To pursue a buy-first scenario, many people use their home equity line of credit as a "bridge" or "swing" loan to provide for the new down payment. But the stress of owing on three mortgages (the old mortgage, the bridge loan and the new home mortgage) might force a sale of the old home at a lower price than originally hoped.
Joseph was scheduled to be out of town on business on the day of closing and when he reached his destination, he called his wife on her cell phone. That's when he found out that everything went wrong. "She was frantic, driving around town in the moving van with the kids and all our stuff, with no place to go," he says. You're moving. For whatever reason "and there are countless causes" you need to pack it up and move it in all at once.
Of course, the ideal scenario would be to buy and sell simultaneously, but such timing is never guaranteed. Most homebuyers will need to decide whether to buy a home and then sell their current home, or to sell their current home and then look for a new one. If you're contemplating a move, consider the pros and cons of each strategy.
Buying a new home first can have its advantages, especially if the house is that once-in-a-lifetime find. But to get the property you want, you will need to know how much equity you'll need out of your present home and establish a target sale date. If your home doesn't sell by the time you close, you could consider the option of renting it, which would allow you to hold out for the best offer.
On the down side, you could end up with two houses. To pursue a buy-first scenario, many people use their home equity line of credit as a "bridge" or "swing" loan to provide for the new down payment. However, qualifying homeowners generally need a sizeable income. And for those who qualify, the stress of owing on three mortgages (the old mortgage, the bridge loan and the new home mortgage) might force a sale of the old property at a lower price than originally hoped. Keep in mind that market conditions change. You'll never know for sure just how much you'll get for your present home.
The less stressful scenario calls for selling your home first. It's easy to understand why: You know just how much you can spend on a new place, you avoid carrying three mortgages, and you won't require a home-sale contingency, which may make negotiations easier. The new owners might agree to a long closing or a rent-back option so you can take your time, look around, and buy the house that's just right for you.
But there are a few disadvantages to selling your home first. You might feel great pressure to find something fast and even settle for a less-than-ideal property. You might require interim housing, which can be stressful if you have to stay with family or friends for an extended period. Should you decide to rent, it might be difficult to find suitable housing, especially if you have children and/or pets. In either case, furniture would have to be moved twice and possibly put into storage. If your house-hunting efforts are focused on your old community, selling first might also complicate your relationship to your school district -- check with your school to avoid unpleasant surprises.
Buy first or sell first? How can you choose between the options? First, assess your financial condition. Is it healthy enough to withstand a buy-first scenario? How well do you handle stress? Do you have the resources to manage three mortgages and possible added duties as a landlord? If you sell first, can you adjust to interim accommodations? Would they be practical for the long term?
Answers to those questions are not simple, and arriving at the correct one takes concrete planning and often the guidance of a Realtor. Consider the case of Joseph, a married father of two who last year found the perfect home for his family -- but buying this dream house required first that he sell their current home. Though the entire transaction was completed in just one week, the transaction was traumatic. "Those in the field told us it was the worst-case closing they'd ever seen," Joseph recalls.
When Joseph spotted "a great house that fit all of our criteria" -- and one that added 500 square feet just a few miles from his former residence -- he and his wife knew they were facing a highly competitive sellers' market where bids come in early and often. There was time only for action, not thought. They put together an attractive offer to the seller, but the loan agreement they worked out depended on selling their house first, the money from which would work as a down payment and help secure a loan with good terms.
A time crunch was another money-draining factor in Joseph's move. In a booming real estate market like the one New Orleans has enjoyed for several years now, low interest rates propel high volumes of transactions. Just as there were many bids for Joseph's new home, his old home received three bids immediately after it was put on the market. Yet, the family's top priority "was finding someone who would close on the same day" as their buy, Joseph says, rather than waiting for the highest offer. "If we had more time, we could have waited for more bids to come in, be more selective and probably make more money," Joseph says.
It looked like their plan would work flawlessly. "The arrangements for the simultaneous closings were done for us," Joseph says. "Everything was moving along like a charm. We figured we'd be just closing one door and then opening up another."
Joseph was out of town on business, a factor that was not a concern when he left: "My wife would just have to pick up the keys, and spend the first night in our new home with the kids but without me." Yet, such dreams collided with reality when on the day of the closings, the buyer of their home balked, due to temporary financing issues. "I called when I reached my destination to check in with my wife on her cell phone," he says. "She was frantic, driving around town in the moving van with the kids and all our stuff, with no place to go. A convention was in town, and she couldn't even find any hotels."
Joseph gave his wife the phone number of a friend, who hosted the suddenly homeless family for a night. "The kids went to bed, and a bottle of wine later, my wife finally felt better."
A series of screaming matches over the phone with their loan provider followed the stressful night. Joseph says the lending company provided no information, let alone a contingency plan, about what could happen in such a scenario. "During the whole process, we thought they were holding our hands through it, and it turns out they weren't," Joseph says. "Our Realtors told us they are no longer working with that company."
The original purchaser finally bought Joseph's old house, but the time delay meant that he and his family ultimately had to secure a new loan to purchase their current home. Save the generosity of a family member who assisted with the new down payment, Joseph would have been stuck up the proverbial creek. So how do you avoid such a nightmare? "Have a Plan B," Joseph recommends, pointing to arrangements such as a bridge loan, which they considered but ultimately decided against. "Our Plan A relied on a flawless, simultaneous closing. And that obviously didn't happen."
Slidell-based Realtor Helene Davis Nunez has never encountered a nightmare scenario such as Joseph's in her two years of working in real estate. An agent with Keller Williams, her typical client is somebody from New Orleans selling their property and looking to buy in the Slidell area. Davis Nunez stresses the fact that she tries not to directly advise her clients on their financial dealings, preferring instead to refer them to a team of mortgage brokers with whom she has a solid working relationship. "But it's my understanding, based on conversations I've had with the mortgage professionals I work with, that a bridge loan is often not your best option, as it usually comes with a high interest rate attached to it," she says.
Davis Nunez says she's never dealt with a transaction involving a bridge or swing loan, and has only helped two clients who needed to sell their existing home in order to secure the financing to buy their future home. But a client needing a simultaneous closing is quite common, whether the immediate turn-around is due to a housing or financial need. Last week, she helped a single woman in her 70s sell her house in eastern New Orleans and buy a condo in Slidell. The woman had lived in the eastern New Orleans home her entire life. At noon, the woman sold her home. Three hours later, she had closed the deal on her new condo. Yet the woman was not quite prepared to leave her house, and was able to work out a deal with the buyer to rent the home for an extra week, giving her time to arrange for the move. The key to such a smooth transition is an open flow of communication, Davis Nunez says.
"A lot of problems could have come up, but none did," Davis Nunez says. "It's important that everybody involved knows exactly what is going on. Everyone has to be open and honest and maintain communication."
Davis Nunez says that on countless occasions buyers and/or sellers have made outside-the-contract efforts to assist in the deal proceeding smoothly. "Everybody I've worked with has been very amenable. The buyers want to buy, the sellers want to sell, and they work together to make it happen."