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Should You Buy First or Sell First? Both have their risks and rewards.
It’s a tough decision about whether you should buy or sell first. Both have their risks and rewards so you will have to choose what you feel most comfortable with and what you can financially handle.
Option 1 – Buy First:
If you want to buy first, you will be making an offer with a home sale contingency, and then you will put your current home on the market. This means your offer is contingent upon the sale of your current home. This is an option if you are worried about selling your home too quickly and not being able to find another one you want to buy.
The downfall with this is that sometimes sellers won’t take you seriously unless your house is already on the market or has a contract on it. In a competitive market, sellers will want to take the offer without a home sale contingency (unless the seller has had difficulty attracting interest). Usually, it will take some convincing to show that your home will sell quickly.
Buying first can mean moving will be easier (since you have a place to live), but it may skew your debt to income ratio, making it harder to qualify for a new mortgage (not to mention the difficulty or possibility of juggling two mortgages if the timing doesn’t work out). A solution is to use a home equity line of credit (HELOC) or a Bridge Loan in order to own two homes simultaneously. A Bridge Loan functions as a short-term loan, intended to be repaid upon the sale of your original house.
In summary, pros and cons:
Pros: You will have a place to live, and won’t make hasty decisions buying a home you don’t like.
Cons: You may feel rushed to sell your home now. Less competitive offer with a home sale contingency.
Option 2 - Sell First – With a settlement contingency, rent back, or a temporary rental:
Settlement contingency: This means you list your home for sale, then start looking to buy immediately, but don’t make an offer on any of them until you have accepted an offer on your current home. In this situation, you should know exactly what you are looking to buy so you can make an offer as soon as you find your dream home. The offer is made with a settlement contingency, meaning the offer is contingent on your current home selling by a specified date. If it doesn’t sell by that date, you can pull out of the deal. However, a settlement contingency can still make your offer less competitive in a hot sellers market.
Rent back: This is when a buyer allows you to stay in your home for an agreed-upon period of time (usually 60 days maximum allowed by lenders) in exchange of rental payments (usually based on buyers new mortgage amount, not yours). This way, you can stay in your home while you search for a new one. However, this situation may reduce the number of offers on the sale of your home, or it may possibly come in exchange for a lower selling price.
Temporary rental: Find a temporary place to live while you search for a home. If you can’t get a HELOC or Bridge Loan and need the money from the sale of your home to buy a new one, this could be a good option. This is a hassle since you have to move twice, but it enables you to make an offer without a home sale or settlement contingency, making your offer more competitive.
In summary, pros and cons:
Pros: Slightly more attractive offer with a settlement contingency (versus a home sale contingency). More time to find your dream home with a rent back. You will have the cash to buy a new home, and you won’t feel rushed with a temporary rental.
Cons: A settlement contingency might increase the stress because of time constraints and feeling pressured to buy something you may not love if you get an offer on your current home right away. Possibly less offers coming your way from your current home sale if you request a rent back. The inconvenience of moving twice with a temporary rental.
Whichever option you choose, make sure you're prepared to accept the consequences, such as having to store your possessions and rent temporarily, or undergoing the financial burdens of dual mortgages.