You want to buy a new or different home because of lifestyle changes but need to sell yours to afford a new down payment and get the new mortgage to an acceptable level. This has become commonplace in the Reno/Sparks area due to rising home values starting in 2011 but is very complicated due to low inventory. There’s a large chasm of the unknown keeping you from getting your new place.
So how do you do it? Do you need to rent or shack up with a relative after your home sells?
After many consultations with clients asking those and other questions and getting some of them through the process and closing I decided I should make a list.
Below are a few processes that may work and some definitions to lead you through. There’s not enough time to fully write out the potential pitfalls and options, nor enough space on my server, but this should be a good overview.
Home Sale Contingency: There are a lot of contingencies when buying a home. You needing to sell your home first in order to buy another one is the biggest and most detested by sellers.
Open Contingency: The seller will allow you to put an offer on their home with your current home sale as a contingency. If the seller gets another offer you have X days (typically 2) to remove your home contingency. Yeah, you need to sell and close on your home in 2 days or the seller can remove your offer and go with another one.
Closed Contingency: The seller accepts your offer and will not review other offers until a certain time frame has expired (we usually ask for 3-4 weeks). If you’re unable to get your current home into contract or your buyer fails to complete their contingencies (inspections, appraisal, etc.) within that time frame and the seller isn’t willing to extend it you back out and start looking for another home.
Re-finance aka refi: Getting out of your current loan for a new one with better terms, interest rate, and pricing. A refi does cost money to perform and you’re subject to an appraisal.
Hard-Money Loan: Getting a loan from a rich person or group of people. They don’t do thousands of loans a year like big banks and lenders so your rate will be higher and the terms not as good as an institutional loan. These are generally used for people with poor credit but have good, steady income and a sizable down payment.
Loan Occupancy Requirement: A lender or investor may have a requirement for how quickly someone must move into a home that is purchased with an owner occupied loan. Typically, 60-90 days.
Rent-Back: An owner sells and closes on their home but remains there while paying rent until the home they’re buying closes. The owner is now a tenant and the buyer is now the landlord.
Negotiating Power: Compared with a regular buyer that doesn’t have a home to sell.
Risk: Compared with buying a home and not having to sell your current home (turning it into a rental). Including financial risk.
- Bridge loans, well kind of… According to every lender I’ve spoken to, bridge loans are out the window because of QM lending rules and government intervention of types of loans. The alternative to this is getting a hard money loan with a higher than market level interest rate (think 10-12% instead of 4%) and then re-financing if possible. It may not be possible to refi out of that loan so the best you could do is pay down the current loan amount with the funds from your home sale. At worst, you have a high interest loan but have a lower loan principal. Negotiating Power: Strong Risk: Moderate (depending on if you can refi)
- Buying a new build… Buying from a builder can give you the extra time you need to get your home on the market and sold. Let’s say you and your agent meet with the builder and finalize terms for a built from scratch home that will close in six months. Because the builder couldn’t sell and transfer the home within 30 days (it’s still being built) you have time to prepare a timeline for your current home sale to match up with the builders. It’s better to pad your timeline and get the home on the market earlier rather than later and use a rent back if you sell quickly. It’s prudent to have good communication between your agent and builder in order to make this work. They’ll already be discussing the new home purchase so the relationship should already be there. At worst, your current home doesn’t sell in time and you ask the builder for an extension. Negotiating Power: Poor (It’s a builder) Risk: Moderate
- Selling your home while looking for another… This can work in multiple ways so I’ll explain them as clearly as possible. These are all based on the seller accepting your “closed contingency”. An open contingency has too many pitfalls and I never advise doing it unless you’re in dire straights.
- Putting your home on the market with the stipulation that the buyer’s timelines will not begin until you get into contract on another home and reach some milestone in that escrow within a certain amount of days. The problem with this is there are many contingencies remaining (inspections, appraisal, full loan approval, etc.) before either party can own their new homes. These contingencies make the seller of your new house very nervous and unlikely to accept an offer unless it’s amazing. The goal is to close both homes simultaneously with a short rent-back for moving. At worst, you don’t find a new home in the specified time frame and you release the buyer of your home from his contract. Negotiating Power: Poor Risk: Moderate
- Putting your home on the market and accepting an offer with a predetermined rent back time frame and price within the buyer’s occupancy requirements of their loan. If the rent-back is 60 days you technically have the 30 days of closing and 60 days of rent-back. So, 90 days total to find, offer, and close on another home. This is a little more appealing to the seller of the home you’re going to buy. Especially, if the buyer of your home has already completed the inspection and appraisal contingencies. The major downfall is that you have added pressure to buy a home quickly. At worst, you don’t find a new house, have sold your home, have your money, and are a renter… in an apartment or someone else’s house. Negotiating Power: Poor Risk: High
- Sell, Move, Then Buy… No one likes this one because it means moving twice. Though, it’s probably the most likely in a low inventory market. You sell your home and move into a rental or with family/friends while storing the majority of your things so you don’t pay too much on rent. You have your money from the home sale and you’re now able to shop like a normal buyer with less pressure than a rent-back contingency. Negotiating Power: Strong Risk: Low Annoyingness: High
- Buy Then Sell… If you’re lucky enough to have a big bank account and high earnings you can probably go buy a home without selling first. The loan terms may not be the absolute best but better than a hard money lender. Once you move in and sell the other one you can refi out of the current loan or apply your proceeds to the loan balance. Remember, a portion of your current mortgage will be considered debt when running your debt to income ratios. Though, if you’re doing this you’re very well off financially and it shouldn’t matter. Negotiating Power: Strong Risk: Low
- Borrow the down payment… Have a family member gift you the funds you need to buy the new home. Buy it and then sell yours. The giftor will have to write a letter stating the amount they’re giving, why, and that no repayment is expected. At worst, you owe a big one to someone that loves you. Negotiating Power: Strong Risk: Low
Each of these scenarios are much more intricate than I could put on paper. If you’d like to walk through these options please contact me at (775) 750-1437 or Ricky@RickyBeach.com
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Keller Williams Group One Inc.
10539 Professional Circle., #100
Reno, NV 89521
Office: (775) 393-9601
Cell: (775) 750-1437