To Buy
or Sell First: The Real Estate Catch 22
How to Avoid Getting
Stuck with Two Homes
Every month, thousands
of homeowners are faced with the stressful dilemma of
whether to buy first or sell first. You see, if you buy
before selling, you could run the risk of owning two
homes. Or, just as bad, if you sell first, you could end
up homeless. It's what insiders in the industry call the
Real Estate Catch 22, and it's an extremely anxious
position to find yourself in.
This financial and emotional tightrope is one you
usually have to walk alone because most agents have no
way of helping you with this predicament. But one local
real estate agent has created a unique Guaranteed Sale
Program which solves this dilemma. This program
guarantees the sale of your present home before you take
possession of your new one. If your home doesn't sell in
120 days, they will buy it from you themselves for the
previously agreed price ensuring that you never get
caught in the Real Estate Catch 22.
Buy First or Sell First?
If you already own a home, both strategies have their
pluses and minuses.
Financially, move-up home buyers have a much easier time
than first-timers, who are trying to scrape up enough
cash to cover a 5% down payment and closing costs. But
trade-up buyers face a whole new complication: Buy first
or sell first?
Buy first:
This strategy makes the most sense if you're in a hot
market where you're likely to encounter a bidding war
over prime real estate.
The main risk here is that you could get stuck making
payments on two houses if your old home doesn't sell
fast enough. Plus, you will have to come up with the
cash for a down payment.
Many people use their home-equity line of credit as a
"bridge" or "swing" loan to supply the new down payment.
But you need a robust income to qualify for payments on
three mortgages: the old mortgage, the bridge loan and
the new home mortgage.
The lender will probably turn you down for the new
mortgage if the payments on all three (plus any other
outstanding debt) total more than 36% of your gross
income. The burden of three mortgages could force you to
jump at a low-ball offer -- and you can expect such
offers once buyers tour your empty house and realize
you're under the gun to sell.
Renting out the old home is another option, and maybe a
better financial move if the rent checks more than cover
the mortgage and the expense of upkeep. Tax deductions
could even put you ahead of the game.
If you end up renting out your old house, most lenders
will consider up to 75% of rent payments as income, as
long as you have a signed lease.
Keep the rental temporary, though, and keep trying to
sell the house if the sale will produce a profit. You'll
need to sell within three years of the time you move out
in order to claim that profit tax-free.
Sell first:
Why not just make your offer to buy a new home
contingent on selling your old one? Because in a strong
market, sellers won't even consider such a deal. It ties
them up with an offer that is by no means a sure thing.
Real estate agents prefer that you sell first and put
off serious shopping until after you've accepted an
offer on your current home. That's safer for them:
There's more risk that an offer encumbered by a
home-sale contingency will fall through -- and take the
agent's paycheck with it.
Trouble is, if you've already agreed to vacate your home
in 60 days, you could feel tremendous pressure to settle
for a house that falls short of your ideal. And if the
sellers of the house you want know you need to find a
home quickly, it can be all that much harder to
negotiate a good price.
If you sell first, you can take some of the heat off by
negotiating better terms for your home sale.
Aim for a longer period until closing -- say, 90 days
instead of 60 -- or ask the buyers if they would
consider a short-term rent-back to you for another month
or two after closing. (If it's a seller's market, they
may agree to your terms.) Offer a security deposit --
say, a couple of thousand dollars -- and a daily rent
that covers their new mortgage costs. Both parties
should check with their homeowners insurance company to
make sure their homes and possessions are covered during
a temporary rent-back.
Article courtesy of http://www.kiplinger.com/basics/archives/2003/03/buying1b.html |
