Buying new home before selling old one?

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Buying new home before selling old one?

Postby snodog » Sat Jan 26, 2013 8:00 pm

My wife and I are looking at upgrading to a nicer home and met with a realtor for the first time last night. I was planning on selling the old home first (or at the same time) as buying the new one and then taking some savings I had along with the old house money (old house is payed off and we are debt free) and buying the new home without need for a mortgage and messing with financing. However the realtor mentioned that it might be a good idea (better negotiating power and better chance of not losing a house we like if we can't find a buyer) to get pre-approved for a loan and buying the new home first (if need be) and then paying off the loan when we sold our old house.

We could make a 50-60% down payment on the new home and take out a loan for the rest and the payments and taxes would increase our expenses from currently $2800/month to around $3800/month and still leave us with 30k in emergency savings. Income after tax is $5000/month. Now that I'm typing this maybe a better idea would be to pay less down and keep more in emergency....if I do it.

I've always been real conservative with our money and I'm not so sure if this is a good idea or not plus I've never bought a home at the same time as selling so I'm not sure of all the dynamics involved there so please bear with me. We have an acquaintance who IS interested in our house (not through a realtor) but he's in his early 20's so its hard to know how serious he is. If I would do it I would like to get a low or no fee/points loan if possible, but I'm left wondering if a bank will even make a loan if you are just going to pay them back so soon, especially if it is no fee/points.

Am I even thinking correctly to even be considering this? I say this because my parents shocked us all and got separated a few weeks ago and there's been a lot of drama lately.

So do the benefits outweigh the risks and is it worth the hassle with the banks? What is your advice?

And by the way I would rather not be a landlord.

Any advice is appreciated. Thanks. :sharebeer
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Re: Buying new home before selling old one?

Postby Clark & Addison » Sat Jan 26, 2013 8:31 pm

I've never been in your position, but I'd like to be in 5-7 years. I would probably get pre-approved for the loan just in case. I would make sure there are no pre-payment penalties on the loan and not tell the bank that I was planning on paying it off right away (not sure if it matters or not). I think the hassle of dealing with the bank would be less than the hassle of finding the house you want to buy and being forced to dramatically cut the price of your current home in order to buy it without dealing with the bank.
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Re: Buying new home before selling old one?

Postby hansp » Sat Jan 26, 2013 9:06 pm

From your description of your financial situation, I'd say that the benefits outweigh the risks, but only you can make that call in the end. The risk is that your old place takes a very long time to sell so you are left paying a mortgage for longer than you had originally anticipated. Play out worst case scenarios and see if you'd be financially ok making mortgage payments even if it took a year (or more) to sell your old house.

I did something similar to this about 5 years ago. Difference was we had a mortgage on our old place.
We took out a HELOC on our old place and used that for a good chunk of the down payment on the new. Definitely a bit more risky than your potential situation (had the potential to be carrying 2 mortgages + HELOC), but old place sold very quickly and we never had to make simultaneous mortgage payments.

If taking out a mortgage on the new house, I'd take the following into consideration:

1) Get a "no closing cost loan" (cash back at closing that can be used towards other closing costs). This will carry a higher interest rate, but over the relatively short time you'll have the mortgage, it won't make a big difference. At the very minimum get a 0 point loan.

2) Make sure the is no prepayment penalty. Don't say anything about your intention to pay it off quickly, but ensure there is no fee. As long as there is no penalty, you can pay it off anytime.

3) Remember, mortgages are paid in arrears, so you won't owe a payment for at least one month after you close (exact time will depend on your closing date). If you're lucky, your old house will sell quickly after you buy and you may end up only needing to make one or two payments, depending on what your local real estate market is like.

4) I'd assume that your acquaintance won't be the buyer, so you'd be going through a "typical" sale time frame.


Finally, another route you might consider: See if you could get a HELOC (home equity line of credit) on your current house big enough to combine with your savings to buy the new place for "cash". Interest does not accrue until you draw on the line of credit, so other than the application fee and appraisal, there wouldn't be much cost in getting it set up.

The advantages to the HELOC approach:
1) It makes you a "cash buyer" for your new place (no financing contingency) which might give you a little more bargaining power (you can offer to close faster than someone who is getting a new mortgage).
2) The HELOC will be paid off upon the sale of your old house.
3) Most HELOCs only require payment of interest at the very beginning (no principal due), so if you had a huge financial emergency, you would only be required to make the interest payment, giving you more flexibility.

Disadvantages:
1) The HELOC may have a slightly higher interest rate and it will be variable (although it is usually tied to the prime rate, which hasn't changed in several years).
2) It will probably take a few weeks to a month to get a HELOC set up, so depending on your purchase time frame, it may not be available soon enough.
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Re: Buying new home before selling old one?

Postby jbdiver » Sat Jan 26, 2013 9:10 pm

Personally I would never buy a new home without selling my existing home. I don't like to gamble either. Maybe your realtor believes she can't sell your existing home so the only way she makes money is by convincing you to buy a new one first. Dunno.

I sold my first home to a buyer that was willing to do a 60-day rent back agreement. I had plenty of time to shop for a new home once my sale closed. You want purchasing power? Tell someone you will pay all cash and can close in a week pending inspections.
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Re: Buying new home before selling old one?

Postby Bacchus01 » Sat Jan 26, 2013 9:50 pm

One thing to look out for: insurance.

During a relocation 3 years ago, we bought our new home while the old one was on the market. No problem since my company paid dual-housing costs and had a guaranteed buyout.

HOWEVER, when we got insurance on our second home, they wanted to know about our first. Ooops. Because the first house was vacant, and for sale, our homeowners insurance was cancelled. Which means our mortgage was called. We had to get high-risk insurance and it went from $800/yr to over $5K/yr.

Ironically, we now own a "second home" as a vacation property, and although it's empty most of the time, we don't pay a vacancy penalty. If your house is listed, however, your insurance will likely drop you in 30-60 days.

Get your insurance figured out.
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Re: Buying new home before selling old one?

Postby jsl11 » Sat Jan 26, 2013 10:25 pm

We were in your situation a few years ago. We were completely open with the bank about what we were doing. We considered three possibilities: A bridge loan, a mortgage on the old house, and a mortgage on the new house. After talking with the loan officer, it turned out that a mortgage on the new house was our best option. We took out a no-fee loan, expecting to pay it off after a few months. It turned out to be 14 months, due to the bad real estate market. Otherwise, the only unexpected cost was an extra fee on the homeowners insurance for the old house because it was empty. IIRC, this cost was less than $100 per year.

Owning two homes is expensive. Even after you move out, there are utilities, insurance, real estate taxes, and any upkeep that may be required. As long as you know this is coming and are prepared for it, it should not be a problem. The biggest cost may be that you have incentive to sell the old house as soon as possible, and you may be willing to accept a lower offer than you otherwise would.

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Re: Buying new home before selling old one?

Postby Watty » Sun Jan 27, 2013 12:08 am

If you move out of your current house then buyers will see this and may give lower offers since they will think you a motivated sell, which you will be. An empty house does not "show" as well so it may also take longer to sell the house. This is why some sellers will pay to have furniture brought in to stage the house.

I have bought and sold a home to move into at the same time and it worked out OK since the closing dates are part of the negotiating process. One problem with this though is that when things show up in the inspection you are weak position to get the best deal since a delay in either closing will cause problems.
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Re: Buying new home before selling old one?

Postby Stonebr » Sun Jan 27, 2013 11:59 am

My wife and I recently made the move you are contemplating. We insisted on selling first, then buying. As it turned out we found the house we wanted a few days after we received a quality offer on the home we were selling. Our buyers were financing, but had excellent credit and were approved for far more than the mortgage they needed. That gave us a comfort level, but on buying our new home we discovered the advantage of a cash offer. Cash offers have way more power than financing, even with pre-approvals. Our low-ish cash offer was accepted within a few hours in a fairly hot market, no negotiations necessary. The issues that came up in the inspection were resolved quickly to our advantage. Cash is king.
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Re: Buying new home before selling old one?

Postby Bengineer » Sun Jan 27, 2013 1:39 pm

What getting approved for a mortgage does for sure is make your agent feel good about the likelihood of getting a commission, both in terms of the surety of your finances and in terms of reducing the obstacles to the transaction, though that can backfire if the purchase won't appraise.

There is currently a low inventory of housing for sale nationwide. You of course know what your local market is like. We had multiple good offers and sold to well qualified buyers with no contingencies in a week for well north of asking. I attribute that to low inventory, realistic pricing and staging the house so it looked its best. I'd think that if your house looks good and is priced to your market, you'll sell quickly. Finding something that fits your needs, budget and tastes to buy might be a bit more problematic. We ended up buying something that met our needs quickly, but it could have taken much longer, as there are still very few houses on the market here today.

I can't imagine you'd have better negotiating power than with an all-cash offer. No mortgage contingency, likely no appraisal contingency. Assuming your offer price is within a few $k of the highest and the others have contingencies, you're in. The flip-side is that if you have to sell your current home first, you could get out-bid by someone else with cash ready today.

If you sell first, you'll either have to do a lease-back on your house or move and get a short-term rental somewhere. It will be tough to know when you'll find a house that will work and that you can make the winning offer on. Moving is no fun and doing it twice less so, but you might put a fair bit into storage when staging it to some advantage.

If you go the mortgage route, you'll have to strip down to your financial underwear, pay something like 1% or so to get it (in fee or rate or they'll get it somewhere) and make what are likely above-rental-market payments until you pay it off.

Getting pre-approved and going with the sell-then-buy plan might be a good call in that it won't cost you anything but time & eye-rolling requests for the third page of your bank statement 6 months ago and will give you options if the sell-buy timing doesn't quite go as planned.

In short, it's complicated! You'll have to run the numbers on buying, selling, mortgages, renting and moving. It's possible there won't be a clear choice.
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Re: Buying new home before selling old one?

Postby reggiesimpson » Sun Jan 27, 2013 2:26 pm

Ran in to an old attorney friend recently. In the discussion he said the single biggest financial mistake he made in life was buying the "next house" without selling the "first house" first. As i write this i remember another friend who did even worse. He owned three houses at the same time in three different states. Pulled his hair out until he got rid of two of them.
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Re: Buying new home before selling old one?

Postby Beverage » Sun Jan 27, 2013 4:19 pm

We were in a similar situation and chose the route your real estate agent suggested -- it was my idea, not our agent's. I have no regrets.

The main reasons we did this were a) to give us as much time as needed to find the right house; b) to give us flexibility with the purchase (closing dates, etc.); and c) mortgage rates are so low I figured I may as well treat the mortgage as a low-rate margin loan which I can invest more conservatively than the rest of my portfolio.

It took us around 1 year to find the house we ended up buying. Almost bought two others but backed out due to concerns related to the inspection. I was really glad not to have forced us into a situation where we had to settle. Yes, I had to pay utilities on two houses for a few months but that was a small price to pay. It was also easier to get our old house ready to sell and keep it that way without us living in it. We left some furniture behind for staging purposes and moved it to our new house after the sale.
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Re: Buying new home before selling old one?

Postby btenny » Sun Jan 27, 2013 4:47 pm

I have done what you are thinking twice before, once in 1980 and again in 2001. Both times I took out a new loan on the new house and then paid it off (2002) or refinanced it (1982ish with lower interest rates) after I sold my other home. I think it is a great way to go but it has issues. See below.

The biggest advantage for us was we planned to buy a home that "needed some work and some remodeling" and then to do this work before we moved into the second home. This was a great big deal to us as I did much of the remodeling work as sweat equity and also because my wife and I could redo a home to suit our needs and style before we moved in. This also allowed us to choose from a lot more neighborhoods and a variety of homes to buy as the home did not have to be perfect for our needs, we could "fix it".

The other big deal to us was we could take our time and move into the new home slowly rather than spending big bucks for a moving company to do it fast. This worked perfectly in 2001 as we sold our older home to a builder who was going to build a big custom new house on our lot and tear down our older modest sized home. So he was not in any hurry to have us move out. But it did not work out so good back in 1980. In that case our old home sold while we were still remodeling so we had to move quickly which was difficult at the time. So beware when you put your older home on the market that it may sell fast or slow and you have almost no control of the timing.

In the 1980 case the sale of our old house bounced after we had moved out. This means we had to resell the house when it was vacant of furniture and any furnishing. This was very bad as a vacant house shows every paint scrape or defect in the walls and building. This hurts the price as our furnished home looked great but not so much with the vacant home. So net net we had to settle for a lower price as result. Plus in this case the interest rates went up during the process.

In the the 2001 case our older home sale bounced twice before we completed a sale the third time. We moved during these activities. But both times we raised the price as that was what was going on the the market at the time. So in this case it worked out great.

So you see things are very dependent on the local situation and timing and market conditions and other factors.

So I would say go for it if you have the money as currently the home market seems more stable and in most locations properties are selling. But beware that there are issues and you need to have steel nerves and good negotiating skills.

Good Luck
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Re: Buying new home before selling old one?

Postby Bustoff » Sun Jan 27, 2013 7:09 pm

Bacchus01 wrote:One thing to look out for: insurance.

During a relocation 3 years ago, we bought our new home while the old one was on the market. No problem since my company paid dual-housing costs and had a guaranteed buyout.

HOWEVER, when we got insurance on our second home, they wanted to know about our first. Ooops. Because the first house was vacant, and for sale, our homeowners insurance was cancelled. Which means our mortgage was called. We had to get high-risk insurance and it went from $800/yr to over $5K/yr.


Wow ... never heard of that kind of issue. Is this common ?
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Re: Buying new home before selling old one?

Postby ilisira » Sun Jan 27, 2013 9:54 pm

Bustoff wrote:
Bacchus01 wrote:One thing to look out for: insurance.

During a relocation 3 years ago, we bought our new home while the old one was on the market. No problem since my company paid dual-housing costs and had a guaranteed buyout.

HOWEVER, when we got insurance on our second home, they wanted to know about our first. Ooops. Because the first house was vacant, and for sale, our homeowners insurance was cancelled. Which means our mortgage was called. We had to get high-risk insurance and it went from $800/yr to over $5K/yr.


Wow ... never heard of that kind of issue. Is this common ?



We were close to get into the same situation when we had to move out of town (for my wife's work), and could not sell the house, so we rented the house in the new town that we eventually buy (we were lucky, we did not have to commit immediately), and we found a tenant for the old house, but the insurance company sent a letter saying they can only extend the insurance for another year, and asked us to find a new insurance company. Things worked out for us, eventually we were able to sell the house with only one month of having it empty, but there are many things that might go wrong, and if you can avoid, I do not recommend it.

(Our tenant sent us a mail just before thanksgiving saying he is losing his funding, and needs to move out of town before summer)...
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Re: Buying new home before selling old one?

Postby snodog » Sun Jan 27, 2013 10:14 pm

Thanks to all who have replied especially whomever mentioned the insurance issues as I never would have thought of that and will need to check on. I have a lot to chew on.

For the record as of now I'm kinda leaning towards the HELOC. At my local bank looks like the only fees are an appraisal cost which I thought about getting anyway. With the money we have saved and a $100k HELOC(not sure if HELOCS go higher than this) which should be enough for almost all of the houses we look at and for the one we are most interested in. If we spend more we will just have to sell our old house first. I don't see the empty house as a selling problem because we are planning to update some of our furniture anyway and could leave enough behind to look lived in.

The 21 year old came back again this time with his parents to tour our house. We let them roam free and they took about 1/2 hour and didn't say much when they left so we will see what happens there.
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Re: Buying new home before selling old one?

Postby surfer1 » Sun Jan 27, 2013 11:26 pm

I've had my house up for sale for 3 years now. Thank goodness I didn't buy first.
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Re: Buying new home before selling old one?

Postby NorCalDad » Mon Jan 28, 2013 12:13 am

I think it really just depends on your market and your timeframe. Our market has very low inventory and bidding wars at the moment. We got our house because we chose not to have the contingency of selling, while other bidders had that contingency. Sure, there was some risk, but things worked out and the low inventory helped us get the price we needed on the selling end, too.

On the other hand, if inventory levels are more normal and you have the time to wait on a new house, it may not be necessary. Or if you are concerned about getting a particular sales price on your current home. Just a matter of how competitive a buyer you want or need to be.
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