If you currently own a home and are considering a move, you may be wondering, “Should I buy a home first or sell a home first?” The answer is, it depends. In fact, it depends on a lot of factors.
We recently offered a webinar specifically covering that question of whether to buy first or sell first specifically because it’s a question that many people ask. You can watch the replay here:
Some general factors to consider in evaluating your options are:
- Market conditions
- Financial resources & equity position in your current home
- Your tolerance for risk and the possibility of moving twice
- Your sense of urgency or flexibility with regards to timing
Obviously, our market has been impacted recently by the COVID-19 pandemic. Take a look for example at the difference between the Long Beach CA housing market in April 2019 versus April 2020:
- New Listings Down 51%
- Pending Sales Down 68.8%
- Closed Sales Down 15.2%
- Days On Market Down 42.9% (24 DOM average in April)
- Median Sales Price Up 8.7%
- Percentage of Original List Price Received 100.2%
- Inventory of Homes for Sale Down 31.6%
While our team and other Long Beach real estate agents have moved toward a virtual real estate model in many cases, there’s still been an impact on sales as well as showings. And in some neighborhoods that’s more true than others. Downtown Long Beach, for example, has more inventory and a longer time on the market than do some east Long Beach neighborhoods. Before you make a decision as to whether you should buy a home first or sell a home first, you want to speak with a local real estate agent who’s familiar with the area you’re buying as well as the area you’re selling.
Financial Resources and Equity Position
Determining the source and size of your down payment for the home you’re buying is a critical step. Will it come from your current home or do you have other funds available. And how much equity do you have in your current home? To determine that, you’ll need to know the approximate market value first. Then you can subtract what you owe and the cost of selling to come up with your available equity. If you’re selling a home in Long Beach CA, we can help you determine the market value. You can also get a quick estimate of the home’s value on our page here.
You’ll also want to consider your ability to pay two mortgages. Will you qualify for two mortgages at once? And even if you do, will you be comfortable doing so? An experienced lender can help you assess that.
Other Factors to Consider
- Willingness to move twice
- Options for temporary housing
- How urgently you want or need to be in your next home
- How picky you are and what the inventory of homes is in the area and price range where you’ll be looking
- How quickly you think your home will sell and the inventory of homes available in the area and price range where you’ll be selling
Pros of Selling First
- You have the luxury of time & can avoid rushing into finding another home
- Aability to make a strong, non-contingent offer if you close escrow first on your sale
- Knowledge of exactly what your net will be
- You ensure that you’ll only have to pay one mortgage
Cons of Selling First
- You may be in a rush to buy if you don’t have temporary housing lined up
- You may need to move twice
- The costs of temporary housing can add up
- Note: If you are selling first, you can help reduce the possibility of making two moves by either making your sale contingent upon a replacement home (though that can sometimes deter buyers) or you can request a lease-back from the new owner. When you do that, you typically pay a prorated amount to cover the new owner’s costs.
Pros of Buying First
- You don’t have to be in a rush to find the right place
- You have the certainty that you’ll find the right home before you give up your current home
- You only have to make one move and have more control over your moving timeline
- You can paint or do other work to the new home before moving in without feeling rushed
- You can move out of your current home so you don’t have to be there while it’s being marketed and shown.
Cons of Buying First
- It may be a strain to pay two mortgages
- You don’t know exactly what your net will be from your current home before you commit to a price on your next home
- You may have fewer financing options without selling first
Financing Options
If you do decide to buy your home before selling first, one option for financing is to use a Home Equity Line of Credit (HELOC) for the down payment. A benefit of doing that is that the payments are typically low because they are interest only, making it a good option if you plan to sell quickly, said Alex Scurr, a mortgage broker with NAL Financial. However, since it’s a riskier, adjustable type loan with no ceiling on rates, it’s not an ideal product for long-term use, Scurr said.
A cash-out loan on your current home is an option as well if you plan to retain your current home and convert it to rental.
Bridge loans can also help you with transition financing. A bridge loan is essentially one loan across the two homes. It pays off the loan on your current home and allows you to buy the new one with no money down, using combined equity to establish enough of a spread between the loan and the values. A bridge loan may be ideal for a situation where you expect longer marketing time of the home you’ll be selling. The interest rates are typically reasonable and interest-only options are available. Potential downsides, however, are increased transactional costs, which usually involve points, and the requirement that you have a lot of equity in your present home and combined Loan to Value (LTV) maximum of 75&.
One other option to consider is buying your next home with a lower down payment and then “recasting” the mortgage after you sell your current home. For this scenario, you need to qualify for both mortgages, but you could purchase with 5% down and then after selling, make a large principal payment, which triggers a reamortization, bringing your new monthly payment to what it would have been if you sold your home first and used the proceeds to make a larger down payment. Note: You cannot change the term of the loan – ie, you can’t go from a 30 year to a 15 year loan and there is a small fee to process. But it doesn’t require a full refinance so it’s less cumbersome and costly than that option.
So How Do You Determine Which Option is Best For You?
Once you’ve reviewed the pros and cons, how do you determine which path you want to take — buying your next home first or selling your current home first? We recommend taking the following steps:
- Obtain a market evaluation of current home
- Review availability of appropriate future homes
- Assess financial position & options
- Prioritize acceptable uncertainties – possibility of two moves vs. paying two mortgages vs. feeling rushed on either end
- Assess willingness to live in the home while it’s being shown
If you’re considering buying a home in Long Beach CA or surrounding areas or selling a home in Long Beach CA or surrounding areas, our team can help by providing information on home values and pricing trends and housing inventory in Long Beach CA.
Is Now A Good Time to Buy a Home in Long Beach? Or to Sell A Home in Long Beach?
We understand that COVID-19 combined with economic uncertainty and other factors have many people hitting “pause” on their plans. And maybe this isn’t the right time for you. Yet we hear from many people that they’ve either decided to sell because they think the market isn’t good and their home won’t sell — and that just isn’t the case. Many homes are selling rapidly with multiple offers and for above list price. We also hear from people that they’ve decided to wait because they’re concerned that the market is going to crash and they’re waiting for prices to come down.
The fact is, nobody can tell you for sure what prices will do. However, economists predict that prices will continue to increase modestly in Los Angeles and Orange Counties, so if you are “moving up,” the gap between what you’re selling and what you’re buying, is likely to increase as well. And interest rates are unlikely to be lower than what they are currently. If prices and interest rates both go up, the monthly payment for your next home could go up considerably.
The other thing to consider is … if you aren’t in the home you want to be and you could be now, why wait?
Our team is happy to help you create a custom strategy that meets your needs. Simply give us a call at 562.896.2456 or fill out the contact form below and let’s set up a time to talk about your individual situation.
