The real estate industry is based on people buying a new property and selling their old property. In the past, we have hinted that you shouldn’t sell your house before having eyes on another one, but that can be circumstantial. The question today is, should you buy a house before selling your own?
Benefits of Buying Before Selling
There are great benefits to buying a home before selling, that you want to be aware of. Later, we will get into the disadvantages and tips if you are considering buying a property with this method.
Buying Before Selling Can Be More Cost-Effective
More people are selling their homes first and then pursue the market for new properties. This is the usual practice, which is safe and can have a small financial impact. They get to use the proceeds from the sale of their house to buy the new one, or to make the down payment of their next mortgage.
A major problem with the traditional method is the in-between time. Since you sold your property, you may need to temporarily rent or stay in a hotel until you find your new property.
There is a risk factor here that people might end up spending more on the relocation costs than necessary. By buying a new house before selling your own, rids you of this risk and gives you a backup location to stay in.
Enough Time to Move
When you buy a home before selling you will not be rushed out of your current property. You can also take as much time as you need to furnish the home for your eventual move-in.
If you are financially secure, you can also wait to sell your older property until you believe the value has risen to a wanted amount or make upgrades to the property in order to increase its value yourself.
Opportunity to Remodel Your Current Home
After you’ve purchased the new property, you can take your time to focus on your older home. Before listing the property, you should ensure that it is at its best and consider staging the home to increase its value to potential buyers. There are plenty of ways to remodel and increase the value of your property.
Room for Negotiation
With this strategy, you are in no hurry to relocate. You can also afford the luxury of rejecting low-ball offers. You can take your time to find a home buyer who is willing to agree to your terms, but you don’t want to get too greedy with the amount you want.
You will have more leverage on the buying side as well because you may be able to avoid overpaying due to being in a rush to buy.
Disadvantages of Selling Before Buying
With those positives in mind, the following are some disadvantages to this method of buying:
Level of Uncertainty in Terms of Sale
Unfortunately, there’s no telling what type of offers you might get and when. Here, it’s fine to underestimate what you’ll get, but should you make the mistake of overestimating. You might end up spending more than you can on the cost of the new property and be unable to cover it up with the sale.
Until you make the sale and the deed is signed off to the buyer, you are bound to your first mortgage as well as your second. This presents a challenge when applying for a second mortgage. And even if you do qualify, you’ll have to make payments for both mortgages, which can be a significant financial impact.
How to Buy First Without Selling?
The best thing you can do is close the deal on the home you mean to buy and offer a delayed contract initiation date. This allows you to secure a deal and it prevents you from needing to pay two mortgages at once. If that option is not available, you may need to pay a second mortgage for a short time while you wait for your home to sell.
Here are tips on how to buy a new home before selling your own:
Plan the Time of Sale
When you are ready to purchase the new property, estimate how long it will take to sell the current property. It is equally as dangerous to assume that your house will sell in a month as it is to assume it will sell in a year, where it might take around 3-6 months.
The selling time is entirely dependent on your local real estate market. We recommend that you don’t play the guessing game and conduct some research. You can also find a listing agent for a more accurate time frame.
If you overestimate the selling time, you might end up having to pay two mortgages at the same time or bear the expenses of maintenance of both houses. On the other hand, underestimating the same might lead to giving you less time to remodel and move to your new house.
Renting Instead of Selling
If you do not need to worry about short-term finances, it can be significantly easier to find renters for your old property. This way you can still gain income from the property to cover the original mortgage.
Now, the average monthly rent for apartments amounts to $1,100, which can eventually dig into the mortgage costs. These rental prices can be higher demanding on location, so it is best to see the prices around you to get the best deal.
You can also have options by renting, you can consider leasing out the house on a month-to-month basis if you plan to sell the house in the near future.
Factors to Consider
These are the most important factors you will need to consider when looking to purchase a home with this method:
A Second Mortgage
The biggest hurdle is handling the increased financial pressure. You could try taking out a second mortgage, but you need to make sure you qualify for it first. Before making a definitive decision, we recommend you contact your real estate agent or your bank.
The first thing banks will look at will be your debt-to-income ratio. You must have enough assets, liquid or otherwise, to be able to meet the monthly debt you’ll accumulate.
For example, if you owe the bank $4,000 every month and have (excess) assets of $8,000 or above, you have a positive debt-to-income ratio. The bank won’t hesitate to give out the second mortgage.
Banks and lenders often require you to have around 60-67% more assets than your debt. If your debt amounts to more than 43% of your gross income, you might not qualify.
Remember, the mortgage of your current home will also be considered when calculating your debt-to-income ratio.
Be Ready to Move Once Finalized
With financial stability, there’s no need to rush. If you’ve bought a house before selling your own, don’t advertise your house for sale yet. Take your time to remodel the new house to your liking, ensure everything is in order and list it when you’re close to moving.
But, if your remodeler has given you a time frame of 1 month and your listing agent gave you at least 2 months to sell the property, it may be best to start listing the property early and updating the listings as it is remodeled.
As soon as your new house gets finalized, start moving out. This way, you’ll show buyers that the house is ready to be occupied as soon as possible, thus increasing its value.
There are many advantages and disadvantages to buying a house before selling your own. But there are many ways to see if this method is best for you in comparison to the traditional method of buying.
This works best if you are financially stable and if you can get approved for the second mortgage. If you need a more detailed view of how sound this decision is, we recommend you contact us.