All homeowners planning to move face a chicken-or-egg dilemma: Should they sell their current home first and then buy another, or buy a new home first and then sell? The answer depends on many factors, including the local market conditions both where you are selling and where you are buying, your financing options, and your feelings about potentially moving twice if you sell your home before your next residence is available.
Market Conditions
Before you assume that your real estate market is a buyer’s market or a seller’s market, you need to be very specific about what parts of the market you’re looking at: your particular neighborhood, the style of home you own, and the price range for your property. Since you’re also not just selling but also buying, you also need to assess the availability of homes that meet your criteria.
You’ll need to work with a knowledgeable, professional REALTOR® who can talk to you about how quickly homes similar to yours are selling and for how much. Three bedroom ranch homes may be selling like hotcakes in your neighborhood but four bedrooms Victorians might be languishing.
On the buying side, you should do some preview shopping to get an idea of what you want and how easy it is to find, as well as how long that type of home stays on the market. If the kind of home you’re looking for doesn’t stay on the market long, you may want to consider buying a home before you sell, so that you’re sure to have a place you want.
Financial Options
In an ideal world, everyone would have the funds to pay cash for their next home, but the reality is that most people need the equity from the sale of their current home to make the down payment on the next house. One option is to sell your home and then negotiate to rent it back from your buyers, but remember that you’ll need to pay them for the rental. Also, lenders will limit the rent-back term to a maximum of 60 days because a rental lasting longer than that would be considered an investment property.
Alternatively, you can temporarily live with friends or family or in a short-term rental while you’re between homes. In that case, you might need to pay for a storage facility for your possessions.
You may also be able to borrow money for a down payment from relatives that you can repay after your home sells.
Some lenders also offer bridge loans for transitioning homeowners as long as they have excellent credit and sufficient equity in their current home. A lender can help you evaluate your options.
A serious drawback to selling your home first is that you may be unable to find a home to buy, or you may feel rushed into taking a place that doesn’t meet your expectations. Buyers should remember the 80% rule: if you like 80% of a home, do not like 10%, and can live with the other 10%, then you should probably buy that home.
Risk Aversion and Plan B
You’ll have to ask yourself what scares you most: selling first and having nowhere to live or buying first and being stuck with two mortgage payments. The answer depends on your finances and your local market, but in either case you should have a back-up plan to deal with the worst case scenario – either another source of income for those mortgage payments or an identified place to live for a few weeks or months while you shop for a home.