Selling a home has been relatively easy in prior years. The
challenge typically was finding a new home to buy. Many sellers refused
to sell their existing home until they found a replacement.
Buying first worked well for many sellers in years past as the risk
of owning two homes for a long period of time was relatively low.
Now there is substantial evidence suggesting that the real estate
market is slowing with supply now exceeding demand. If so, is it still
a good idea to buy before selling?
First, consider the alternatives. If you buy first, you will know
where you’re moving, what it will cost and when you can move. Families
with small children often find it easier to market their old home after
they have moved out. Their home can then be prepared for sale and kept
that way with little, if any, effort.
The downside to this approach is that it’s expensive. You must come
up with cash for a down payment and closing costs before your home is
sold. Many homeowners do not have the extra cash in savings to
accomplish this. Some homeowners may tap into their home equity before
selling by using an equity line of credit.
House Hunting Tip: In a changing market, it’s wise
to factor in a longer marketing period for the home you’ll be selling.
You could get lucky and sell quickly. However, in a soft market, it
usually takes longer for homes to sell. It’s far better to err on the
conservative side than to be caught short of cash making mortgage
payments on two homes.
The biggest risk you face in buying before selling is that your home
doesn’t sell in the desired time frame and the market worsens. In this
case, you could be forced to reduce your list price in an attempt to
speed up the selling process.
An option may be to rent your old home until the market improves.
But, keep in mind that to take advantage of the federal capital gains
tax exemption on the sale of a primary residence (a $250,000 exemption
for single sellers and $500,000 for married sellers who file jointly),
you need to have occupied the property for two of the last five years.
Homeowners who can’t qualify to buy before selling, or who don’t
want the anxiety of owning two homes, have other options. The most
appealing is to buy the new home contingent on the sale of your home.
Unfortunately, sellers of the most desirable homes usually don’t look
favorably on contingent sale offers. A local real estate agent will be
able to tell you if contingent sale offers are a viable option in your
area.
If not, consider selling your home with an option to rent it back
from the new owners for a time after closing. This will give you extra
time to find a home to buy if you haven’t found one by the time your
sale closes.
Typically the seller’s rent covers the buyer’s costs of ownership
during the rent back period. This may be more than you paid to own your
home, particularly if your home has appreciated substantially and the buyer is taking out a large mortgage.
The Closing: Renting your home back from the buyer
after closing is done for convenience sake. If you want to pay cheaper
rent, you can always move to a temporary rental until you
find your dream home.