I recently connected with past clients to refresh them on the process of buying and selling real estate.  They purchased their first home about 4 years ago, and have since welcomed their first child.  Naturally, the question of moving to a larger home is beginning to take shape.  We talked about a lot of details… from obtaining a pre-approval and considering their budget for a subsequent property, to preparing their existing home to sell.  Another element of our conversation revolved around how they could manage the process, and what the implications of each decision might be depending on whether they chose to purchase first, or sell first.

In some cases, a contract can be negotiated with a condition of sale. This means that a purchase is not firm and binding until the ‘back-up’ home is sold.  A timeline for this task to be completed is established (failing which, the offer becomes null and void), and should another acceptable offer be received on the first property purchased, the Buyer usually has 24-72 hours to either firm up on the transaction, or release the contract if they can’t commit before their current home is sold.  In a Buyer’s market, this scenario is more common, minimizing the risk for Buyers.  However, as the market heats up, and while demand is high, many Sellers are less inclined to entertain offers of this nature as they include no guarantee of a firm sale until the Buyer’s home is also sold firm.

Assuming that we can’t count on this strategy to be successful, it means that a home owner must decide whether to buy a home first, and then sell, or vice versa… to sell first, and then buy.  What is best?  There isn’t a one-size-fits-all approach for this, and every consumer’s circumstance is unique.

Purchasing First:

  • Buyer commits to the property and must have a plan to finance the home, regardless of whether the home they own sells (and closes) before the purchased home is sold and closed.
  • Buyer must be in a position to carry both mortgages (and be approved for the appropriate amount of mortgage debt to fund two properties).
  • Typical process involves refinancing the first home, drawing out equity to use as a down payment on the second home, and paying both mortgages.
  • Some Buyers choose to rent their first home or arrange an interim financing plan until the first house sells.
  • Buyer can ensure they secure a property that meets their search criteria without feeling the pressure of purchasing with a closing date looming.
  • Commonly considered when there is confidence in a quick sale and acceptance of calculated risk in the event the ‘back-up home’ does not sell within the required time.

Selling First:

  • Buyer sells their current home before securing a property to buy. Purchase Agreement ensures that sale proceeds are arranged in order to fund a subsequent purchase.
  • Provides a clear sense of equity and funds available (beyond mortgage preapproval) to budget for a new purchase.
  • In a market where sales cycles are longer and there is less confidence in selling quickly, this is a responsible method of managing the process, mitigating the risk of owning two homes at once, overextending mortgage debt, or being denied funding for another commitment.
  • A closing date is established, with the expectation that a move is required without certainty of where the homeowner will move to. This can induce a sense of urgency to secure a new home quickly if a back-up alternative is not available.

Some consumers are in a position to carry multiple properties and prefer to secure a purchase before selling their existing home, but many do not have the options or financial backing to accept the risks involved with this option. Each consumer must consider their financial well-being, the level of risk they’re willing to take on, and what the ‘back-up plan’ looks like in either scenario – whether they’re forced to fund multiple properties at once, or find a new home before successfully securing one in the event they have sold theirs and are required to move out.  Undeniably, there is stress involved in either strategy, but understanding the options available to you will help you to make informed decisions that will enable you to navigate your move smoothly and successfully.

A note about Bridge Financing. Many Buyers believe that they can easily obtain a bridge loan – money to fund a purchase indefinitely while they wait for their current property to sell and close. Unfortunately, it’s not usually this simple. The privilege of a bridge financing loan is extended only when there is a firm offer in place for both properties, and the closing dates do not match up. In this case, the bank will lend funds to close on a purchase, knowing with clarity (and a contract) that the funds will follow when the second property closes. Without these details in order, the bank will not simply extend funds to cover this gap in timing. Be sure you inquire about whether your lender will allow this privilege if needed, and what the associated costs are with this arrangement.  In some cases, a bridge financing loan will make for a much smoother transition, allowing a Buyer to close on their purchase, take a few days or weeks to update and move, and then complete the transaction on their first property.

Understanding the intricacies of financing, mortgages, preapprovals, and available loans is an important piece of the real estate process.  Ensure you speak with a professional who can guide this discussion with experience and clarity.  If you aren’t connected to someone trusted who can help, please reach out and I would be happy to refer you to someone on my team.

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