It’s not uncommon to find yourself in a situation where you’re playing the role of homebuyer and home seller at the same time. According to the National Association of Realtors, 71% of repeat home buyers owned their previous residences.
Unfortunately, it’s not quite as common to time your sale and purchase so perfectly that you magically have the equity for your new downpayment just as you find your dream home. When there’s overlap in homeownership, there are a few processes you should be aware of to navigate the process smoothly.
Funding Struggles When Buying and Selling Simultaneously
One of the biggest obstacles that simultaneous buyers and sellers must overcome is finding the ability to fund their down payment while their equity is still in their previous home. First, you have to decide if owning two properties is financially feasible for you. Do you have enough assets for a second down payment? Can you afford two mortgage payments? For how long?
If you answered “no” to any of those questions, then you need to prioritize selling your old property before you buy your new one. If you found your dream home and just have to make an offer, you could also consider refinancing, getting a bridge loan, or making a contingent offer.
Cash-Out Refinance
You gain equity in your home as your mortgage matures because you’re actively paying off part of your home’s value each month. A cash-out refinance leverages that accrued equity and allows you to take out a larger mortgage on your home and pocket the difference.
For example, let’s say the mortgage on your current home is $300,000 and you’ve paid off $100,000. You need an additional $30,000 for the downpayment on your new home. With a cash-out refinance, you take a portion of your equity out and add it to the new mortgage principal. In this case, you need $30,000, so you refinance your mortgage for $330,000 and pocket $30,000 in cash.
Bridge Loan
A bridge loan is a short-term loan that taps into your current home’s equity to help you fund the down payment for your new home. A bridge loan typically has terms for six months to a year, so you would make a balloon payment to pay it off as soon as you sell your existing home.
While bridge loans are designed for this exact buyer/seller duality scenario, they do have some downsides. Lenders see bridge loans as a riskier investment, so they typically have higher interest rates.
Make a Contingent Offer
Making a contingent offer is a much less risky way to navigate buying a new home before selling your old one. In this scenario, a contingent offer includes a condition that says you’ll only buy if your current home sells. It also ensures your earnest money is returned if your current home doesn’t sell.
While making a contingent offer mitigates your financial risk, it drastically weakens your offer in the seller’s eyes. If the seller has multiple offers to choose from, they will almost never choose an offer with a contingency on the sale of a current home.
If You Decide to Sell First
As you can see, buying first comes with a myriad of financial challenges. The smartest thing you can do as a homeowner is to try and sell your current home first to secure the funds for your new one. If you go this route, you really only have two considerations: planning for the gap period and finding a tactical real estate agent.
The Gap Period
Obviously, if you sell your home before you buy, you’ll need to figure out a place to stay and store your things while you house hunt and during the closing process before you can move into your new home.
One option is to arrange a post-closing occupancy agreement with the buyer of your current home. This would mean that you could continue to occupy the home after closing until you move. These arrangements typically involve some kind of compensation for the buyer, whether that’s paying rent while you occupy the house or reducing the sale price.
Another option to fill the gap period is finding a rental property in the interim. Try your best to find a property on a month-to-month basis, otherwise, you’ll have to pay to break the lease.
Your best-case scenario is finding a listing agent who specializes in property presentation to secure a quick sale and a buyer’s agent who can help you find a new property and minimize the gap period as much as possible.
Finding a Competent Realtor
According to a Home.com survey, 40% of Americans say that buying a home is the most stressful event in modern life. That gets even more stressful when you’re trying to sell your home at the same time. Regardless of which step comes first in the process, your real estate agent plays a pivotal role in helping you navigate it.
If you’re selling your home in Western Colorado, I’d love to be that broker for you. Our goal at United Country Real Estate Western Land & Lifestyle Properties is to always help our clients sell their property as quickly as possible and for the highest price. So while you’re looking at properties for sale, you can trust that your property is being marketed with a proven strategy to sell. You can always reach me at rob@coloradocountrybroker.com or 970-986-2955 to learn more about the selling process.
