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Move-up Juggling Act

It is tough to be put in a position where you have to simultaneously buy one home and sell another. Often, you can end up with two mortgages on your hands or, if you sell before you manage to buy, you can be living in a hotel room with your possessions in storage. Additionally, including a contingency in the offer to buy a home that you have to sell your home first is often a deal killer.

So, what can be done in this very common situation? You do have several options, as discussed in a recent Realty Times article.

Wait for the Right Market

When buying a new home and selling your old one, it is prudent to buy low and sell high. Obviously, this may not be possible in a market at one time. It is ideal if you can afford two mortgages at once, even if it’s only temporarily. Winter months are usually great times to buy houses, as sellers are more motivated to sell and rates are often lower. You can then hang onto your current home until the spring months, when buyers are especially motivated and you can get a great price. If you can own two homes at once, you will be sure to benefit financially.

Rent Back

Many people, however, will not be able to afford owning two homes at once. There are still options if this is the case for you. A common move-up strategy is called “rent-back,” where a seller sells the home, but stays in residence, paying rent to the new owner. Rent-back is definitely a short-term option. Periods are usually 60 or 90 days, and sometimes longer, depending on what the parties agree upon. This strategy works well during peak buying periods when sellers have little difficulty finding buyers willing to put up with rent-back. This also means that sellers do not have to put a sale contingency in when making an offer to buy a home. Be prepared to buy a home quickly, however. You should be pre-approved for a mortgage and know exactly what you are looking to buy, before entering into a rent-back agreement, so you don’t get stuck in a bad situation.

Bridge Loan

This strategy should only be used as a back-up plan, as it is more risky than the above options. A “bridge” or “swing” loan uses your existing home as collateral. You can take this loan out for a period ranging from three months to five years, using it as the down payment on your new home. When you purchase your new home and can sell your old one, you pay off the mortgage and the bridge loan. A loan like this is less risky in a quickly appreciating market, where appreciation can pay off the extra payment on the old home. Even in the best market, these loans are expensive and riddled with extra points and caveats. It may even be a better idea to take out a second mortgage or home equity loan to use as a bridge loan instead.

A final option when you are stuck between buying and selling homes is to combine some of the options above. Whatever you decide to do, carefully consider your tolerance for risk and plan accordingly.

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