Every day someone buys and someone sells a house. After all, that’s what the real estate industry is based on. In our previous blog, we hinted that you shouldn’t sell your house before having eyes on another one, but that was for when you’re going through a tough time. But what about under normal circumstances? Is buying a house before selling your own a good idea?
Well, there is no definitive answer to this. There are a number of obstacles that prevent home buyers from buying a new home before selling, the most prevalent of them being monetary problems. If you’ve got that covered, we’re here to tell you that there is nothing wrong with going for a new home.
It will not only save you a lot of trouble after selling your current house, but it also speeds up the selling process significantly. Buyers are often on the lookout for homes they can move into quickly, and some are even ready to pay a premium for such houses!
Here are tips on how to buy a new home before selling your own.
Buying a House Before Selling Your Own – Important Things to Remember
- A Second Mortgage – Good Idea or a Disaster Waiting to Happen?
As mentioned above, 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 local 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.
Keeping the Selling Time in Mind
People often make the mistake of under or overestimating the property market before taking such a bold step. 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 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.
Selling the House – Is It Really Necessary?
You should also consider which is a more financially sound decision; selling the house or renting it out. The asking rent for houses and apartments in the US has increased over the years, with the average monthly rent for apartments amounting to $1,471.
Plus, renting a house out is often much faster and easier than selling. You can also consider leasing out the house on a month-to-month-basis if you plan to sell the house in the near or far future.
Be Ready to Move Once Finalized
- Don’t 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.
Again, this is highly dependent on your local real estate market and how long it takes for a house to sell. If your remodeler has given you a time frame of 1 month and your listing agent gave you at least 2 months, then you can start trying to sell your house.
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.
Benefits of Buying Before Selling
- Buying Before Selling Can Be More Cost-Effective
More people selling their house first and then peruse the market for homes. This is the usual practice and is pretty safe and has a very low financial impact. They get to use the proceeds from the sale of their house to buy the new one – or make the down payment of their next mortgage.
The problem with this model is that people often end up having to rent out a new place until they find their dream house. There is a risk factor here that people might end up spending more than they have on rent, relocation costs (twice), and generally settling in.
Buying a new house before selling your own rids you of this risk by giving you a viable contingency plan.
- Enough Time to Move
Since you have a place to go before even listing your house, there is enough time for you to remodel your new house to your liking and move when and as you like.
- Increased Property Value
As mentioned above, the value of your property increases slightly, especially if you find a buyer who is in a hurry.
- Opportunity to Remodel Your Current Home
You can also take your time before listing your current home to remodel it and make it like new, further increasing the home’s value.
- Room for Negotiation
Since you already have a place to stay and are in no hurry, you can afford the luxury of rejecting low-balls. You can take your time to find a home buyer who is willing to agree to your terms, but be careful. Don’t let it get to your head and ask for ridiculous prices.
Disadvantages of Selling Before Buying
- There is a 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, the results can be disastrous. You might end up spending more than you can spare and be unable to cover it up with the sale.
- Two Mortgages
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 hole in your wallet.
There are many advantages and disadvantages to buying a house before selling your own. If you need a more detailed view of how sound this decision is, we recommend you contact us.