- Buying or Selling first?
You have decided to begin looking for a new home and are faced with the decision of when
you should put your existing home on the market. Controversy and debate always surround
this question! At first glance, people who are faced with this question think that they
should first locate their future home and put it securely under contract. There is
rationale for this choice, although it is often the least prudent option of the two
choices that are available.
By first locating the new home, you will:
Know how much equity you will need to take out of your existing house in order to afford
the new one.
Know when you will need to finalize the sale of your existing house in order to move into
the new house.
Know that you will have a place to live when you move out of your existing house.
Although the logic behind these reasons is sound, most people who are experienced in
"moving up" to another home will argue that it makes more financial sense to
list your home first, and then begin the house hunting process.
The following scenario will help to demonstrate the serious consequences that can occur
when a party commits to buying a property without first having initiated the sale of their
Using logic similar to that listed above, the Jones decide to first select their new home
and then, once they know what it will cost, put their existing home on the market. They
discover and fall in love with a home that meets all of their needs and they make an
offer. The offer is accepted, but they are not allowed to make the offer contingent upon
the sale of their first house (most sellers will not allow these contingencies). They push
the closing date out as far as the seller will allow them, which they believe will give
them ample time to sell their home. They have three months to find a buyer and close on
the sale of their existing home.
They scurry to complete the upgrades that had long been planned for their existing home,
managing to put the home on the market the following weekend. They price it where they
have seen other similar homes sell, and where they can reasonably expect to attract some
interest. And they begin to wait.
The first week there are a good number of showings, but then the activity drops off. The
market seems to have softened a little, and the Jones begin to think they should lower
their price. This is a bit of a concern, since they were counting on selling very near the
current sales price and rolling the proceeds into the purchase of the new property.
Three more weeks pass. There have been intermittent showings, and very few repeat
showings. The real estate sales agent is running ads, passing out brochures, and has held
an Open House. One offer comes in, but this buyer has a home they have to sell in order to
close. The Jones can't risk accepting this offer, since it would mean taking their home
off of the market while they wait for the buyer to come through. They have to turn the
offer down. The sales agent knows they are feeling the time pressure, and suggests another
price reduction. Now the Jones are concerned that if an offer comes in much below this new
price, they might be hard pressed to come up with the down payment on the new house.
The Jones are facing a closing on their new home within six weeks, and they still don't
have a buyer for their existing home. They begin to look into securing a bridge loan,
which would allow them to purchase their new home while carrying the mortgage on the
They learn that bridge loans come with some strings attached:
1. Lenders who offer bridge loans are difficult to find. Very few
financial institutions pursue this line of lending because it is short term and high risk.
2. To qualify for a bridge loan, the Jones must show enough income and
net worth to carry both the existing home and the new property. In other words, the lender
views this as two complete mortgages, which is exactly what it is. Even if approved, the
Jones are deeply concerned about their ability to pay two mortgages at once.
3. The rates on the bridge loan are not competitive, which threatens to
further strain the financial picture of the Jones.
This story only has three possible conclusions.
First, the Jones get very lucky and accept an offer on their home, which goes straight to
closing without any problems. Unfortunately, they receive considerably less than expected
since the word had gotten out that they were desperate to sell.
Second, the Jones find a bridge loan that they can live with - barely - and end up buying
the second home and carrying the first home for another couple of months. The financial
strain is extreme, as is the strain on their marriage. Suddenly, everyone wants to know
whose idea it was to buy the new house without at least putting the existing house on the
Third, the Jones do not find a buyer and they fail to secure a bridge loan. The seller of
the home they put under contract sues them for defaulting on the loan. After this
experience, the Jones decide that they will live in their original home forever and invest
whatever money they have left to just make it look nicer.
The lesson to be learned: be cautious and thoughtful in making this very important
decision about when you put your home on the market. You must assess your financial
picture honestly, as well as your ability to handle the stress that will accompany any
decision you make. Be aware of the downside of buying before placing your own home on the
market, because the worst case scenario can be extremely costly and difficult to bear.
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