Thursday, January 22, 2009
Buying vs. Selling..What should I do 1st........
In a buyers market like we have in Chicago, clients who are looking to sell their current home and purchase another have a tough choice to make. Should they sell their current home, or purchase their next home first? There is no one-size-fits-all answer, but here are a couple of scenarios to consider:
A. Sell Home 1, Then Buy Home 2: In this market, you have a lot of control over the purchase of your home. If you sell Home 1 you will know exactly what you have to work with financially as you approach the purchase of Home 2. You will also get a better price on both homes. That is because you will not be under any pressure to sell Home 1, therefore you will not be tempted to jump at a low offer. You will get a better price on Home 2 because you will be working with a definite timetable, and will not need to make your offer contingent on the sale of your home. A seller who has to deal with a sale-of-home contingency will, almost by definition, expect more money for the sale of their home. Sellers look for two things when they are selling their home: top dollar and security in the sale. Which would you rather give them?
B. Buy Home 2, Then Sell Home 1: This option is often the most comfortable one for people who want to move up. There is something that is difficult about selling the home you live in when you don't know where you are going to go. Finding your new home first gives you the motivation to sell your current home. The whole process falls together better in your mind when you go out and purchase a home first. The risk of this option is that you will lose out on Home 2 because you are not able to sell Home 1. This is a significant risk in a market where there is a 7-month supply of homes on the market. Also, as I noted above, you will have to give the seller more money if you use a sale-of-home contingency, and you will feel significant pressure to sell Home 1 as quickly as possible, putting you in a position to take less money for it. This pressure will come from the knowledge that you could lose Home 2 at any time because of the "kick out" clause in the contingency. This allows the seller to kick you out of the sale if a non-contingent offer comes along and you are not able to remove the contingency because your Home 1 has not yet sold. This possibility is heavy on people's mind after they spend significant time, money, and mental energy to work out the purchase of Home 2 (ie. negoitiations, home inspection, and planning for the future in Home 2).
C. Buying Home 1 First Without a Sale-of-Home Contingency: This is only an option for people who can afford to carry mortgages on both homes. For a seller to accept a contract under these circumstances, they will require proof that you are able to carry both mortgages. In a sellers market, a move-up buyer could prove their ability to do this--sometimes only with a high-interest loan they could qualify for, but would not actually want to take. This strategy worked for people in a sellers market because they would turn around and sell Home 1 the following weekend, then be able to qualify for a more favorable loan on Home 2. The worst case scenario of not selling Home 1 was extremely unlikely. In the current buyer's market, someone using this strategy is very likely to end up with an unfavorable loan or at best paying two mortgages for a while. Of course, those who have the financial means to carry two loans, and to qualify for two loans that are of a reasonable interest rate may choose to buy first and hold onto both home as long as they need to.
Another option is to get a bridge loan to hold both houses until you can sell House 1. If finances are tight for you this will put a lot of stress on you, and may put you in a desperate position when you are negotiating with a person wanting to buy your home.
For most people, I recommend getting Home 1 sold before you put a contract on Home 2. You should go out and see what is available for you to purchase before you put your home on the market. This will give you an idea of the types of homes available to you. It will also give you the motivation you need to get your current home sold.