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How to Execute a Simultaneous Sale/Buy

July 3, 2015 By Rick Jarvis

So you want to buy a new home, eh? Great! We can help.
But you have a house to sell, too. Great! We can also help with that.
But you can’t buy the new home until you sell the existing one. Got it.
And you don’t want to settle for a new home that you don’t absolutely love. No sweat.
And you don’t want to move twice. Understood.
And you don’t have to move so if you don’t get what you want, you can just stay put. Noted.

Selling and Buying at the Same Time

We hear these statements all of the time … and trust us, we really do understand.

As the market rebuilds itself and more and more people are getting back to a position where the value of their homes has recovered, we hear the aforementioned wishes more and more. But correctly executing the sale/buy transaction is harder than it sounds … and it is about to get harder. Likewise, one person’s best way might not be another’s best way. This is not a ‘one size fits all’ type of transaction.

Let’s look at what to consider.

Everyone is Different

First and foremost — no simple answer exists.

Everyone has a different view of financial risk, and thus, no one solution exists ...

If anyone has a single ironclad way of handling this scenario, I have yet to meet them. Not only is each situation unique, but everyone has a different view of financial risk. What may feel comfortable to one buyer may feel unnerving to another. The possible combination of factors – price, income, equity, interest rates, timing, distance (and many more) – makes recommending a single ‘step by step’ pathway both irresponsible and short-sighted.

At the end of the day, you need to consider many factors. By understanding the concepts and their risk/impact, you will give yourself a framework to help discover YOUR best path.

A Framework for Understanding

Remember, it is a portfolio decision, involving a buy AND a sale ...

First and foremost, you need to realize you are making a portfolio decision. The sale of a home and subsequent purchase of another is nothing more than rebalancing your overall financial picture, at least as it relates to housing, and decisions made on one side impact the other. These two seemingly independent events need to be considered in conjunction with one another and should not be separated. Many people want to look at the two transactions as independent of one another, but they are not.

Unless you are moving from one market to a completely different one or selling and moving into a long term rental, replacing one asset with another simultaneously means similar market conditions on both sides (with some exceptions, obviously.) If it is a seller’s market when you sell, it is when you buy. The reverse is also true. Don’t expect otherwise.

Months of Inventory – Richmond Region

For more information about market conditions, check out our STATS page

Pick a Side

One side of the transaction is more important than the other ...

That said, you have to recognize that one side of the transaction is more important than the other.

Typically, when trading up from the starter home to the 5 bedroom home that will take you through the next 20 years, the home you are buying is more important than the one you are selling.

Act accordingly.

Timing is Everything

The sale/buy is about precise timing.

A properly executed sale/buy means the execution of many complex things all at once – closing, funding the mortgages, payoffs, wire transfers and movers (to name a few.) Make sure your team (Realtor, lender, attorney) is not only experienced, but experienced in working with one another.

A missed date in a sale/buy can get incredibly expensive extremely quickly and guess what – you are the one who carries that risk.

Contingent? First Right?

Sellers in accelerating markets hate both ‘Contingent Contracts’ and contracts with a ‘Right of First Refusal.’ Being either a contingent buyer or first right buyer in most cases, means overpaying, and is a poor strategy.

Liquidity is Power

Many financial advisors have scared their clients by not understanding the housing implications of their advice ...

Liquid assets are your friend. 401k, stock accounts, home equity loans, other retirement funds … all of these have value either as collateral for a loan or in their ability to be turned into cash.

Make sure you fully understand the impact of accessing these assets (taxes, penalties, borrowing rates, vesting) before blindly refusing to use them. It should also be noted that many a financial advisor has scared clients by not understanding the housing implications of their advice. Asking your financial advisor is prudent, but filter that advice they give you.

Use Your Math Skills

Furthermore — remember it is a math problem.

Don't try to save $1,000 on one side to cost yourself $3,000 on the other side ...

Often, we hear clients say ‘well its too expensive to borrow against my 401k’ when in actuality, the cost of accessing assets like the 401k is far cheaper than the alternatives. Don’t try to save $1,000 dollars on one side and cost yourself $3,000 somewhere else. If liquidating a stock position makes you a stronger buyer, seriously consider it.

Use Your Strength

Likewise, the more strength you have as a buyer, the better deal you can drive.

Remember that an offer is a combination of price AND terms. Being a good buyer is more than just price. Down payments, closing dates, inspection, appraisal and sale contingencies are all part of the contract and can make your offer more attractive than someone else’s in a competitive offer situation. The better the home you are buying, the more offers it will generate.

Vet Your Lender

A good lender is a must.

The use of a non-local lender always costs more in the long run ...

If you use an internet lender or some other lender tied to your stock portfolio, money market account or insurance carrier, prepare to have a miserable and expensive experience. I cannot state this loudly enough – the use of a non-local lender will cost you substantially more in the long run. Do not worry about how great their incentives are to get you to use them, don’t do it. Nothing they can offer you will make up for the expense of missing the closing date on a simultaneous transaction. If you are talking to one now, hang up the phone, close your internet browser and step away. Non-Local lenders never ever ever work out. Never. Ever. Never. And, once again, you are the one who loses, not them. If you take nothing else from this post, remember this point … please.

Penny Wise and Pound Foolish

Beware the tendency to be ‘Penny Wise and Pound Foolish.’

Many times I have seen a seller (who is under contract to buy) make a dangerous decision about an minor inspection item and put their own sale at risk. Buyers are still skittish and being too aggressive on a small item, regardless of how right you may be, means losing big in the end. If you have removed your own contingencies and spent money with your lender, inspectors, insurance broker and appraiser, losing the contract on your house over a small inspection item will feel incredibly foolish in hindsight. Be extremely careful about everything you do that can give your buyer an out when trying to execute the simultaneous transaction.

Do Your Homework BEFORE it is Due

Speed is critical, and so is market knowledge.

Do your homework, get prepared and rehearse!

Minimizing the time between when you find the perfect house, get it under contract and have yours on the market minimizes your risk. Knowing the market means immediately recognizing a good deal and being prepared to act gives you the greatest chance for success. Do your homework, get prepared and rehearse.

Keep your home ‘show ready,’ even if not on the market
Get pre-approved, not just pre-qualified, and keep it updated
Have the ability to go see a newly listed home within 24 hours
Be ready to pull the trigger and negotiate quickly
Have your team ready and understand the costs

Expect Competition

Expect the best listings to have multiple offers and prepare accordingly ...

In a market starved for inventory, your value as a buyer is far less.

Don’t expect the new listing in the perfect neighborhood to negotiate price much (if any) and don’t be surprised if there are multiple offers. As a matter of a fact, expect the best listings to have multiple offers and prepare accordingly. And the more you lallygag with making an offer, the more competitive offers will magically appear.

Wait or Act? You Decide …

Waiting makes ‘Trading Up’ more expensive. The long term prognosis for both interest rates and home pricing is heading up. If you are moving up, then waiting until the home you are selling appreciates some more (probably) means buying a more expensive home at a higher interest rate. Yes, your $200,000 home might go up by 5%, but so did the $500,000 home you want to buy. Do the math.

Get Housed Right!

Do not discount the cost of being ‘Housed Incorrectly.’

If a recent job change has created a 90 minute commute or a change in familial status means you have too much (or too little) space, it causes stress. The impact being in a house that no longer fits is not without actual cost or mental/emotional cost. The creation of unnecessary stress and expense is unwise.

Accept the Idea of Moving Twice

Be prepared to move twice.

No one wants to hear this but know that making a decision about your next 10 to 20 years is worth a short term rental or week in a hotel. No one makes their best decision when they are under pressure. Removing the ‘I refuse to move twice’ condition from decision means more and better options as well as a stronger bargaining position. Buying a home that does not fully fit so you didn’t have to move twice means going through the process again … how big of a pain would that be? Not only would be a big pain, it would be an expensive one, too. If moving twice gets it right, do it.

The Sale/Buy is Harder than Ever!

Similarly, the ability to execute a simultaneous buy/sale is about to change and may force you to move twice.

The implementation of the CFPB’s mandated new closing protocol will occur in late 2015 and change how closings are handled. Many of the changes create timing issues that are going to impact the ability to close consecutive transactions. The old way is no more and the protections that are now built in on the buyer’s behalf takes away about half of the flexibility to correctly execute the simultaneous buy/sell. For sell/buys using highly leveraged mortgages, or closings where multiple people are executing simultaneous buy/sells (think of a long line of dominos,) it will be even harder.

Plan B

Have a backup plan in place.

Do you want the know the best way to lose big in a negotiation? Have no alternative, that’s how. Playing chicken with a lender, mover or builder gets awfully difficult when you have no backup. And know that the your lender, mover and/or builder plays the negotiation game every day … you might play it once every decade. They are better at it than you are.

The Use of Contingent and First Right Contracts

Above, we referenced the ‘Contingent Contract’ and ‘Right of First Refusal’ (ROFL) contracts. In theory, they make perfect sense. In reality, they don’t get you what you want. Contingent contracts and ROFR rarely work.

First, a contingent contract effectively says to the seller – ‘I will buy your home when I sell mine.’ The seller takes their home off of the market and waits for the buyer’s home to sell. We very rarely recommend for our sellers to accept a contingent contract. If we do, it is only with draconian constraints and penalties for non-performance by the purchaser. The idea of taking a salable home off of the market during the spring season is colossally stupid and thus, it should not be done without proper protection.

In a ROFL, the buyer effectively says to the seller – ‘I will buy your home when I sell mine, but you can still market the property. If someone else brings you a contract, then I will either figure out a way to buy it or step aside and let the next group buy it.’ Only in the rarest of scenarios do we recommend for a seller to accept a ROFR.

When the market is stout, like it is now, these contracts are basically worthless. A seller is looking for someone without a contingency so they they can get on with their move. In order for you to convince the seller to accept a contingent contract, you pretty much have to overpay to get them to accept your contract.

Similarly, if you are in a ROFR or contingent situation, you have to price your home aggressively or risk losing the property you want to buy. So you end up overpaying for the purchase and underselling on the sale. That is just dumb.

Either way, the contingent contract or the ROFR, the buyer usually pays more and receives less … I am not sure why people try to use these techniques.

Conclusion

At the end of the day, we recommend figuring out how to buy without the use of the contingent contract or ROFL. In this market, these contract structure present risk greater than the reward in almost every case.

If you cannot buy without selling, we recommend selling first and strongly considering the dreaded concept of moving twice. The position of strength you will gain by doing so will far outweigh the short term nuisance. If you can figure out a way to make the timing work, then great, but a temporary move lets you shop from a far stronger position.

And lastly, if you want to move once, make sure you can act quickly and have a backup plan in place, just in case. Know that in doing so, you are limiting your options and placing additional risk in the transaction. The coming changes to closing practices are going to muck up the system tremendously and create chaos. The financial penalties to lenders will make them even more cautious than they are currently and the idle moving trucks in your driveway is not their primary concern when faced with up to a $1M PER DAY fine.

Understanding the inherent risk in this type of transaction is key and hopefully, this article has brought to light the difficulty and danger in correctly navigating the simultaneous buy/sell.

Richmond VA Housing, By Decade

May 23, 2015 By Rick Jarvis

The new homes in Oak Park were inspired by Ginter Park neighborhood of the the 1920's and 30's. — The new homes in Oak Park were inspired by the Ginter Park neighborhood of the the early 20th Century

We recently received a request to create a page that grouped housing by decade. We thought it was a good idea … at least in the 20th Century.

So here you go …

Pre-Qualification or Pre-Approval?

January 27, 2015 By Rick Jarvis

What is this “Lender Letter”?

If you are going to need a mortgage loan to purchase your new home, one of the first questions you will face from your Realtor is “have you been pre-approved (or pre-qualified) for a new loan with a mortgage lender?” What is the difference? Believe it or not, many mortgage bankers exchange the phrases like they are synonymous, but there are subtle and, in some cases, very important differences. Most home buyers will be asked for a “Lender Letter” to present to the seller and their agent upon submission of your initial offer to purchase agreement. The letter is usually based on information gathered or exchanged related to either a pre-approval or pre-qualification process.

So what is the difference? Here is how I would describe each:

Pre-Qualification is a loan officer’s opinion based on verbally supplied information related to a potential borrower’s income, assets, and credit profile relative to a currently available loan product guideline.
Pre-Approval is a fully underwritten mortgage loan in which income and asset documentation is provided as well as a credit reviewed and validated by a mortgage loan underwriter who issues a commitment to lend subject to maximum terms associated with interest rates, monthly payments, cash to close, and loan amount, all subject to a ratified purchase agreement and an acceptable property appraisal (whew…that is a lot of stuff!).

So, one is maybe a 15 minute call, and the other is more like a 20 day process.

Chris Owens with Southern Trust Mortgage has a full range of second home and investment property loan products.

Here are links to the other articles in this series about Lender Letters:

Real Estate and Minivans, Sedans and Convertibles…and 2015, too.

December 30, 2014 By Rick Jarvis

I think all salespeople, as we age, tend to do more of our selling by telling stories and using analogies than we did when we got started. Call it experience or call it wisdom (or just call it being old,) but the ability to take a current situation and compare it to a universally recognized feeling somehow makes it more real to our clients. When you can take an odd situation and make it feel familiar, it helps the client feel at ease with their decision. Familiarity begets comfort.

So recently I ran into an old friend at lunch who I do not see often. He owns a small business selling supplies to local restaurants and has been doing so for many years. Of course, he asked how the market was (all friends ask their Realtor buddies this question.) I told him it was good (which is true) but I sure would love it if people felt a little more like they did in 2006 again. If it was 2006, we would be almost TOO busy (if there was such a thing) as our company had matured greatly since we opened and I wanted to see what we were capable of in the best of times.

I said I wanted the market to feel like they were all driving convertibles again. He looked at me and grinned as he knew exactly what I meant.

We All Drove Convertibles

From 2004-2008, the development market was booming.

The long neglected neighborhoods in Richmond were in the midst of a rebirth with condos, creative office spaces and apartments all being redeveloped at an astonishing pace. The banks were willing participants with (relatively) easy terms and a shared belief that the market was bulletproof. Lending was based as much on momentum as anything else. The development community was ripe with opportunity and the developers had both the skill and capacity to really execute projects. The Richmond we knew in 1995 looked nothing like the one in 2005. It was one of the most amazing transformations I had ever seen in a 10 year period.

The best analogy was it felt like we were driving a convertible on a sunny day with no clouds and a slight breeze with the radio (or CD, or XM, or iPod) playing our favorite tunes over and over. It was a good time.

Driving in a Downpour

And then a few raindrops began to appear.

While there were hints of the coming changes as far back as the summer of 2007, the definitive marker for the bursting of the bubble came in September 2008 with the announcement Lehman Brothers had collapsed. By early 2009, all of the feelings of being bulletproof and carefree disappeared into thin air.

Beginning in late 2007, and continuing well into 2011, banks decided the best way to stay in business was by NOT loaning money. New home buyers disappeared completely and subsequently, droves of sellers decided to hand their keys back to the mortgage companies which had given them loans only a few years earlier. No one wanted to make a decision, especially not one with any risk attached to it, and the market froze. With no loans, there were no transactions and with no transactions, values plummeted.

Sticking with the driving analogy, we had gone from (in 2006) driving a convertible along the beach without a care in the world to (in 2009) driving an old minivan in a downpour, in the dark, on an unfamiliar curvy road somehow knowing that the bridge ahead was probably already washed out.

I don’t think anyone wants to live through that economy again.

Driving Home From Work in April

As we enter 2015 the world has changed yet again. It is better, for sure, but we are not back to where we were…and maybe that is a good thing…at least for a while.

For the last two consecutive spring markets, we have seen rapid absorption, price appreciation and a gradual relaxation of some lending standards. The last two fall markets have been shakier. Spring momentum of 2013 and 2014 stalled by the late summer and some of the gain of the first half were gone by the end of the year. While other current economic standards (oil, stocks and bonds, employment, inflation) all seem to be in pretty good places, no one will mistake 2015 for 2006. Alas, it is no 2011 either, and that is okay by me.

The bottom line is we are now in a place where buyers and sellers can make plans based on expectations rooted in realistic probabilities. And while we have not returned to a market where the inputs (new housing, interest rates, development) are back to pre-recession levels, they are on the way back to normalizing themselves. With normal inputs comes stability and with stability comes predictability. At the end of the day, words like ‘predictable’ and ‘stable’ are good words for real estate.

Driving home to turn on the grill is never a bad thing, is it?

To use the driving home analogy a final time, imagine driving home from a good day of work on that first warm day of spring. It may be a bit chilly to roll the windows down, but you so anyway. And while you darted out a few minutes early from work, you still didn’t miss all of the traffic (and even hit a pothole or two) but it somehow seems okay after living through the ride on the curvy road in the rain. And despite the fact the days are not perfect (yet), you know summer is coming and with it grilling outside with friends, family and familiar faces all in good moods ready to enjoy life for awhile.

The drive in 2015 is less about the car and more about the attitude. Lets all sit back and enjoy the ride, whether in a VW Beetle, Dodge Stratus, Mustang GT or Maserati Quattroporte…

Pricing a Home is Predicting Buyer Behavior

December 20, 2014 By Rick Jarvis

Dear Property Owners,

The entire real estate world is doing you a disservice.

Sincerely,

Past Sales

Our industry is set up to determine values of homes based on the sale of other homes considered to be ‘similar.’

The determination of what is similar is largely based on location, size, features as well as timing. Sales occurring in the recent past are weighted more heavily than those in the distant past. This method (commonly referred to as the ‘Comparable Sale Method’ or using ‘COMPS’) is the primary basis upon which home values are estimated.

What is a Comp?

The logic behind the use of the COMP goes something like this – if House A sold for $X, House B sold for $Y, and House C sold for $Z, then your house should sell for some weighted average of the three, provided the COMPS used are the most appropriate ones available.

The Competitive Market Analysis (or CMA) that a Realtor performs to determine pricing uses this ‘COMP-based’ method, as does the formal appraisal performed by your bank to determine loan conditions. The Assessor’s office uses a similar method when it assesses your home for tax purposes (they look at neighborhood sales) and Trulia and Zillow use a combination of COMPS and assessments to (incorrectly, usually) arrive at their estimate of the value for your home.

But is this the best method?

The Future or the Past?

Lets ask this – Do you drive a car by looking in the rear view mirror? The answer is obviously ‘No’ as most of us spend most of their time looking out the FRONT window (or looking down at their cell phones, but that is a different issue.) We look out of the front window because we are concerned with where we are going and the dangers our journey presents. Stated simply, we are more concerned with future events than past ones.

We (Realtors, Sellers, Buyers, Bankers, Appraisers, Homebuilders) have all been trained for so long to look at the COMPS for guidance and COMPS are events which have occurred in the past.

Take a look at the chart below – it tracks the trailing 24 months of homes going under contract.

Do you notice any seasonality? Yeah, me too.

What happens if the three COMPS you used to price your house in June were from April? Or December? Do you think you have made a correct pricing decision?

Comps are Easy, Unfortunately …

The core issue is this – COMPS are easy to measure and thus prevalently used.

It is unfortunate.

The COMP is not a fact, per se, it is a result. The reasons someone else paid a specific amount for a home at a point in the past is a combination of many complex inputs which do not lend themselves to easy analysis. Inventory levels, interest rates, consumer confidence, seasonality, the ‘Wealth Effect’ created by the DOW and NASDAQ, mortgage rules, Dodd-Frank, job growth (regionally/nationally/internationally), population trends … all combine to influence buyer behavior.

When you look at the number of pending sales generated in 2010 (chart below), do you think think that April did a good job of predicting May?

This is not to say that using COMPS to help price a home is without merit as understanding what has happened recently is a good place to start. If you can determine a point from which to begin your analysis, it is of great help. Establishing patterns in past behavior has value…it is just that using COMPS exclusively falls short, especially in a dynamic market. The quicker the market shifts, the less value any individual COMP has (see the example above.)

Pricing Should Look Both Directions

Ultimately, a pricing model is not complete without some projection of future events and relatively simple tools exist to help drive the analysis. While predicting the future is far more challenging, it is not impossible, especially given the almost universal access to information we all have. The tools we use for analysis are cheap and easy to use and some level of predictive intelligence is achievable in almost all situations.

Pricing any asset for sale SHOULD be undertaken with the mindset of ‘what behavior from our audience are we EXPECTING?’ and that can only be achieved by looking into the future, as murky as the view may be.