After more than a decade of strong seller markets, many people have faced the unenviable situation where they have to sell a home before they can buy a replacement home. In other words, they need the proceeds of their current home in order to move forward on a replacement property. In such competitive seller markets however, it's worth pondering some of the potential outcomes, good and bad, to thoroughly evaluate one's options. It’s a bit of a catch-22: how do you buy a home if you have to sell your current home first? What happens if you sell your current home and can’t land a replacement property in time? As you can imagine, there are lot of ways this scenario can play itself out depending on the circumstances and flexibility (financial or otherwise) of the buyers and sellers involved. Let's take a look at a few potential scenarios.
Closing vs Sale Contingencies
Let's say you have an accepted offer on a house contingent on the sale of your current home. Lucky you! Not a lot of sellers out there willing to work with a buyer that has a home to sell. Now the trick is to avoid getting "bumped". What does that mean? Well, it means that when someone writes an offer on the home that you already have under contract they can potentially "bump" you out of the way if you're unable to remove your sale contingency in time. Talk about stressful! A better option can be to collect an accepted offer on your primary residence before you attempt to put a replacement property under contract. Then you'll be able to make your offer contingent on the closing of your primary residence instead of contingent on the sale of that property. What's the difference, you might ask? Well, if you've already collected a strong offer on your primary residence and that offer is written in such a way that the transaction can't fall apart (for the sake of simplicity, consider the example of a cash offer with no inspection), then it's less risky for both buyer and the seller to do business together. The reasons for that are two-fold: as the buyer you're not in as much danger of getting bumped and as the seller, they're not waiting for you to put your primary home on the market or to procure a buyer for that home. Even better if you're already gotten through the inspection contingency and you're just waiting for the buyer's financing. Brownie points if you've gotten through the inspection and it's a cash offer! Then the home is already technically sold. Bear in mind that the closing contingency will also protect you in the event the transaction on your primary home does not close, for example if the buyer is utilizing financing and loses their job right before they go to close on their mortgage. In that case both transactions will most likely have to be cancelled (most loan commitments are insured with a caveat that the buyer's employment be verified just prior to the disbursement of funds). Fortunately there are a few ways to avoid that scenario which boil down to the type of offer you accept on your current residence. At Lake & City Homes we definitely have you covered in that regard! Or can refer you to a like-minded Realtor if the home you intend to sell is located outside of the South Central Wisconsin MLS (SCWMLS).
The Prolonged Closing Strategy
If you accept an offer on your home with a prolonged closing date, you may very well have sufficient time to remove all the contingencies in that transaction so that the closing contingency in the offer on your replacement property is merely a formality. That would typically make it easier to secure a replacement property despite the closing contingency. At the same time, a delayed closing would allow you more time to identify and secure a replacement property without the hassle or expense of having to move into a temporary rental property or having to secure temporary housing of any kind.
The Buyout Strategy
Another possibility is to ask your Realtor if they would be interested in purchasing your home for cash. Many Realtors (myself included!) occasionally invest in real estate either as a new residence for a friend or family member, for current/rental income, for asset appreciation, as a flip or “rehab” type project, and on certain occasions to help a client out. Also, it’s worth pointing out that a bonefide Realtor puts their money where their mouth is—i.e. they actively invest in real estate. Why? Because Realtors believe in the intrinsic value of investing in real estate as an asset class and know first-hand what an excellent investment it can be. Not only that, Realtors believe in the dream of home ownership and how it can transform lives, even whole communities. Will you get top dollar if you sell your home to your Realtor? Probably not but you'll avoid all the prep work, showings, open houses, repairs, potential surprises, etc. And in return you'll gain certainty and peace of mind. And if your property is a fixer upper or you have other circumstances that make it very difficult to accommodate showings (for example the removal of pets during showings while you're trying to juggle a job) this might be an option to consider.
The Temporary Housing Strategy
This is our least favorite option due to the logistics involved. If you secure a great offer on your primary residence but the buyers have to close and take possession quickly due to the start of a new job or other circumstances, you might want to consider what options are out there for you to obtain temporary housing so you can go ahead and accept that great offer. Depending on your situation you might be able to move in with a family member temporarily, you might be able to secure a month-to-month rental property, or depending on your flexibility and whether you have pets, you might be able to stick it out in an executive stay type hotel for a few days or weeks. Not ideal, of course, but one should not hesitate to plan for contingencies in situations like these just in case. If you're not willing to entertain temporary housing, then you'll have to be careful not to accept an offer on your primary residence that has too quick a closing or one in which you’re not able to rent back from the new owner (more on this below) until you land your replacement property.
The Rentback Strategy
Another strategy you might want to consider is closing on your primary residence as quickly as possible and then renting back from the new owner for a set period of time while you concentrate on locating a replacement property. Why would you want to do that, you might be thinking? The advantage to this strategy is that when you go to make an offer on a replacement property you would no longer have to include a sale or a closing contingency at all. And, depending on how long you've owned your primary residence and how much equity you have built up in it (e.g. maybe you no longer have a mortgage on the property or you only have a very small mortgage balance on it), you might be in a position to write a cash offer on your replacement property. And if not cash, you might be able to write an offer with a large downpayment which would make the financing contingency in your offer more attractive to the seller of your replacement property than an offer with little to no money down. After all, Sellers (and their Realtors) prefer to see that buyers are planning to have some “skin” in the game similar to a large earnest money commitment.
The Replacement Property Contingency
One of the cool things about real estate is that licensed Realtors have a limited license to practice law. While we are of course not licensed attorneys, Realtors do have the opportunity to exercise a fair amount of creative license in drafting offers. How does that come into play in a situation where you have to sell your current home before you can buy a replacement property? Consider doing this: when marketing your home for sale, consider requiring the buyer to include in their offer a pre-written contingency that the Seller shall have 72 hours (or similar) to obtain an accepted offer on a replacement property, otherwise the offer is null and void and all earnest monies shall be returned to the Buyer. Of course this strategy works best if you're working hand in hand with your Realtor to identify potential replacement properties. Let your Realtor give you a tour of all the listings that fit your search criteria and then be ready to tour homes of interest as they pop up incrementally on the MLS. That way you'll be ready to go after your top picks at any point whenever the opportunity to put a listing under contract presents itself.
The Bridge Loan Advantage
Why not check with your lender to see if they can pre-qualify you for a bridge loan? We hope you won't need it but it can be invaluable in the event that all contingencies are removed on the home you're selling and someone tries to "bump" you. It can be especially useful if you're close to satisfying all the contingencies in the purchase of your replacement property. In other words, if you can provide evidence of bridge loan financing you'll likely avoid getting bumped by another buyer. The hotter the property the more likely a bridge loan should be lined up in advance...just in case.
The New Construction Advantage
One advantage of pursuing a new construction home as a replacement property is that you are much less likely to get bumped if the home has not been completed yet. Many people do not want to wait for a home to be built so if there is an accepted offer with a bump clause on the listing as well, that is likely to be a strong deterrent for many buyers to get serious about that property. There are other advantages to pursuing a home under construction. Contact Lake & City Homes Realty at (563) BUY-SOLD for more details.
The Grace Period
You may also be able to work into your offer a grace period that's more generous than the standard 24, 48, or 72 hour bump clause. The way this would work is that you would be obligating the seller not to bump you for the agreed upon time period. This can be a good strategy when it comes to new construction homes, especially if you're planning on customizing it, for example finishing the basement so that the builder will be doing extra work to the property for a higher price. Most new construction homes do not include a finished basement but it can be cheaper to do it while the construction workers and other crew are still active in the neighborhood. In circumstances like this, talk to your Realtor about possibly adding a two week grace period to your offer with a promise to get your home on the market within the next 48 hours, if not sooner. Sometimes temporary housing can also be included in the sale at no cost if the construction timeline extends beyond the date that you are able to stay in your primary residence.
In conclusion, buying when you have to sell first is not for the faint of heart! After all, if you don't manage the situation carefully you could wind up losing your dream home or worse, winding up in temporary housing. Fortunately at Lake & City Homes Realty we have handled simultaneous buying and selling for our valued clients hundreds of times over the past decades and no one has ever wound up having to rent or obtain temporary housing. At Lake & City Homes Realty we welcome the opportunity to guide you through what we know can be a smooth process of buying and selling simultaneously. After all, this is not only an area we have a lot of expertise in, it is an area we actually specialize in. Give us a call or fill out the contact form below to get started. We welcome the opportunity to help you evaluate your options—no-risk, no pressure, and always 100% hassle-free!