BOULDER – When you are selling one house and buying another, there are inherent risks that you may not be able to control. I will outline seven options of what to do in these situations. Each of the options has pros and cons. Which option you pick depends on equity levels, qualifying ratios, and other considerations. Welcome to part one of my two-part series.
1) List your home conditional upon finding a replacement property
A Realtor can list your home and put in the comments in the Multiple Listing Service database (MLS) that it is “conditional upon you locating a replacement property.” This method allows you to put your old home under contract, then find a replacement property within an agreed upon period of time.
The disadvantage is that some of the best buyers, (such as corporate transferees that have three days to buy a house), may not want to look at your listing. The reason for this is that they don’t want to “wait and see” if they have purchased a house based on your ability to find a replacement. It is estimated that you lose about 30% of the available buyers by offering a listing “conditional upon finding replacement property.” If a buyer is willing to purchase your home with such a condition, they will usually give you 10 days or so to locate and contract on another a home that you would like to purchase.
The difficulty is, what happens if the contract on the home you are purchasing falls apart after you have removed the condition of “finding a replacement property?” A buyer might be willing to wait until you contract on another property but very seldom will they wait for you to resolve inspection conditions or actually close on the “replacement property.”
2) Make an offer on new property conditional upon selling your current property
It is possible to make an offer on your new home “conditional upon your old home going under contract.” This method can also keep you from doing a double move. Your Realtor’s ability to structure the transaction this way is dependent on market forces. If the market is hot, the odds are good that a seller of the home you want to buy will receive offers from buyers that do not have a house to sell. In a hot market, having a house to sell before you can buy puts you at a negotiating disadvantage.
If it is acceptable for the seller to give you time to sell you your house, it is usually structured where you have 30 days to get a contract on your home and another 60 days to close it. Sometimes when you make an offer conditional upon the old house selling, the seller might come back with what is called a “first right of refusal.” This means that you and the seller have agreed to the price and terms of the contract. The seller then can continue to market the property and see if they can find a buyer that doesn’t need to sell a home. In the event the seller receives another offer to purchase, most first right of refusals have 48 to 72 hours to remove the condition of selling your current home. In order to remove that condition, your Realtor would need to have placed your home under contract or arranged a “bridge loan.”
3) Bridge loan financing
A “bridge loan” allows you to use the equity in your old home to use as down payment for your new home. The advantage of a bridge loan is that it gives you a strong negotiating position in acquiring your new home by not needing a contingency to sell your current home. A bridge loan will typically allow you to use up to 80% of the value of your current home, minus your current loan balance for the purchase of your new home. If you are willing to obtain a bridge loan, you can “beat out” other buyers that may have a home to sell before they can buy. This method can usually prevent you from doing a double move.
The disadvantage of a bridge loan is that if the old house doesn’t sell quickly and you close on the new home, you have the new loan payment, the old loan payment, and the bridge loan payment.
It is best to market your home aggressively to try and sell it before you need the bridge loan, and to close on the bridge loan at the last possible moment, if needed. Most lenders will approve you for the bridge loan upfront so that you can still remove your contingency. If this alternative appears beneficial to you, it is in your best interest to meet with your lender to determine that you qualify for the bridge loan and to discuss any questions that you may have.
In part two of this two-part series, I will discuss four more options and the advantages as well as disadvantages of them all.
By Duane Duggan, RE/MAX of Boulder. Duane is an award-winner Realtor and author of the book, “Realtor for Life.” and has been a Realtor for RE/MAX of Boulder since 1982. He has facilitated over 2,500 transactions over his career. He has been awarded two of the highest honors bestowed by RE/MAX International: the Lifetime Achievement Award and the Circle of Legends Award. Living the life of a Realtor and being immersed in real estate led to the inception of his book, Realtor for Life. For questions, e-mail Duane at firstname.lastname@example.org, call 303.441.5611, or visit boulderco.com.