Most homeowners who sell one home to buy another want to secure the replacement home before they sell. But many of these buy-first sellers may find it difficult, if not impossible, to do this due to recent tightening of mortgage lender requirements.
Before the credit crunch, sellers who bought a new home before selling the old one were allowed to claim rental income for the home they were selling if it didn’t sell. This boosted the income needed to qualify for owning two properties. Today, most lenders no longer consider rental income for the unsold property. This makes it harder for many to qualify to buy before selling.
There are a few options available for homeowners who want to move to a home that better suits their needs but who can’t afford to buy first. One is to buy contingent upon the sale of their current home. In some markets — typically those still overloaded with unsold inventory — this approach might work.
Most sellers who are willing to entertain an offer made contingent on another property sale want the purchase agreement to include a release clause. This allows the sellers to continue to offer their property for sale. If they receive another offer, they can accept it in backup position, subject to the collapse of the primary offer.
The sellers then notify the buyers in primary position that they must remove the contingency for the sale of their property within a certain time frame, and provide proof that they have the financial wherewithal to close the transaction. Otherwise, they must withdraw from the contract and the property goes to the backup buyers.
In markets that haven’t been hit hard by the housing downturn, buyers making contingent sale offers can’t compete for the best listings. This is particularly the case in the most desirable locations where there are few homes listed for sale.
In many markets, if a listing is priced right, well-located and in good condition, it sells. However, sellers aren’t keen on contingent sale offers because of the risk factor. What if the buyers don’t price their current home competitively? How long will it take for it to sell? Will they negotiate reasonably when an offer comes in?
Sellers need to consider which house is more salable given current market conditions. If the sellers’ home is in a higher price range and it isn’t moving, it might be worth the gamble to accept a contingent sale offer from buyers who will be selling a cute starter home in a great neighborhood that’s in high demand.
Some sellers who won’t accept a contingent sale offer if the buyers’ property is not yet on the market are receptive to offers made from buyers who already have a buyer for their home and all contingencies have been removed from the contract.
Buyers who need to sell in order to complete the purchase and who are unsuccessful making contingent sale offers need to consider selling their current home first. When the house sells, the contract could include a provision for the sellers to rent back their current home for a time after closing. This provides more time to find a replacement home. The worst-case scenario is that the right home can’t be found in time and the sellers have to move to an interim rental.
THE CLOSING: A big benefit of selling before buying is the sellers know exactly how much money will result from the sale. For some, this financial peace of mind offsets the anxiety of not having a replacement home lined up, or having to move twice.
Dian Hymer is a nationally syndicated real estate columnist and author of "House Hunting, The Take-Along Workbook for Home Buyers" and "Starting Out, The Complete Home Buyer’s Guide," Chronicle Books.
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