A concern of potential buyers whether they are up-sizing, downsizing or moving to a new community is the need to sell first before closing on a new home. What are the options for dealing with this dilemma? In the last couple of years, I have had more clients needing to find a solution. They will ask “I want to buy, but need to sell first. How does that work?”
Of course, there is always the option of doing nothing and just dream. Maybe that is best, though the dream will remain unfulfilled.
If you are wealthy, purchase the new property for cash and then sell the old. We all wish we were in that position. If you need financing, then your options become somewhat restricted.
The number one rule concerning lenders is, should you purchase a home and continue to own your old home the second home will be considered non-owner occupied, meaning higher interest rate and larger down payment, unless you plan on renting your old home and can provide a lease for your lender. Then the new home could be considered owner-occupied. With that economic reality out of the way let’s continue.
The best option, in my opinion, is to go ahead and sell your home and find a temporary living arrangement. This way you will know exactly your financial situation. No stress of finding a home within a limited timeframe. This option may not work for everyone and will add additional expenses. If not doable you are left with the prospect that you will be closing two homes, old and new, approximately at the same time. This proposition could lead to undue stress.
“But I don’t want to move my furniture twice.” Wait to search and submit any offers until such time you have an accepted offer on your current home and the buyers has removed all contingencies. Counter any offer with a 30-day rent back to give you some time to close on a new residence. Waiting for removal of all contingencies from the buyers gives you some comfort there is a greater chance that your sales transaction will close. If all works out, you will only have to move your furniture once, or at the very most store it for a short period.
As a seller first and buyer second you can ask for a contingency concerning the sale of your home. As a seller, you can make the sale contingent on you finding a replacement home. As a buyer, you can make the purchase contingent on the sale of your old home.
Contingency, what is contingency? According to The Language of Real Estate contingency is “a provision in a contract that requires the completion of a certain act or the happening of a particular event before that contract is binding.” Let’s talk about the two options.
In the standard contract used by the California Association of Realtors, there is a provision for the seller to make the sale of their home contingent upon finding a suitable replacement. That is subject to interpretation. Needless to say, the seller makes this determination. The seller needs to place a time frame on this contingency. It should not go into perpetuity. The buyer needs a reasonable expectation concerning timelines. Also, the fact that such a contingency is stipulated, it should be done so upfront, before a buyer writes an offer. Home buying can be emotional, and we don’t want needless tears by a potential buyer of your home.
You, as a seller, wanting to purchase a new property can make the purchase contingent upon you selling your home first.
First and foremost, do not even think about submitting this type of offer without your home first being on the market. Sellers and their agent will not accept the offer. They will ask and want proof. Don’t make the mistake of finding the home and then decide to put your home on the market. The time it takes to prepare your home to go on the market will probably exceed the time your desired home remains active on the market. Meaning it will most likely go pending by the time you are ready to submit an offer.
So, your house is on the market, you found the perfect home and want to submit an offer contingent upon selling your property.
The standard contract addendum I use provides language. You can specify the number of days you would like the seller to give you to obtain an accepted offer on your “for sale” property before removal of the contingency. The standard language indicates 17 days. I usually ask for at least 30. For that period the seller cannot accept any other offer without being in breach of contract. Once the period is over, the seller can ask you to perform, giving you three days to remove the contingency and go ahead with the sale or cancel the contract, no harm no foul. You would still have contractual protection should you decide to proceed with the transaction. For this protection, it would be imperative that your offer specifies that all time frames wrote in the contract begin when this contingency is removed, not when the offer is accepted. Believe me. Anxiety can set in once removing the contingency and your “for sale” property has not yet closed.
The purchase agreement defines other contingencies such as; investigations/inspections, appraisal, and loan approval. I would suspect that your lender will make the selling of your home a condition of loan approval. If you are given 21 days for loan approval, the net result is you have three weeks to close on your “for sale” home from the time you decide to proceed with your purchase. If for some reason the “for sale” home transaction falls apart within those 21 days you would be able to cancel your purchase because the loan would not be approved, no breach of contract. An extension of a contingency can occur if asked for in writing. If the seller has no other offers and no prospects, then I suspect an extension would be granted, though no guarantees.
Consult with a real estate professional before embarking on any of the above strategies. Your particular situation may necessitate a different solution. Your agent should be able to explain aspects of the contract to help you make the best decision for you. If they are not able, my opinion would be to seek a different agent. One last idea, make sure you read before you sign!