Q: We have owned our current house for almost 15 years now. It was our first home. We would like to shop for a new home in a nicer area but we’re confused regarding the logistics of shopping for a new home at the same time you’re trying to sell one. We are one of those few who have equity in our house. But if we sell this house first we will be homeless until we find and close on a new home. We have been hearing about how hard it can be to get an offer accepted and we don’t want to get caught in a tough spot of leaving this home and not having a place to go. How do other people handle this?
A: For homeowners in your position, this is a much bigger problem than it was even a couple of years ago.
While there is a ton of cash in the real estate market right now, most of it is investor money and not coming from people who want to actually live in the property.
Most people in your position don’t have the ability to pay cash for a new house and must rely on the equity of their current home. By far the two most common ways of handling the whole transaction is to put your current house on the market while you are shopping for a new one. Or, in the alternative, identify your new home and then put your current house on the market.
There is a third choice that we’ll discuss in a minute.
Whether or not to put your current home on the market before shopping for your new one is a decision you need to make with your Realtor, based upon the current market conditions. When it is a seller’s market, meaning that there are more buyers than sellers as it is right now, you can wait to put your home up for sale. The theory is that it will take you longer to find and buy a home in a seller’s market. But it won’t take you very long to sell your current property since there are so many buyers.
The opposite theory applies when it’s a buyer’s market, meaning there are more homes on the market than buyers to buy them. In this scenario it will take you longer to sell your home than to buy the new one.
In either event, the purchase contract you enter into will be contingent upon closing escrow on your current property. Nowadays, that’s a problem. The reason is simply that a vast majority of the houses on the market are short sales and require the seller’s bank to approve the transaction. Their bank won’t care that you’re a nice couple who actually want to live there.
If you’re competing with an all-cash offer, the bank won’t even sniff at a contingency offer like yours.
The third option I referred to earlier is known as a bridge loan. Bridge loans are nothing more than a short-term loan given to you by your lender to allow you to get into the new home before selling your old one. Once your old home sells you immediately pay off the bridge loan.
Bridge loans usually carry a very high interest rate and can be difficult to get. The advantage, however, is they help to make for a smoother move. However, the availability of such loans in the aftermath of the great recession is questionable. That’s where the guidance of a good mortgage broker is needed.
If you have enough equity above and beyond what you need to get into the new house, this could be an option.
So which scenario is best for you? I don’t know.
A good Realtor can help guide both transactions to a simultaneous close and, in an ideal situation since you aren’t short selling your home, give you a short rent back in your existing home so you’ll have time to move out.
But your agent can never guarantee that delays won’t take place in one or both escrows.
Personally, I think most people would be happier with the bridge loan, if they can get one. It may be expensive but it will take a lot of the pressure off of the whole process. If you don’t qualify for a bridge loan you can take heart in the knowledge that this type of transaction takes place thousands of times each day and most happen without any catastrophic problems.
Tim Jones is a real estate attorney in Fairfield. If you have any real estate questions you would like to have answered in this column you can contact him at [email protected]