The Buy-Sell Dilemma
Should I buy first or sell first? This is a common question
most sellers ask.
Wondering how to make the jump from one house to the
next without owning two simultaneously--or, perhaps worse yet, owning none at
all? You're not alone. Most moving-up and trading-down homeowners struggle
with the dilemma of whether to buy first, then sell, or sell first, then buy.
Some homeowners are financially secure enough to avoid the problem by buying
a new house and selling the old one at their leisure; others are mobile
enough to sell first, move to temporary quarters and buy later. And some
lucky folks are able to negotiate buying and selling escrows that close
simultaneously.
Most people either make offers to buy first, then hope for a quick sale of
their existing houses, or put their houses on the market, then find new housing
before escrow closes.
The primary advantage of buying first is the ability to shop for the new
house and feel completely secure in that decision before putting the current
house on the market.
Buying first is a harrowing experience, the harrowing part is the possibility
that the current house might be on the market for a longer time than expected or
need to be sold at a below-market price.
One way to avoid that risk is to make the purchase escrow contingent on the
sale of the current house. However, it's rare that a seller will
accept such an offer unless the market is weak, the house is a tough sell, the
buyer offers an especially attractive price and favorable terms, the buyer's own
house is already in escrow, or the seller simply is in no hurry to move.
Some sellers will consider this if there is an escape clause that gives the
seller the right to continue marketing the house and requires the buyer either
to walk away from the transaction or to waive the contingency if the seller
receives another acceptable offer.
The seller will say: I will take your offer, but I am going to leave my house on
the market. In the event that I receive another offer that is acceptable, I will
give you, for example, 48 hours to remove the contingency, at
which time you will have to either buy the home before your home is sold or lose
the home to the next buyer and start looking again.
This 'two houses are better than none' scenario can prove costly
because you must make two mortgage payments. Renting the for-sale
house to a tenant can offset some of the cost, but finding a buyer for a
tenant-occupied home presents other difficulties.
Buying first can prove costly in other ways as well. By buying first and
selling second, you are putting yourself in the position of paying more for the
up-leg property and probably selling for less on the down-leg because you are
under the gun to sell before someone else bids on the house you want to buy.
On the flip side, the primary advantage of selling first is a negotiating
position of maximum strength on the sales transaction because there's no
pressure to sell quickly. Selling first also eliminates the burden of carrying
two mortgages simultaneously.
The downside is the strong likelihood of at least a short-term visit to "limbo
land". Many times, people list their home for sale, then start
looking at a home to buy. They don't find anything because the home they are
looking for is special, unique or tough to find. Then they decide to rent for a
while. That requires a double move, which is not possible for some people.
The obvious way to avoid the temporary housing scene is to make the sale of
the current house contingent on finding a replacement home to purchase.
People buy homes that are sold contingent on the seller's buying another house.
The only problem is that it puts the buyers in limbo because they don't
know whether the person they purchased the home from is ever going to find a
house to buy.
This strategy is most likely to succeed if the market is quite strong, the
seller's house is truly a rare find, the price and terms are highly favorable
for the buyer or the buyer is in no hurry.
Selling subject to finding another house puts the seller in a good position
because the burden of uncertainty falls on the buyer.
Many people manage to avoid limbo by leasing back the sold house for a
short period after escrow closes. Sellers shouldn't count on an extended or
open-ended lease-back period, however, because if the buyer intends to occupy
the house as a principal residence, the lender probably won't allow a lease-back
of more than 30 days, and the buyer won't like the possibility of having
to evict the sellers if they can't find a new house.
The seller's odds of a lease-back are better if his or her next house is already
in escrow.
Sometimes the seller will decide to rent a residence, live with a roommate,
occupying corporate housing, move in with family or friends, or camp in a hotel
room until a suitable house is purchased. These short-term living
arrangements could be uncomfortable, inconvenient and expensive.
It's not uncommon for personal circumstances to dictate how homeowners
resolve the buy-sell dilemma.
Beyond personal circumstances and all else being equal, a final consideration
for homeowners should be the state of the local housing markets.
A low inventory of homes for sale and demand among buyers tilts the
balance toward making a purchase offer first, then putting the house on the
market.
Conversely, a large inventory of houses on the market and a scarcity of
buyers points toward putting the house on the market, then shopping for a
replacement. The expected direction of mortgage interest rates may factor into
this complex equation as well.
The other issue worth considering is whether houses are appreciating
or declining in market value. If prices are headed up, buying first
makes sense. If prices are headed down, selling first is smart. In a
mixed-signals or transitional market, the best strategy is far less obvious.
Whether to accept a contingent offer, whether to buy first, then trust me to get
your home sold, or whether to sell first and trust that the market isn't going
to get away from you because prices are rising--all that comes back to what's
happening in the market and what works best for you!
