Buying and Selling: How to do both at the same time

Glad you’re here! This is a really common thing I discuss with our clients on a regular basis. Say you own your home already, and you’d like to buy a larger home or just a home in a different neighborhood, perhaps for warmer weather or a different elementary school. In this post, I’ll share with you the different ways that you can structure it all to minimize stress and hopefully make it smooth sailing.

Buying First, Then Selling

Since it’s hard to know when the home you want to buy will come on the market, this option allows you to take your time and be patient. Whether the right home pops up next week or four months from now, you can buy it, close, and then move. This is nice since you just move once from your old house to your new house. 

For many, this option is typically the most preferred, though it can also unfortunately be expensive.

In terms of cost, you will incur payments on both your new home and your old home until your old home is sold. Our goal is to minimize the length of time you are paying for two homes at the same time. If you’re reading this post prior to engaging with an agent or your lender, you’ll want to get that ball rolling now so you can figure out if the bank will qualify you for carrying two loans at the same time (check out our financing post for more details).

On my end, there’s a number of things we can do to reduce this time period so it’s a nice and smooth transition to your new home. 

Since you know you’ll be selling your home after you buy, even though we don’t know when “the one” will pop up that you want to buy, we can typically save you three to four weeks of extra time owning both homes, which could equate to one month of mortgage and taxes. 

What we can do for you in advance:

• Get estimates for any home prep work you’re thinking may need to be done after you move out, but prior to photography (like deep cleaning, window cleaning, painting, landscaping refreshing, etc). 

• Schedule visits from our copywriter and our floorplan vendor to create a 2D floorplan

• Get the home and pest inspections done. By learning about any issues that could be an obstacle for a buyer or their agent, we can address all those minor things in advance with a handyman, or if we learn something more significant, you can have ample time to address, or just plan to disclose as is.

• Perform a sewer lateral test, if you’re in a town that requires it

• You can also get a head start on the disclosures, and then again before you sell, you can add any final comments. By getting the disclosures done far in advance, it’s one less thing you’ll need to think about when a lot will already be on your mind and you’re focused on moving into your new home. 
  

For us to kick start the above, we just would sign a listing agreement in the beginning, which would formally allow us to begin the process on your behalf and with your participation.

Bridge Financing: How to finance your purchase before you sell

There are a couple of ways these transactions can typically be structured. 

The first is via a direct lender/bank, like a PNC, Wells Fargo, First Republic, or Guaranteed Rate, for example. With a signed listing agreement on the departing residence, some lenders will extend regular purchase pricing (best interest rate) since they know you’ll be selling your current home. If your income and reserves are sufficient, the bank will allow you to buy the next home without selling your current home, and they may or may not require your current home to be rented out, so it’s something you’ll want to think about.

The second option would fall under the category of alternative financing, or hard money financing. The way it works is the lender extends you financing for your new home at a higher interest rate, and you typically pay cash for your new home, which is attractive to the seller of your new home because you can close quickly (10 to 14 days). Typically the lender will want you to have plenty of equity in your current home in order to extend your financing on the new home, since they need some collateral and don’t want you to be highly leveraged already. Given the hard money loan is typically paid off within a short time, for the lender to make a profit, they charge “high” fees (or points) for it to make sense; these fees can be in the low tens of thousands of dollars. Despite these fees, in the context of the overall and relatively large numbers in the transaction, I typically have several clients per year who find this option highly appealing. Then, after your home sells, you can go ahead and do a regular refinance with the lender of your choice.

Selling First, Then Buying

The benefit of selling first is that you will know exactly what your proceeds are and have your cash ready for your purchase. 

The less exciting part of selling first and then buying is it’s likely you will be in a position to move twice - once to move to a short term rental option while you wait for the right home to pop up and buy, and then a second time to actually move to your new home.

In a perfect world, your home would sell and we’d have a 30 day close of escrow. Then ideally, you could negotiate some type of occupancy after sale from the buyer, of say perhaps 30 or 45 days, which would give you more time to find a home and buy. However, given the high dollar amount of your purchase, I definitely wouldn’t want you to feel pressure to buy a home that you’d consider to be a B+ or lower. So focusing on what will make you happy long term is often the best plan, but can require a bit of patience in a market with generally not a ton of supply. Also, the buyer of your home may be pretty eager and excited to move into their new home, and be willing to pay you a premium for that, so negotiating the occupancy after sale is not necessarily something I would guarantee as a slam dunk – think of it more like a helpful tool that can give you a little more time in the right negotiation.

Now, you may be wondering what is the typical time period from start to finish for selling first, and then buying. The best way I can answer it is that most of our clients find a home of their choice within several months of working together. Depending on your situation and how specific or narrow your search is, that could impact the length of time to find your new home, so we’d look very closely at the data of recent sales to see how likely it is that you can find something similar that will check most of your boxes.

The other benefit of selling first and then buying is that the overall cost may be less than going down the hard money financing route which some buyers would use to buy first. The good news here is that you’re only paying one housing payment or rent at a time. Yes, there could be several weeks of rent overlap that runs concurrent with your new mortgage, but it can be nice to have a little time to move, as well as do any small house projects before you move in, like painting or landscaping, for example.

Buying First with a Contingent Sale, and Selling at the Same Time

The more challenging of the options I’m sharing in this post would be the contingent sale. The way it works is, you write an offer on the home you want, and you make the offer contingent upon selling and closing your current home. This is attractive because then you’d only have to move once, and only pay for one home at a time, so it’s basically a dream option from a convenience standpoint.

This is actually a fantastic option for those wanting to buy and sell, however, as attractive as it can be for you as the buyer, contingent sales are much less attractive to sellers. Why is that? Because most sellers don’t want to accept your offer and then wait another 45-60 days for your home to go on the market and close. The sellers’ fear is that a lot can go wrong in that long window and that there are more things outside their control from another transaction (your sale) that they’re not participating in or have any control over. They would much rather just take a “regular” deal with few or no contingencies and close within 21 to 30 days – it’s a lot less headspace and worry for a seller. 

Why would a seller want to work with a contingent sale? What is a kick out clause?

A contingent sale could be attractive to a seller because they can hopefully get close to their asking price, or possibly get a stronger price than a regular buyer would pay. They know that in order for the buyer to encourage the seller to wait a couple months for the transaction to close, the price needs to feel like enough of a premium for them to wait and stick with you. For example, if the seller were to receive another offer with a better price than yours and a quicker close, they could try to “kick you out” of the contract. The seller could give you what is called a “notice to perform” and say if you don’t remove your contingency on selling your home within two days, you will be kicked out of the contract, and the seller can then work with a new buyer. Now as the buyer you might say, “hey, that’s not fair – we went through a lot of work to get our home on the market, and now we’ve only been on the market two days, what else were we supposed to do?” To prevent the seller from doing that, not only does the price need to likely be higher than what anyone else would pay for the home, but you’d want to negotiate the longest “kick out clause” you can. For example, if both parties agreed in the purchase contract to a 21 day kick out clause, that means if the seller gets a “better” offer on day 8, they cannot try to kick you out until day 21, and give you the notice to perform then. The longer the kick out clause, the more beneficial it is for the buyer, and the shorter the clause, the more opportunity it gives the seller to find a buyer who can close quicker

Another reason why the seller may be totally fine with a contingent offer is if their home has been on the market for a really long time with minimal interest. One contingent transaction I did in San Mateo several years ago was a fantastic home that needed quite a bit of work. Though it had a good floorplan, the home was pretty dated, and had a downward sloping rear yard that backed to a creek, so the yard needed a lot of work to make it functional. My clients had a good vision for the home, though they had to sell their current home to make their dream a reality. Fortunately, the home they were interested in had been on the market for several months without a price adjustment, so it was safe to say it was overpriced. The sellers had moved out of state. We came in with an offer below asking but not far off, so the sellers got close to what they wanted. We demonstrated to the listing agent our plan for getting my clients’ home sold in a short period of time, and luckily it all came together.

Can I make the purchase contingent on the sale AND close of my current home?

The other negotiable item is whether your purchase should be contingent on the sale of your home, or the sale AND close of your home, the latter being a much more attractive option to you. You might feel it’s unfair to commit to closing your new home until your old home has actually closed escrow. The seller of the home you’re buying may not be as attracted to that term because if theoretically, the buyer of your home were to back out, your seller would basically have just gone through two months and been left with nothing. In order for this all to work, there needs to be exceptional communication between all parties so everyone feels they’re being dealt with honestly and the seller of the home you’re buying is super confident you’ll get your home sold in a reasonable amount of time.

I realize we’ve just gone through a ton of info in this post. If you’d like to chat further about your current situation and run a scenario past me, I’d be glad to chat with you.