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I am looking to sell and buy a house. But with the current market being as crazy as it is (houses are selling fast for sometimes 150,000 over asking), I'm afraid if we sell first, we could be stuck without a new house. Or stuck settling on or over-paying for something and wishing we never sold at all. I'm wondering if it's possible to buy first. What is the best way to secure my next house before selling my current house without getting locked into a B-lender mortgage or risking too much?

I know there would be some risk putting an offer on a new house without knowing how much the current house will sell for, or the risk we don't sell the current house before the new house closes. I'm also afraid conditional offers will not be considered. Are there any other options?

(We do have a mortgage on the current house, but because the market has gone up so much there is also a good chunk of equity.)

  • 6
    This experience is pretty much exactly the emotional equivalent of jumping from one moving train to one coming the other direction. Good luck! – mattdm Mar 22 '17 at 19:34
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    In the UK you'd usually buy and sell at the same time. The lawyers and banks take care of it all for you. Chains of three or more sellers all moving at once are common. The downside is that it can be an utterly glacial process, to the extent that selling a house with "no chain" is an attractive proposition to buyers (particularly first-time buyers who themselves have "no chain"), so much so that it can even justify a price increase on the property. – Lightness Races with Monica Mar 23 '17 at 14:58
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    Don't forget that you also put yourself in a worse bargaining position. If a prospective buyer knows that you already have a new house then he/she could make a lower offer because you "need" to get rid of your old house because of double expenditures. – Pieter B Mar 24 '17 at 13:51
  • The best way is to have enough money to buy another house without a mortgage. – Jodrell Mar 24 '17 at 15:14
  • @PieterB Or, you can move quickly, raising the value for a first-time buyer, as BoundaryImposition suggests. – jpaugh Mar 24 '17 at 18:40
54

You can make a contingent offer: "I will buy this house if I sell my own." In a highly competitive environment, contingent offers tend to be ignored. (Another commentator described such a contingency clause as synonymous with "Please Reject Me".)

You can get a bridge loan: you borrow money for a short term, at punishingly high interest. If your house doesn't sell, you're fscked.

You pay for two mortgages (or even buy the other house for cash). If you can afford this, congratulations on, you know, being super-rich.

Or you can do what I am doing: selling one house and then living at my mom's until I buy another one. (You will have to stay at your own mom's house; my mom's house will be full, of course.)

Edit: A commentator with the disturbingly Kafkaesque name of "R." made the not-unreasonable suggestion that you buy both and rent out one or the other. Consider this possibility, but remember:

  1. When considering extending you credit, banks generally regard a dollar of rental income as equivalent to 75¢ of salary. This is not an arbitrary disdain for commerce. Renting real estate is a tough business. Having an property lie empty for two, three, four months is not unusual, and when it happens, you will usually have to accept a lower rent from the next lessee.
  2. It isn't clear how to extricate yourself from this new situation. If the tenant is in the old house, do you wait until he leaves to resell it, giving up several months of rent? Do you try to sell a property with a tenant in it, always a questionable proposition? The problem is squared and cubed in a jurisdiction with rent control.

On the other hand, if the stars align, you might not want to extricate yourself. If the tenant is paying the mortgage and a little more, you have an appreciating asset, and one you can borrow against. With a little work and a little judicious use of leverage, doing this over and over, you can accumulate a string of income-producing rental properties.

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    haha thank you for the laugh. I'm not super rich or willing to live at my moms. But I have definitely considered that! – Hlick Mar 22 '17 at 20:54
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    @Hlick -- not super-rich but insist on living away from your parents? You gotta work with me here! The cost of a bridge loan or the price-premium to make a contingent offer attractive would easily pay for a furnished rental for six months, easy. Find a place you can park for a few months. – Malvolio Mar 22 '17 at 23:31
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    Almost anyone who can afford one mortgage can afford two if they can rent out the second house. The problem is that the banks don't necessarily see it that way. It might help to move out of your house and rent another place to live for a while first so that you have actual rental income documented rather than potential income you think you could be making by renting. – R.. Mar 23 '17 at 16:07
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    You can sell a house with a tenant in it. If the buyer is looking for a property to use as a rental they are very willing to accept a tenured tenant that has a history of paying their rent and not causing a problem. Or you could request an escrow period long enough to legally remove the tenant; consequently you don't want to issue any long-term leases. – Arluin Mar 24 '17 at 18:23
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    @Arluin -- A house with a tenant can only be sold to a prospective landlord. An empty house can be sold to a landlord, a developer who wants to raze it, a contractor who wants to flip it, or someone looking for a home. As a landlord in the People's Republic of San Francisco, I am biased, but it's true to an extent everywhere: a tenant is like an STD, easier and much more fun to get than to get rid of. – Malvolio Mar 25 '17 at 14:19
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The two most common scenarios are:

  1. You put an offer on a house which is conditional on you selling your own house first.
  2. You sell your house with the condition that you will rent it from the new owner until you purchase a new house.

Since you have more control of timing when you are the buyer compared to when you are the seller, #1 is probably more common, however, a good real estate attorney should be able to walk you through your options should #2 come up. Fortunately, many real estate attorneys do not charge you anything until the sale completes, and you will likely get a discount if you involve them in both the sale and purchase, so I would start by finding an attorney.

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    Note that in hot markets, condition #1 is approximately equivalent to stamping your offer with a big red "reject me please" mark. – mattdm Mar 22 '17 at 19:35
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    @mattdm - Hehe, right on. That could be true, but hopefully your own house sells more quickly too due to that same hot market. The condition may simply be that your own already pending house "closes on time" rather than "gets sold at some point". – TTT Mar 22 '17 at 20:12
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    @mattdm Well said. There are hundreds of things the OP could try, but all of them require that the other side of the deal is a total moron. Like selling a house with a contingency offer - when the market is supposedly so hot he can just sell it without any risk attached. – TomTom Mar 23 '17 at 12:16
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    I've bought a house seven times, and know lots of other people who have bought houses. #1 is common (pretty much the norm). I have never heard of #2. This may be because in the UK it is very hard to let a house for less than six months. – Martin Bonner supports Monica Mar 23 '17 at 14:30
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    @mattdm: There's a huge difference between "conditional on selling my house at the same time (and I have a buyer lined up)" and "conditional on selling my house, and I have no clue where to find a buyer". – Martin Bonner supports Monica Mar 23 '17 at 14:32
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A bridge loan (or bridging loan) is designed for exactly this circumstance. They're short-term loans (6 months is common) designed to help home-buyers to bridge the gap between buying and selling.

MoneySupermarket defines them like this:

Bridging loans are designed to help people complete the purchase of a property before selling their existing home by offering them short-term access to money at a high-rate of interest. As well as helping home-movers when there is a gap between the sale and completion dates in a chain, this type of loan can also help someone planning to sell-on quickly after renovating a home, or help someone buying at auction.

Interest rates are very high, and there are likely to be fees, because you'll only need the loan for a short period. Here are some links to Canadian websites that explain more.

12

If you can qualify for two mortgages, this is certainly possible. For this you can talk to a banker.

However, most people do not qualify for two mortgages so they go a different route. They make offers on a new home with a contingency to sell the existing home. A good Realtor will walk you through this and any possible side effects.

Keep in mind that the more contingencies in an offer the less attractive that offer is to sellers. This is how cash buyers can get a better deal (no contingencies and a very fast close). Given the hotness of your market a seller might reject your offer as opposed to first time home buyer that does not need to sell an old home. On the other hand, they may see your contingency as low risk as the market is so hot.

This is why you probably need a really good agent. They can frame the contingency in a very positive light.

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    We would qualify for 2 mortgages only with a B-lender at a higher interest rate. So we wouldn't want to get stuck with that. We would go with that just to receive the pre-approval to allow us to submit an unconditional offer. Then rely on selling the current house before the closing date. – Hlick Mar 22 '17 at 14:17
  • I just noticed the conclusion of our answers is very similar, except you suggest to find a "good agent" whereas I suggest to find a "good attorney". Perhaps someone who can fulfill both roles would be the most cost effective, though that is probably rare. – TTT Mar 22 '17 at 16:08
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There's also the option to put most of your stuff into storage and rent an apartment or go to an extended stay hotel. Some apartments have month-by-month options at a higher rate, though you may need to ask around.

I've known some people to use this as their primary plan because it was easier for them to keep the house clean and ready to show when it's empty.

Basically, this option is to sell your current house then buy the new house with a (hopefully fairly short) transition time in the middle.

3

As the other answers suggest, there are a number of ways of going about it and the correct one will be dependent on your situation (amount of equity in your current house, cashflow primarily, amount of time between purchase and sale).

If you have a fair amount of equity (for example, $50K mortgage remaining on a house valued at $300K), I'll propose an option that's similar to bridge financing:

Place an offer on your new house. Use some of your equity as part of the down payment (eg, $130K). Use some more of your equity as a cash buffer to allow you pay two mortgages in between the purchase and the sale (eg, $30K). The way this would be executed is that your existing mortgage would be discharged and replaced with larger mortgage. The proceeds of that mortgage would be split between the down payment and cash as you desire.

Between the closing of your purchase and the closing of your sale, you'll be paying two mortgages and you'll be responsible for two properties. Not fun, but your cash buffer is there to sustain you through this.

When the sale of your new home closes, you'll be breaking the mortgage on that house. When you get the proceeds of the sale, it would be a good time to use any lump sum/prepayment privileges you have on the mortgage of the new house.

You'll be paying legal fees for each transaction and penalties for each mortgage you break. However, the interest rates will be lower than bridge financing. For this reason, this approach will likely be cheaper than bridge financing only if the time between the closing of the two deals is fairly long (eg, at least 6 months), and the penalties for breaking mortgages are reasonable (eg, 3 months interest). You would need the help of a good mortgage broker and a good lawyer, but you would also have to do your own due diligence - remember that brokers receive a commission for each mortgage they sell. If you won't have any problems selling your current house quickly, bridge financing is likely a better deal. If you need to hold on to it for a while because you need to fix things up or it will be harder to sell, you can consider this approach.

  • "Use some more of your equity as a cash buffer". How does one do this if they have not yet sold the first house? Are you talking about getting a home equity line of credit? – CactusCake Mar 22 '17 at 20:49
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    @JoeMalpass It isn't a HELOC but a completely new mortgage on the unsold house. Using the example of a house worth $300K with a $50K mortgage remaining, there's $250K of equity in the house. A new mortgage of $210K is taken out. $50K is used to pay off the existing mortgage, $130K is used for the down payment on the new house, and $30K (minus legal fees and penalties) is just cash you receive. The lawyer gives you a cheque for this amount on the closing day or shortly after. – Jason B Mar 22 '17 at 21:14
  • Ah, I see what you mean. This might not save any time however, since the bank will want several weeks to approve the refinance deal, (in which time you might have otherwise sold your house). And I'm pretty sure they won't let you have it listed for sale while a refi is still pending, so you really have to commit to this route if you do it. – CactusCake Mar 22 '17 at 23:45
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    By "breaking" the mortgage, do you mean pre-paying? Most mortgages nowadays don't have significant pre-payment penalties, although you might get zinged a little if you pre-pay so early... – Malvolio Mar 23 '17 at 1:53
  • @JoeMalpass it definitely does not save you time. It's more of a tactic to buy you more time while holding both properties. – Jason B Mar 23 '17 at 21:49
3

If you're living in a market where some houses are going for $150K over asking, then you MUST buy before you sell. In a seller's market, you will get multiple offers on your current house when you decide to sell, it will sell for (well) over asking, and you can dictate possession dates. You do not need to worry about selling your own home, if you have a competent realtor.

But buying a home is an entirely different story. You may struggle to find something affordable, and there may be multiple buyers each time you decide to make an offer. You may go through this cycle several times over many months before your offer is accepted. You should do this while living in your own home, with the comfort of knowing that you can sell your own home easily at any time, instead of the stress of an imminent closing date on your own home. Or worse, move into rented space or Malvolio's mom's house for months or a year while the market increases by 15% and the houses in your old area are now selling for $100K more than you sold for. Ouch, now you really can't afford to buy what you want, and you may end up buying something equivalent to what you used to own, for more, plus legal, realtor, and land transfer costs.

If the closing dates don't align, then bridge. This will only end up costing a few hundred dollars, less than $1K including legal fees (the lawyer will also charge to handle this). But by buying before you sell, you'll easily make up that difference.

This advice only applies to hot property markets. I'm not a realtor, just a guy living in the GTA who went through this process last year. Lost out on three offers over 10 months, then bought for asking price on fourth offer (very fortunate), then sold for $90K over asking, then bridged for 2 months. My realtor is awesome and made the process as stress free as it can be.

Get a good realtor, start house hunting while preparing your own house for sale, and enjoy the process. Also you should negotiate with your realtor, they may be willing to reduce their commission on your sale if they are also representing you on the purchase.

Good luck!

P.S. Do not make a contingent offer, and do not accept one. Get your financing in place before you make an offer, and if you are concerned about inspection, you can also do that before the offer, if you act quickly. The inspection will cost ~$500, but it will increase the value of your offer by much more than that since you will be going in without conditions. I spent ~$1,000 on two property inspections on homes I lost out on, and I don't regret it. That is the cost of doing business. The other offers on the home I eventually bought were for significantly more than my offer, but they had conditions. I saved at least $40K by being condition free, and I only spent $1,500 on three property inspections. And, some people will just drop out of the multiple offer scenario when they learn that one of the buyers has done an inspection.

  • Thank you, you seem to understand exactly my predicament. We are going in this direction now after receiving so much great advice. – Hlick Mar 24 '17 at 15:43
  • How did you have the inspection done before you submit your offer? Do you go see the house, and then have the inspection done that day (you would likely need someone lined up for this), then submit the offer? – Hlick Mar 24 '17 at 15:44
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    Right away after viewing a property you are interested in, you call your home inspector (I used Carlson Dunlop) to find out when they are available that day or the next. You book another viewing of the property through your agent at that time. They will need a two hour appointment. You and your agent will attend, but the inspector does all the work. You will also have the opportunity to really take your time looking at the property, imagining your furniture in it, imagining your family living in it. – Ross Mar 29 '17 at 4:39
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You don't say why you want to move. Without knowing that, it is hard to recommend a course of action. Anyway...

The sequence of events for an ECONOMICAL outcome in a strong market is as follows:

(1) You begin looking for a new house

(2) You rent storage and put large items into storage

(3) You rent an apartment and move into the apartment

(4) The house now being empty you can easily do any major cleaning and renovations needed to sell it

(5) You sell the house (and keep looking for a new house while you do so). Since the house is empty it will sell a lot more easily than if you are in it.

(6) You invest the money you get from selling the house

(7) You liquidate your investment and buy the new house that you find. If you are lucky, the market will have declined in the meantime and you will get a good deal on the new house in addition to the money you made on your investment.

(8) You move your stuff out of storage into the new house.

There are other possibilities that involve losing a lot of money. The sequence of events above will make money for you, possibly a LOT of money.

  • This seems like bad advice for a number of reasons, particularly when accompanied by the words 'will make money for you' and 'possibly a LOT of money'. – jwg Mar 24 '17 at 14:55
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    @jwg Yeah much better that he should bankrupt himself with a bridge loan. Brilliant plan genius. – Five Bagger Mar 24 '17 at 16:18
  • If the OP can (practically) move into an apartment for long enough for the market to change, this is a really good option. However, there is the risk that all of the "extra" value created be selling high and then buying low will be absorbed by the storage & rental fees. – jpaugh Mar 24 '17 at 18:48
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    What is going to happen is: you're going to lose money on your investment because you're an amateur in a market with a lot of professionals that want your money. In the year that you're renting prices of houses have risen by another 10%. – Pieter B Mar 25 '17 at 17:17
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I sold my house and had been in the market looking for a replacement house for over 6 months after I sold it. I found someone willing to give me a short term, 3 month lease, with a month to month after that, at an equitable rate, as renters were scarcer than buyers.By the time I found a house, there were bidding wars as surplus had declined (can be caused seasonally), and it was quite difficult to get my new house. However, appraisers help this to a degree because whatever the seller wants, is not necessarily what they get, even if you offer it. I offered $10k over asking just to get picked out of the large group bidding on the house. Once the appraisal came in at $10k below my offer, I was able to buy the house at what I expected. Of course I had to be prepared if it came in higher, but I did my homework and knew pretty much what the house was worth. The mortgage is the same as the lease I had, the house is only 10 years' old and has a 1 year warranty on large items that could go wrong. In the 3 months I've been in the house, I have gained nearly $8k in equity....and will have a tax writeoff of about $19,000 off an income off a salary of $72,000, giving me taxable income of $53,000... making by tax liability go down about $4600. If I am claiming 0 dependents I will get back about $5,000 this year versus breaking even.

  • Your reference to tax deductions is not applicable to Canada, which is the location for the question. Please see the tags on the question -- they may be pertinent, especially when a country is specified. – Chris W. Rea Jun 27 '17 at 4:45

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