A lakefront porch, state of the art kitchen, spacious bonus room, bespoke built-in furniture—you can’t stop fantasizing about your next home. You’ve even created vision boards for each of the future rooms on Pinterest. Now all that’s left to do is to sell your current house and to buy the new one and unfortunately, that’s the hard part.
So which should you do first: do you start by selling your home to play it safe and potentially deal with moving twice? Or should you buy the house of your dreams now and risk paying two mortgages until you sell?
Both options have their pros and cons; it’s the biggest catch-22 of real estate. Lucky for you, we’ve invested time into analyzing data, reading surveys, and interviewing top real estate pros to provide you with the best ways to make each option work.
Start by understanding the market
The state of the real estate market should factor into your decision on whether you need to sell the house before you take on another one:
In a buyer’s market, don’t roll the dice…List your home first
In a buyer’s market, inventory’s high (usually in excess of 6 months), there’s downward pressure on prices, and homes are on the market longer. That means you could list your home first, assuming that it won’t necessarily sell right away, and shop for your new home in the time it sits on the market. Ideally, you would then try to align the buy-and-sell transactions to save you from moving twice.
Expect your house to go fast in a seller’s market
Conversely, in a seller’s market there’s low inventory and high buyer competition. In this case, you could sell your home quickly, but it may take you longer to find your next home if you don’t already have one in mind. And you know what that means: temporary housing in the meantime, whether it’s a lease-to-lease apartment rental or your friend’s couch.
Here’s how to tell what kind of market you’re in:
Nationally, the market is predicted to shift from a hot seller’s market to a more balanced market through 2019; the rising trend in sale prices in recent years has begun to plateau, mortgage rates are the highest they’ve been since 2011, and inventory is on the rise.
For a general overview on market insights, peruse HUD’s Comprehensive Housing Market Analysis on your nearest city. HUD conducts research on over 100 major U.S. cities, releasing a regional report every two to three years which covers the city’s housing market trends including the average home sale price and time on the market, the amount of homes for sale, and relevant economic factors such as job growth rate, population, and average household income.
While regional overviews are a helpful starting place, real estate is local (and we mean down to the block on your street local) so discuss your market’s activity with your agent and use our guide to make your own DIY housing market predictions. Your findings may impact your decision to buy or sell first, as will the below overview.
Sell your house first
Selling your home first is the most straightforward approach when you’ve got two transactions in the balance. It’s more practical financially since you’ll know exactly what your budget is for the new home with all repairs, home preparations, and fees accounted for.
However what this path lacks in financial risk, it makes up for in emotional risk. You’ll potentially have to move twice and make due with temporary accommodation for the interim which could be stressful.
- Buying with a set budget:
You know exactly how much money you have to buy with.
- Financing is simple:
Use the cash from your sale as a hefty down payment; borrow the rest the same way you did for your first mortgage.
- Reduced pressure:
Negotiate confidently for top sale price on your current home; take your time finding the right home.
- Benefiting from market shifts:
Prices could always drop if you wait too long to sell, so if the timing is right, don’t hesitate to strike while the market’s hot.
- Missing out on your dream home:
Say goodbye to the manifestation of your Pinterest goals, the dream home goes to another buyer if the timing doesn’t work out.
- Living in temporary housing:
Rent is expensive and homeowner limbo can be emotional and stressful on your family.
- Moving twice:
You’ll pay twice for movers plus the cost of storing your furniture.
- Risking the market:
Prices in the market could rise, so you comparatively pay more for your new home than you made from your old one.
How to make it work
Transition via rent back
If the market makes a contingent deal unlikely, you can opt for a “rent back”: you rent your home from the new buyer while you secure your next house. While this might sound like an odd arrangement, Mark Takacs, a top-selling agent in Atlanta, assures “it really hasn’t been that big of a deal” in his team’s experience.
“The seller who is renting it back takes good care of the place—it was their house.” Buyers can agree to this concession for a maximum term of 60 days, after that the home is considered an investment property so their loans would carry a 1.25% higher interest rate than a mortgage.
Find temporary housing
Explore the other temporary living options—renting nearby, house sitting, living with family—and consider how each would be for a month to a year’s time. Have a plan B in case the reality of the stay is not what you anticipated.
Buy your new house first
Maybe you stumble upon the perfect house before your home sells… you can’t risk letting it go to another buyer.
Buying a house first allows you to do this, albeit it’s a more complicated route financially. You’ll need to make the down payment and carry two mortgages with your income, or, potentially use a bridge loan, which requires a strong credit score and debt-to-income ratio. It’s important to note that this works best in a seller’s market where your home is likely to sell quickly if priced correctly.
- Securing the perfect home:
Almost invaluable, you now have your dream home.
- Avoiding moving twice:
Save on the cost and stress of moving and storage.
- Benefiting from market shift:
Prices in the market could rise, so you earn more on your home sale.
- Balancing two mortgages:
Just because you can qualify to do this doesn’t mean you want to.
- Taking on high-interest loans:
We’ll break these down for you in a minute.
- Feeling pressure to sell:
This can influence your negotiations for the worse.
- Risking the market:
Prices in the market could fall, meaning you comparatively paid more for your new house than you’ll make on your old one.
How to make it work
Make a contingent offer
If you can’t wait to buy the next dream house, but can’t afford to pay for it until the sale of your own home closes, you can make a contingent offer. This means you will enter contract on the new home when and if your home sells. Contingent offers give you the shot to buy and sell at the same time, but they come with caveats. First off, they won’t work in a hot market where sellers have their pick of offers to work with. Secondly, since a contingent offer is a risky deal for the seller, you can expect they’ll only dance for a price that pleases them.
Apply for a HELOC
The good side of still owning your home is you have an asset to borrow against. You can open a Home Equity Line of Credit (HELOC) to pull funds for your down payment and mortgage payments on the new home, borrowing up to 85% of your current home’s value minus the amount you owe.
You can estimate if you’ll qualify online before meeting with a lender by calculating your loan-to-value ratio (LTV). LTV is a percentage score based on the current value of your home, the outstanding balance on your mortgage, and your credit score. NerdWallet has an easy to use calculator to estimate your LTV and how much you’re eligible to borrow via HELOC.
Opt for other bridge loans
Bridge loans are another way to finance the purchase of your new home by borrowing against the equity of your current home. The loans are typically for a 12-month term so they do not follow the standard “ability to repay” rules.
In layman’s terms, your approval is based on the value and equity of your property more so than your income or credit. Bridge loans are notoriously pricey, carrying higher interest rates than standard home loans (rates vary, but expect them to be 2%-3% higher) and a laundry list of fees. They are also difficult to obtain from institutional lenders, so you’ll need to go to a private lender.
Rent your old home in the interim
If you’re skeptical about adding another loan to the pile, play landlord and bring in renters to cover your mortgage. When selecting tenants, be clear about your intentions and expectations for open houses and showings. Do you expect them to clean before or will you hire a cleaner? What dates are the appointments scheduled for? Would the tenants be open to slip out during showings?
Legally you are required to give at least 24 hours notice before you pop in or hold a viewing. There are also laws dictating the minimum notice you can give tenants to move out—usually between 30 and 60 days depending on the state.
Cash out with Airbnb
An alternative to renting your home is to list it on Airbnb. On average, Airbnb hosts earn $924 a month; with high priced outliers taken into consideration, the median earning is still $440 a month. You can block out available dates for your open houses and charge a cleaning fee to cover costs of tidying up before a showing. Regulations placing limitations on Airbnb are continuing to develop so be sure to check your local laws before listing.
Sell and buy at the same time
With expert planning and a bit of luck, you can have your cake and eat it, too. To better your chances, use the same agent to sell your home and buy a new one. This makes the process more efficient (e.g. communicating with one agent instead of two) especially when it comes to coordinating dates (e.g. pulling off a contingent sale). You may even be able to negotiate a discount on commission.
Work with a top agent
Find the best agent for the job: discover their rank in your market and investigate their track record of buying and selling homes. You want to select someone with strong experience as a buyers and sellers agent as some specialize in one over the other.
Get backed by the right lender
Takacs recommends working with a local lender for your loans—they’re smaller operations which understand the local market and have a more personal interest in your loan closing on time than the big banks.
“It’s OK to shop fees and rates to some degree, but I wouldn’t make that my primary decision point…It’s more about closing on time, the back office not screwing things up, the underwriter being local.”
Your agent can point you to a trusted lender they have experience working with. If you’re still curious about the bigger backers, U.S. News provides a detailed guide of the best mortgage lenders.
Choose the path that best fits your needs
As you can see, there’s no definitive “best” order to buying and selling. It all depends on your personal and financial circumstances. Whichever path you take, make it work with a set course of action and a backup plan in case the timeline runs longer than anticipated.