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Newbie question here folks. My wife and I currently own our first (20% down on a condo in San Francisco in 2009; fixed 30-year loan). Obviously at some point (maybe 2-4 years from now) we would like to trade up. But how is that typically done? Or, more importantly, what's the smartest way to do that? It seems really difficult to do the juggling act. For example:

-- Seems smart to do a staging for Home A so that it looks great, and you can get the best price for it. But obviously you can't be living in Home A while it's being staged for prospective buyers. But moving to Home B entails your having already made the purchase and closed the loan for Home B. Which means that you're now carrying two mortgages. Which is financially risky if Home A takes a long time to sell.

So what's the best way to trade up (for relatively young people who have a sizeable mortgage on Home A)? Specifically: what should the desired order of events be? Thanks!

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You can totally live in a home that is being staged. Take as much of your stuff to storage as you can stand, eat out a lot, and make the bed and clean the bathroom every morning. –  MrChrister May 14 '12 at 3:29
    
@MrChrister You forgot "Don't leave the breakfast dishes in the kitchen sink"! More seriously, there are many different meanings attached to staging depending on the locality, ranging from what you describe to replacing the velveteen "Dogs playing poker" and "Elvis" with less tacky wall hangings and prints (conveniently loaned, for a fee, by the real estate agent) to moving out completely and having different furniture put in (again arranged for, for a fee, by the real estate agent) that "shows" better than the home furnishings of the seller, etc. –  Dilip Sarwate May 14 '12 at 11:21
    
Even if it's 2-4 years from now, I hope that the previous answers indicating you would be holding 2-3 loans will discourage you from trading up. Check out the Case-Shiller home price index (standardandpoors.com/indices/sp-case-shiller-home-price-indices/…) to be clear on how precipitously home prices have fallen in your city in the past 5-6 years. Unless you need more space (perhaps due to starting a family), tying up a substantial portion of your income in relatively illiquid assets is not a good idea financially. –  Scott A. Lawrence May 14 '12 at 14:01
    
@ScottA.Lawrence Regardless of whether one is trading up, down, or sideways and how much money is available for making a down payment on the new house, it is hard to avoid having at least two loans or living in a hotel or elsewhere with stuff in storage for what one hopes is a relatively short while. –  Dilip Sarwate May 14 '12 at 15:56
    
@DilipSarwate All the more reason not to up-size absent a compelling reason to do so. –  Scott A. Lawrence May 14 '12 at 17:53

3 Answers 3

up vote 6 down vote accepted

There's likely to be a period where you will own both houses. Although everyone wants "simultaneous closing", it can be very rarely achieved. To achieve that, what is usually done is that the purchase of house B is contingent on the sale of the house A within a certain period of time. Then, you close both sales together with the proceeds from A going towards the purchase of B. It also means that you must stay in an hotel with all your stuff in a storage, because when you close the deal, A must already be empty (because the buyer takes possession at closing) and B will be empty (because you also take possession at closing), leaving you in a limbo but without the need of paying two mortgages at once.

As a side-note - I never understood the need in staging. IMHO its just another way for realtors to pocket money. When I was looking for an apartment not far from where you live, I saw both staged and non-staged, and in some cases even places where people were still living. I didn't see any difference re the asking price or the price I would offer. With a good inspection you can see straight through the "staging" so it doesn't really fool anyone.

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Staging totally works. Clearly you are the type of buyer who goes on facts, but staging works on emotional buyers. –  MrChrister May 14 '12 at 3:30

Depending on where the homes are, you might be able to find a bank that will make you a bridge loan which works as follows.

  • You start preparing your current home for sale while still living in it as you look for a new home to buy.

  • When you find a place to buy and make an offer that is accepted (contingent on the mortgage being approved within 30 days, termite inspection, home inspector's report etc), clean-up of the current home goes into frenzied mode. If you don't have enough savings put by to make the down payment on the new home and pay the various closing costs, ask the bank making the mortgage loan to you for a bridge loan for what money you will need. This is a short-term loan on which you pay only the interest each month and which will be repaid in full when the current house sells. In the best of possible worlds, you will have enough for the down payment and closing costs saved up already and won't need a bridge loan, but remember that you will get a lower interest rate on the new mortgage if you can put 33% down rather than 20%, and so if you anticipate getting some money out of your current home when it sells, a bridge loan may still be worth getting in order to boost the down payment and lower the interest rate on the mortgage.

  • As soon as the new mortgage is approved, your current home goes on the market. Maybe it will get shown while you are still living in it. Don't be at home when the prospective buyers and their real estate agents visit or when your real estate agent holds an open house unless, of course, you are doing a FSBO deal. If you are lucky and/or the market is booming, you might get visits and even offers to buy while you are still living in your home.

  • After closing on your new home and moving in there, think about staging your old home for sale, though I agree with littleadv that there is really little need for it since most buyers (and especially those who have been looking for a while) can see through the whole thing.

  • You are now the proud owner of three loans, so start praying that your old home sells as quickly as possible and you get out from under two of them. Yes, you are paying a lot of money, but remember that staying in a hotel because you sold your old home (someone made you an offer you couldn't refuse) before finding a new one, and putting your stuff in storage also costs (not to mention moving your stuff twice). It also makes you anxious and eager to compromise and prone to agreeing to buy something that you might regret later because you are fed up with living in that hotel.

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While I've commented previously against the idea of trading up (at least in the current economic climate), there is an option that might keep you from carrying 2-3 mortgages simultaneously (if a buyer is open to it)--rent back.

According to this article, real estate agents in California have a purchase agreement addendum that specifically addresses rent backs of 30 days or less (among other things). While this approach does put you on a bit of a deadline to purchase a new place, you at least delay having to rent elsewhere while finding a new place (along with going from one loan to zero loans until you find a new place).

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