Buying

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.

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

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.

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Months of Inventory – Richmond Region

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

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Pick a Side

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.

More on this later.

Liquidity is Power

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.

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.

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.

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

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.