buyer for their existing home. They begin to look into securing a bridge loan, which would allow them to purchase their new home while carrying the mortgage on the existing home.
They learn that bridge loans come with some strings attached:
- Lenders who offer bridge loans are difficult to find. Very few financial institutions pursue this line of lending because it is short term and high risk.
- To qualify for a bridge loan, the Smiths must show enough income and net worth to carry both the existing home and the new property. In other words, the lender views the bridge loan as two complete mortgages, which is exactly what it is. Even if approved, the Smiths are deeply concerned about their ability to pay two mortgages at once.
- The rates on the bridge loan are not competitive, which threatens to further strain the financial picture of the Smiths.
This story only has three possible conclusions.
First, the Smiths get very lucky and accept an offer on their home that goes straight to closing without any problems. Unfortunately, they may have to sell for considerably less than expected since the word had gotten out that they are desperate to sell. Second, the Smiths find a bridge loan that they can live with and end up buying the second home and carrying the first home for another couple of months. Third, the Smiths do not find a buyer and they fail to secure a bridge loan. The seller of the home they put under contract can now sue them for defaulting on the loan.
The lesson to be learned: be cautious and thoughtful in making this very important decision about when you put your home on the market. You must assess your financial picture honestly, as well as your ability to handle the stress that will accompany any decision you make. Be aware of the downside of buying before placing your own home on the market, because the worst-case scenario can be extremely costly and difficult to bear.
