Buy Before You Sell

Moving home is always a major project, and if you're lucky enough to already own a home one of the biggest challenges can be the transition process - selling your home in order to have the funds to purchase a new home will most likely leave you looking for temporary accommodation for an uncertain time frame. Ideally you would buy your new home and move in before listing your departure home for sale, but this usually presents significant financial challenges for most people. Here is an analysis of the ways lenders can assist in this process:

There are currently 3 ways that you might buy before selling – 1/. Bridge finance. 2/ Cross Collateralization. & 3/. What I’ll call “Confirmed Exit”.

I would highly recommend talking to a lender about the details of how these might work. My local partner Chris Davis of Guaranteed Rate is an expert in the field and would be happy to explain them in detail and how they might apply to your specific situation, but here are some key points:

1/. Bridge loans are short term loan used to purchase the new home. These loans involve fees (known as points) which are usually 2% of the loan amount.  Rates are usually higher than regular mortgages by at least 2% depending on your credit rating. As the loan is short term the bulk of the cost is usually the points. Usually 30% equity is the minimum needed for a bridge loan.

2/. Cross Collateralization uses the equity in your current home as additional security for the purchase loan (there are liens on both . More equity is required for these – 40-50%, but the cost may be lower.

3/. Confirmed Exit requires a listing agreement to be in place. This allows the lender to qualify the borrower for the new loan without taking into account the payments (mortgage/taxes/insurance) on the departure property. Qualifying for one mortgage rather than two. This option requires the lowest equity in the departure property – as low as 20%

While all these options come with added costs, it’s important to remember that a vacant and prepared home will sell faster and for more money than one that is occupied and “as is”. As a rule of thumb, I’d say 5-10% more. So, there is usually the exceptional ROI.

Whenever you sell a home there will be preparations that will increase the sale price - cleaning, painting, minor repairs and staging – usually around $20-$40K. Financing a purchase before sale might cost the same again but if you're purchasing a home that has been on the market for a while you might consider asking the seller to pay some of the finance cost.

The alternative would be to make an offer contingent upon the sale of your home, which would only be accepted under limited circumstances – the home has been sitting on the market (not attractive) or your offer price was attractively high (expensive). And you would then be selling you home occupied reducing the likely sale price.

As noted, transitioning from one home to another is always a challenge, but we are experts and can make this process as seamless and stress free as possible. 

To find out more, please reach out to any of our team members.