Sell To Buy – How To Concurrently Buy And Sell A Home
Changing homes can be difficult, especially when it involves using equity from your first home in order to purchase a new home, or when you need to “sell to buy”. In this article, we discuss different options of how to “sell to buy”, as well as the advantages and disadvantages of each approach.
Purchase Of New Home Contingent On Sale Of Previous Home
The simplest, and least risky, method of buying and concurrently selling is to make the purchase of the new home contingent on the sale of the previous home. Experienced buyers are familiar with a purchase agreement’s “contingencies”, which allow the buyer to back out of the purchase if specific events do not occur. For example, the “loan contingency” allows the buyer to back out of the purchase if the buyer is unable to obtain loan approval. In the same way, a “sale contingency” allows the buyer of a home to back out of the deal if a property that the buyer currently owns does not sell by a specific date.
From the buyer’s perspective, this is one of the least risky methods to “sell to buy”. It allows the buyer to identify a property he or she would like to purchase, secure an agreement for the purchase, and then complete the purchase only if the buyer is able to sell a different property.
From the seller’s perspective, however, this is one of the least preferable options. When a seller enters into a contract for the sale of property, he or she is typically interested in a quick and risk-free sale. Contingencies introduce uncertainty in the process. While a seller may be willing to tolerate typical contingencies, like a loan contingency, a seller is less likely to be willing to add additional risk to the process by accepting a sale contingency.
In today’s sellers’ market, where it is not uncommon for sellers to receive multiple offers, sellers are almost certain to turn down sale contingencies. As a result, the sale contingency is typically a non-viable option.
The obvious alternative to the above approach is selling the previous home first, and subsequently acquiring the new home. This eliminates the “sale contingency” and frees up equity from the previous home, thereby making the offer on the new home more attractive to the seller.
While this alternative eliminates the problems associated with making an offer containing a “sale contingency”, it presents an issue of timing. For most people, the previous home that was sold was their primary residence. As a result, once the previous home is sold, the owner must either immediately identify a new home to purchase, or move into a temporary home until a new home is acquired.
One way of minimizing this problem is entering into a “leaseback” with the purchaser of the previous home. A leaseback, which we discussed at length here, enables the seller of a home to remain in possession of the property after the close of escrow. While entering into a leaseback agreement alleviates some of the timing issues, the purchase of the new home must still be made relatively quickly because leaseback agreements are typically short term, i.e. 30-60 days.
As a result, this approach requires a significant amount of preparation and aggression on the buy-side. Before the previous home is listed for sale, the owner should be well-educated on the market, and should have a solid idea of the location and type of property that he or she intends to acquire. This will allow the seller/buyer to quickly identify a new home within the leaseback period.
A third option, which many property owners find to be most attractive, is a “bridge loan“. A bridge loan is a short-term loan against the equity in a currently owned property. The loan is used to “bridge” the gap between the purchase price of a new home and buyer’s available funds. This allows the purchase of the new home to be made while using equity in the previous home, but without selling the home and running into the timing problems associated with a leaseback.
This option is not, however, without risk. The primary risk associated with this option is the risk of whether the prior home will sell. Once the new home is acquired, the owner will have two mortgages to pay, as well as the payments on the bridge loan. This typically means that the owner of the properties will need to quickly sell the prior home in order to avoid the significant expense associated with the bridge loan and two mortgages. Thus, similar to the leaseback option, the owner should be fairly familiar with the market and should have a sale strategy in place well before listing the property for sale.
There are, of course, a multitude of factors that every individual needs to consider before determining which of the above “sell to buy” approaches best fits that individual’s circumstances. At Esquire Real Estate Brokerage, Inc., we strive to give every client the individual attention they need in order to determine which option best fits that client’s needs. If you would like to further discuss how Esquire Real Estate Brokerage, Inc. can help you in the Los Angeles real estate market, feel free to give us a call at 213-973-9439 or send us an email at firstname.lastname@example.org