When You Have To Sell A Property Before You Buy Your Next Property

Moving from one home to another brings a plethora of moving parts, but even more so when you have a house to sell.  We’ve compiled a list to help you navigate and also consider alternative routes to accomplish your move as pain free as possible.

The Contingency Sale and Possible Back to Back Closing

Many home buyers don’t have the resources, income or just don't want to commit to completing the purchase on a new home while still maintaining and carrying the mortgage on the existing property while it is on the market. One option is to submit an offer that is contingent on the buyer closing on the primary property closing first. It is possible to close both properties on the same day! While this scenario does happen, there are some items to consider. 

• Sellers are not typically eager to accept contingency contracts, especially if the buyer’s property isn’t already under contract and worst yet if it isn’t listed yet. 
• The buyer’s offer on the seller’s property will need to be fairly enticing for the seller to agree to lock themselves to the buyer while they wait to find their own buyer.
• Offers with selling contingencies typically include a kick-out clause that will allow the seller to accept another contract by giving the buyer a very short period (a few days) to remove the contingency and complete the purchase or get kicked out of the contract allowing the seller to go with the other buyer.
• The buyer’s listing agreement and their purchase and sale contract on the property they are selling will become part of the buyer’s contract for their new purchase and may need to be shared with seller.
• Sellers that have been on the market awhile are typically more open to accepting a contract with contingency, while sellers that are new to the market will require a very attractive offer to get them to accept the contingency.
• The Contingency contract is easier to pull off if the buyer’s current property is already under contract and getting ready to close.  However, this typically doesn’t leave the buyer with much time to find and close on the new property.  This can lead to hasty decisions on buying the next property. See Post Closing Occupancy as possible relief in this situation.
• The buyer for your existing home can hit a snag with the their purchase.  Maybe it’s something with the appraisal or their finances.  These type of problems can have a domino effect on both transactions. 

Seller Post Occupancy

We have seen more sellers requesting post occupancy in recent years.  Post occupancy allows sellers to stay in their current property for a limited time AFTER closing. This allows the sellers to receive their equity, find their next home and move at a more leisurely pace.

• Post occupancy can be just a few days or a few months.  The additional time in the home can be offered for free or the buyers may want the seller to cover their prorated mortgage payment during the extra time in the home. Everything is negotiable.
• Sellers should expect some of their proceeds to be ‘held back’ similar to a security deposit to cover any damage that may occur as the seller moves out of the property. 
• At the end of the day, there is a little alignment of the stars to implement this plan and sellers should still have a back-up plan.

Third Party Funding

If the biggest problem is getting equity ‘out’ of the current home to complete the purchase of the second home, but there are other financial freedoms available.  There are other ways to get to the finish line. 

• Home Equity Loan. If your current home is not already listed, you may be able to take a home equity loan out on your current home so you have the equity to purchase the next home without having to pay top dollar with a contingency contract. Lenders don’t like to lend on properties that are listed for sale, so it will be important to do this quickly.  The total of all mortgages should not exceed 80% of the value of the property.
• Bridge Loan.  Lenders can offer a bridge loan to lend you the equity from property A to purchase property B.  The loan terms are typically manageable during the bridge and settle into a normal payment after you have closed on the property you are selling.  Talk to your lender about fees associated with this option.
• Portfolio Loan.  Buyers with healthy portfolios with brokerage houses (Ed Jones, Charles Schwab, etc…) can often take a loan against their portfolio without incurring capital gains since they this play doesn’t require them to sell any stocks.
• Private Lender.  Hard money loans can be obtained in real estate.  These loans can typically occur faster than 

Back-up Plans

Buyers that have the means to create a back-up plan to complete their new home purchase will be better prepared to solve last minute problems that can (and have) come up with these transactions that have more moving parts than a more simpler transaction.

Mortgage Recasting

Maybe the real reason you want to sell before you purchase the next property is just to keep your payment low on the new property once your equity is applied.  If this is the only reason you want to sell before you buy, you may want to look at doing a mortgage recasting after both closings. Recasting a mortgage allows you to apply a large sum to your mortgage and have your mortgage recasted with the same terms and a lower payment.