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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.
By first locating the new home, you will:
1. Know how much equity you will need to take out of your existing house in order to afford the new one.
2. Know when you will need to finalize the sale of your existing house in order to move into the new house.
3. Know that you will have a place to live when you move out of your existing house.
Although the logic behind these reasons are 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 a party commits to buying a property without first having initiated the sale of their present home.
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 discover and 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 begin to 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 very few repeat showings. The real estate sales agent is running ads, passing out brochures, and has held an Open House. 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 of the market while they wait for the buyer to come through. They have to turn the offer down. 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:
1. 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.
2. 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 this 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.
3. 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, which goes straight to closing without any problems. Unfortunately, they receive considerably less than expected since the word had gotten out that they were desperate to sell.
Second, the Smiths find a bridge loan that they can live with - barely - and end up buying the second home and carrying the first home for another couple of months. The financial strain is extreme, as is the strain on their marriage.
Suddenly, everyone wants to know whose idea it was to buy the new house without at least putting the existing house on the market.
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 sues them for defaulting on the loan. After this experience, the Smiths decide that they will live in their original home forever and invest whatever money they have left to just make it look nicer.
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.