There are inherent risks when you are selling one house and buying another, and you may have not control. I will outline options of what to do in this situation. Each of the options has pros and cons. Which option you pick depends on equity levels, qualifying ratios, and other considerations. In my previous article, I discussed the first three options including: listing your home conditional upon finding a replacement property, making an offer on a new property conditional upon selling your current property, and Bridge Loan financing. Welcome to the Part 2 of my two-part series, which lays out a few more options.
- Keep your current home as a rental, use the equity with a refinance, and purchase the new home
In some cases, you can keep your present home as an investment property. It is a good idea to visit with your tax advisor to see if owning an investmentproperty helps your tax situation. The general benefits of keeping the property in your investment portfolio include:
- No transaction costs to pay, only refinance costs
- Tax benefit-depreciation
- Possible future appreciation of the value of the property
If this alternative is attractive to you, the next step is to visit with a lender who can determine if you would qualify for the financing. To qualify for structuring the transaction in this way, the lender will require that you have at least a 30% equity position in your current home. 75% of the monthly rent will usually be considered, and apply toward your income figures. Any negative cash flow using the formula: Rent x 75% minus monthly PITI of the loan secured by the rental, is considered just like any other debt payment and the appropriate ratios applied.
- Buy new home using available cash for down payment, a first mortgage in the amount you want to end up with when your current home sells, and a second mortgage on the new home that you will pay off when the current house sells
The advantage of structuring the transaction in this way is that it gives you negotiating power to purchase the new home, doesn’t have a bridge loan “short fuse,” and you can avoid mortgage insurance on the first mortgage if you limit it to 80% loan to value.
Another alternative is to use available cash for down payment with a maximum mortgage. Then when the current house sells, invest the cash proceeds in other investments.
- Sell, Move, Buy
If you want to have negotiating power, are willing to do a double move, and can wait for the right home to come along, then sell your old home, move into a temporary situation and watch for the right property to come along. Having your old home sold, and the cash in hand, and a pre-approved mortgage gives you a strong negotiating position. strong negotiating position.
- Shop for a new home, list your current home, write a contract on the new home as soon as your current home goes under contract
The first step in structuring the transaction in this way is to shop and review the market to see if the types of homes you are looking for are generally available. Once you feel comfortable that they are available, you can put your home on the market. Once you and your Realtor have a contract on your current house, you can write a contract on a new one, conditional upon your current house closing. This puts you in a negotiating position stronger than having a house to sell, but not as strong as having the cash in the bank, or if you used the Bridge Loan method. To get an offer like this accepted, you and your Realtor need to show the seller of the new home how strong the contract is on your current home. If you and your Realtor are able to structure a transaction in this manner, you would try to close on both your current home and your new home on the same day.
About Duane Duggan: Duane Duggan has been a Realtor® for RE/MAX of Boulder in Colorado since 1982 and has facilitated over 2,500 transactions over his career, the vast majority from repeat and referred clients. He has been awarded two of the highest honors bestowed by RE/MAX International: the Lifetime Achievement Award and the Circle of Legends Award. Living the life of a Realtor and being immersed in real estate led to the inception of his book, REALTOR® for Life. Also see his video podcasts about real estate topics on RE/MAX of Boulder’s YouTube channel.
For questions, email Duane at DuaneDuggan@BoulderCo.com or call 303-441-5611