The Art & Science of Buying & Selling a Home at the Same Time

Wondering what the best way to manage the process of buying a new home while selling your old home is?

You're in the right place...

Let's walk through the art and science of buying and selling a home at the same time:

There are three main challenges involved in attempting to buy and sell at the same time – carrying multiple mortgages/payments; moving multiple times; and, generating liquidity for the purchase. 

Are you looking to minimize costs, effort, or  risk? There's no universal right answer, so you'll have to use both your feelings and a calculator to decide.  

This guide will help you understand what the tradeoffs are in reaching the optimal decision.  

Multiple mortgages

Buying before you sell is tempting. Your decision to move might be driven by having just found your new dream home and you can’t let it pass by. Buying before you sell often means you have to find a way to finance a new home purchase while you still have obligations under an existing mortgage on your current home.

Here's a summary of the challenges and potential solutions:   

Qualifying:

The mortgage lender for your new home is not allowed to assume that your old home sells and your old mortgage is paid off. They will calculate your ability to pay based on carrying two mortgages, which will limit your ability to qualify; the recommended solution to this is as follows:

  • Sell and rent back: Before the advent of some of the new products (generally known as “ibuying”), this was the best solution. You sell your existing home as you normally would, but you ask the buyer for a lease-back. This allows you to rent the property from the new owner for a certain amount of time while you look for a new home. This solves the qualification issue, because the new mortgage lender is able to assume that you won’t be under the rent obligation for purposes of the new mortgage.The issues are the cost of the rent-back and the burden and cost of having to find a new home on a tight timeline (unlikely you will be able to get the rent-back period >60-90 days).
  • Buy with sale contingency: Securing the new home while giving yourself a window to sell the old home is a great solution in a buyers market. However, in a sellers market where sellers can choose between multiple offers, this will likely not be accepted by the seller.   
  • Pay cash for new home: Paying cash for the new home does not require you qualify for a new mortgage while under an existing mortgage, and eliminates this issue. If you don’t have cash on hand to consummate the new purchase, companies known as ibuyers have products that act like cash offers. Depending on whether it is a cash offer or a trade up product, there may be a cost similar to the rent-back option; other issues include lack of availability of the product in many markets, and less flexibility in getting top dollar for your existing home. Trade up and cash offer style products are offered in some markets by companies such as Flyhomes, OpenDoor, Zillow, Knock, and Keller Williams. 

Costs:

It's possible that you can qualify for the new mortgage even taking into account your existing home mortgage payment. However, if you decide to go this route, which involves buying a new home before selling your existing home, you will have to bear the costs of two mortgages, and have liquidity for a down payment on the new home. If you have liquidity for the down payment on the new home, then we recommend you compare the carrying cost of the new mortgage with the carrying cost of a cash offer program or the limitations of a trade up program; in the current interest rate environment, the new mortgage will likely be the lowest cost best option.

The risk is similar to these other programs, in that if your existing home doesn’t sell, it will prolong the period with the added costs, and cause increasing stress. However, you will have more flexibility to deal with the costs on your old home; for instance, you can rent it out for added income. This is not available with the other products, because the new mortgage lender during underwriting will likely want to see a lengthier history of renting the property to give you credit for that income and go through with the new mortgage (if the new mortgage lender gives you credit for the rental income in assessing your ability to pay, then you can obtain the new mortgage without having to sell the old home; if not, you have no other option to qualify than to sell the old home).  

In summary, there are three ways to avoid having multiple mortgages; either 1) sell before you buy; 2) use a cash offer/home swap/Trade Up program; 3) pay out of pocket cash for new home. 

If you can pay all cash out of pocket for the new home, that is the best solution; however, there are new products such as trade up, home swap, and cash offers that mimic the benefits of paying out of pocket cash, and their cost is likely not materially different than the opportunity cost of using your own cash, so expect them to grow in popularity with many types of homebuyers, even those that already have access to excess cash.

Minimize cost: Trade up programs are designed to minimize the cost of simultaneously buying and selling; the biggest issue is simply that it is a relatively new product not available in all markets; in those markets, a cash offer program is a close substitute.  

Minimize effort: Trade up programs have the edge over cash offer programs here because the trade up company will buy your existing home if it fails to sell within a certain period, taking a potential struggle of a failed sale process off your plate. However, trade up programs are still limited in their ability to deal with more expensive homes or those that naturally take longer to sell, so if you're already concerned about selling your home, your home might not be eligible for a trade up program; in which case, a cash offer program is the next closest substitute.   

Minimum risk: Trade up programs minimize risk by putting a floor price for your existing home sale; however, these companies seek to limit their risk by only working with certain types of homes in certain type of markets, so a cash offer program is the next closest substitute.

Two moves

Putting aside the issues of mortgages and financing, what is the most effective way to move out of the old home and into the new home?

If you sell your existing home before buying the new home, then you will either need to rent-back from the buyer or find temporary housing. Even if you can get a rent-back from the new buyer, it may not be long enough for you to find and close on the new home, forcing you back into the need for temporary housing. 

To make this as smooth as possible, you should start arranging your temporary housing before you even list your home. Most people try to find reasonably priced short-term rentals and separately pay for storage to hold their excess belongings until it's time to move. Check out the likes of Airbnb, VRBO, HomeAway, Apartments.com, or extended stay hotels for options. For storage, check out Upack and Pods.  

General liquidity

As discussed above, it's possible your income could qualify you to carry two mortgages simultaneously but you need the sale proceeds from the old home to make the down payment on the new home. 

Here are some suggestions on how to unlock this equity without having to sell your existing home immediately. The benefit of going this route is it gives you more flexibility to buy the new home on a timeline independent from the sale of the existing home. The issue with both of these products is they are higher cost than traditional mortgages and you may be locked into paying the cost longer than you like if you struggle to sell your existing home; and, these products may have short terms (as little as 6 months) effectively forcing you to sell your existing home within six months even at a discounted price. Your new or old mortgage lender are the first places to start to evaluate these options.

  • HELOC: A home equity line of credit allows you to borrow against the equity in your current home. If you qualify, you could use a HELOC to access money for your down payment, then pay it off when your home sells. It is typically longer term (up to 20 years) than a bridge loan helping you avoid being a forced seller of your existing home, but you have to watch out for products where the lender can demand repayment on short notice. Also, it might be difficult to qualify once your home is already listed for sale. On the other hand, financing home improvements in preparation for a future sale is considered a valid use case.    
  • Bridge: This is a short-term loan that taps into the equity in your current home to get the necessary down payment to complete your purchase. This is only a viable option if you’re comfortable taking on two mortgage payments for up to six months or a year, which is the typical term for a bridge loan. Rates are typically at least 2% above the prime rate (and the prime rate is currently in the vicinity of 30 yr. fixed mortgage rates). Bridge lenders also typically charge upfront points and fees in order to offset the shorter interest earning period. Some buyers make their offers contingent on getting the bridge loan rather than on the sale of their home, which might be more attractive to sellers. Some lenders might limit the bridge loan to an 80% loan-to-value ratio on your old home, which might not provide you with much cash unless you have substantial equity in your home. The bridge lender might also only agree to do the loan if they also get to make the new mortgage loan as well. The good news is Fannie Mae explicitly allows bridge loans as a valid source of down payment funds for a new home purchase; however, lenders are free to add their own overlays which could restrict their use. 

READ NEXT: The Potential Roadblocks To Know When Closing on a Home

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