It’s a hot Seller’s market, you have identified an amazing, larger home, with bigger bedrooms, nice sized yard, in a wonderful school district that your family is in love with. You realize that in order to buy that home, you need the equity from your existing home. Anyhow, you make an offer on that home, but that home had multiple offers. You just lost that home to another buyer. The seller found a ready, willing and able buyer without a contingency of the sale of their home. You are confused, upset, feel helpless. What do you do? In a perfect scenario…..
- You want to get the highest possible for your current home, as fast as you can, so you can use that equity for a down payment and in turn afford the new home.
- You want to buy the new home as cheap as possible, perhaps get the best deal in town, after all you are putting almost all cash down / a large down payment ( more than other buyers would) to buy that home.
- You are scared to get caught having sold your existing home, and now you can’t find the home you want. You don’t want that horrible feeling of, where will we go now? Yes! That is scary as hell.
- Finally, what you really want is to get through the process of selling your existing home, match the timelines with the home you are going to buy, make huge profit and then buy that other home while getting a great deal on it, match the timelines of closing with the home you just sold, with as little pain as possible.
- Phew!!!! There, you have identified your CATCH 22 dilemma!
Before we get too deep into the different options that you have, first things first, please watch the video below to have a better understanding of whats coming………………
Now that you have watched the video and understand the questions that come out of this complicated process, I suggest we look at our needs and identify them. Here are some clues that you need to look at.
- Find your real Motivation: Why do you need that new home? Is it because your kids are grown and you need more room? Is it to be in a better school district? Is it because your travel time to your work has increased and you want to move closer to work? You just need a better neighborhood? How about, you want to down size, as climbing the stairs has become harder? How about your kids moved out and you no longer need the 5 bedroom place anymore? Now, I can go on and on with examples here but you get my point don’t you? The key here is to identify, do you really have to move in a hot market? Give your motivation a priority scale from 1-5. With 1 being I want to move and 5 being I need to move. If the answer is absolutely, positively yes, then let’s move on to the next factor.
- Get your timing right: Is this the right time for you to make this move? Sometimes timing is everything. If you are looking to sell your home in a hot sellers’ market, probably any time is a good time to sell. It’s the buying side of the transaction that will require some thinking and strategy. Obviously, the competition is immense, there is a shortage of homes in the market. Now what you need to identify here is the timing when you are most likely to have lesser completion and chances of a bit more inventory to look at while buying that home you want. You need to identify timing when the market is not at its peak of sales, so you have a better chance of your contingent offer to be accepted. Yes, there are months that do favor that statement a bit. Every area, region and city is different. In my work area, of Woodland Hills, Reseda, Calabasas and Thousand Oaks CA, usually, the autumn months are slower selling months, which may benefit the buyers. If you can sell at end of the peak period and buy towards the start of the slower period, now that is timing. For that, you need a great agent to help you identify those timelines. (Click here to find out about 10 Real Estate terms every buyer needs to know, that may cost them money!)
- Identify Your Needs: Again, let me emphasize, selling your home may not be as much of an issue in a hot market, but buying that other home will be. Now that you have identified the Motivation and Timing, you need to identify your needs and narrow them down. Do you have to have a 5 bedroom home? Do you have to have the home in that little 1 mile x 1 mile neighborhood? Do you have to have that school district only? Perhaps, you can get a beautiful home, in a great school district of your choice and live with 4 bedrooms, but you get an amazing location. Be realistic, compromise a bit, know the difference between what you need and what you want. I tell my clients, buying a home is like finding a spouse (lol), you may not get everything on your list. So write down the intangibles and compromise on some that you can live with.
- Get your numbers right: This is a huge key. You have to know, what you are going to realize out of the sale of your home. What is the net take home amount? What your closing costs are when buying that new home? What is the realistic timeline to sell your home? How much of the net realized amount are you going to use towards your down payment? What is the payment of your new home that you can safely endure for the next 30 years? How much can you rent your existing home for and if that is an option available to you? What mortgage loan options do you have? Does your income substantiate holding both properties or do you have to sell in order to buy another? At what price that new home will no longer be an option to you? These are some of the financial questions that need to be answered before you take a plunge into the Hot Sellers’ market. For this, I highly suggest talking to your financial advisor, Your CPA and your Real estate agent. (click here to know more … Top 5 mistakes a home seller makes when selling a home, that will cost you money).
Now that you have found the real motivation, decided upon your needs and wants, identified the timing, you are in a much better position than before when you made that offer on pure emotion and lost that home. This will also give your Real Estate Agent a great insight on what you really want. Now armed with this amazing information, which your experienced Real Estate Agent should have shared with you, let’s move on to some options that you have.
Sell your existing home and try to buy a new home at the same time with a concurrent close:
This option is the most common option offered to clients. You see so many people sell their existing home and buy the new home at the same time. In a hot sellers’ market, if you are priced right, you should sell rather quickly if you have the right agent. So what’s the problem? Good question! What your Agent didn’t tell you is, that this is not the only option, because this option benefits them from a standpoint of making more commissions and in turn solidify both sides of the transaction for themselves. Now if your agent was a great selfless agent who gave you all the options, presenting it with equal weight, and you choose this option as the right option for you, here are some issues you may run into……
- In most cases, because of the pressures of the timeline, you may end up taking lesser for your home and pay a bit more for the new home or vice versa. I see this happening to many Sellers of homes, looking to buy another.
- The pressure of the timelines during a concurrent close in a Hot Seller’s market gets to the best of the minds. Remember you are selling a home contingent upon you finding the home of choice and closing on it. You will be buying that home contingent upon successful close of your existing home and both these transactions timelines have to match.
- Let’s look at realistic timelines. 15-30 days to market and sell ( anything over 15 days is considered stale), another 30 days to close, that means you have 15 -20 days with pressure to find that new home and get into escrow ( in a market where it takes an average buyer 30-60 days to get into escrow)
- Finally, to throw a curve ball, the buyer of your home and their performance will affect your timelines to buy that new home.
Here is my most favorite technique to combat this issue that I learnt from my mentor. I call this The Rent Backs. I have been using this technique for many years very successfully, giving my clients the best advantage.
Rent Backs: In a seller’s Market, one thing constant is that you should be able to sell your home for the top price, in the quickest time frame possible (Be aware that not every agent is able to get you this result, you do need a Star Agent. Yes Agent matters!) The key here is to find enough, reasonable, time to find the home you are looking for and be able to get into escrow with lesser pressure of rapidly expiring timelines ( like in the Catch 22). When negotiating with your buyer on the existing home, I would ask for a 60 day escrow and 30/60 days rent back at PITI (to know what this term means, click this article).
As soon as you get into escrow, you should get serious in looking. Remember, you have power, because you are in escrow for your current home and it holds more weight, unlike at the start when you got shut down because you were not in escrow. This will provide you more time than the normal 30 days you would have had in the earlier scenario.
Let’s talk about some other options you have from the obvious option you see above.
Buy your home first, before you sell your existing home option:
This option is available to folks that have the Income and Down Payment available to buy a home without the need to sell the existing home. Many years ago when I first got into Real Estate, my mentor gave me a great advice. He said “always advise your client to make a portfolio of Real Estate, that means to buy & rent, then buy some more and hold, until it is absolutely necessary to sell. This is my favorite option.
- Renting your existing home: If you have the option of buying another home and renting the existing home, thus eliminating the HOME SALE contingency, you will definitely find a better deal in a hot sellers’ market. Don’t forget, that the prices in a hot sellers’ market are rising faster than you anticipate, especially true in a hot Los Angeles Sellers’ Market. If your income substantiates this option and you can procure enough down payment, then this option is a no brainer. In this option you must talk to your CPA about becoming a landlord and its advantages or disadvantages. You must know how much you can rent out the existing home ( typically a lender will take into account the income from rent, which is usually 75% of the monthly rent to raise your income to qualify you for your new home). Your mortgage consultant should have done their homework in guiding you the right way. If you do end up renting the home (Rents are off the charts in this hot Los Angeles market, Insane!!), remember as the market continues to climb, you may realize more gain if you sell in a year from today.
- Bridge Financing: In a perfect scenario, this is a loan that helps to buy that new home you want by getting a loan on your equity of existing home while you try to sell it, towards the down payment of your new home, so you could buy that new home. This is an option which comes with high fees and lots of risks. In a loan like this, there are still qualifying ratios that need to be met, these loans come with high origination fees and closing costs. If you are not able to sell the existing home in the specified time, the Bridge lender can proceed to foreclose. Having said that many people do take advantage of this option. Talk to a mortgage specialist and your CPA before you plan to go ahead with this option.
Sell your existing home before you buy another home:
Be Aware that this option usually works when you have substantial equity from the sale of your home. This is not a good option to folks who are barely taking out 10 or 20% for down payment from their proceeds. This option is very similar to what investors do in a 1031 exchange. In this option, the benefit is that you know your time lines, you know that you sold your home using my RENT BACK technique that I gave you before. You know that you have 60 days to move out. This is much less pressure than the first option. Now to be a devil’s advocate, I could argue that the prices of the homes have increased, and you lose two months of rent. Yes! A great argument, this is where you have to decide, what is more important to you, the pressure of concurrent close, its time lines, the lack of inventory to find the home you like in the limited time of 15-20 days or knowing what you have in your hand and having 30-45 days to find a home to find a more suitable home, while the prices are going up?
I can’t give you the answers, I can only give you options. There is no right or wrong. There are many options available to you. Never allow your Real estate agent to put your existing home on the market to buy another, unless you have clear answers.
I can’t stress enough, that in a sea of average, inexperienced agents, your only job as a Home Buyer and Home Seller is to find an agent knowledgeable enough, experienced enough and honest enough to give you the right options and help you through this complicated yet exciting journey. Good agents will give you an unbelievable experience. Most people only experience the services of an average agent and they don’t know any better. I have to remind you, that a good agent is worth every penny they earn which is peanuts compared to what they get you, so when you find one, be loyal to them.
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- Hope this article has helped answer some of your questions. If you still have any remaining questions that are unique to a transaction please email me or call me.
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Pebble Singha is a proud member of BrokerInTrust Real Estate, an Elite All Broker Network and Consumer Advocacy group. My blogs are a way to educate the consumers on what actually goes on in the Real Estate world vs what they think they know. This is one passionate Real Estate Brokers opinion on how he sees the Real Estate World in Los Angeles.
Disclaimer: Pebble Singha is not an Attorney or a Financial advisor. These are independent views and opinions of Pebble Singha and how he sees life in Real Estate. This blog is not to discredit or devalue anyone or their name. Information deemed reliable but not guaranteed. Cal Bre Lic # 01458748