Jeff Neal, 33, of Lancaster, Pa., bought a bigger house last year when his wife was pregnant with their third child.
They planned to sell their two-bedroom home first, but the buyer backed out of the deal after the couple made an offer on a four-bedroom house in the same city. Fortunately, Neal’s relatives pooled money and lent him the cash so he could pay off the 30-year mortgage on the first home. As a result, the Neals were able to buy their next home before selling the old one.
Neal, who runs an e-commerce website, eventually became the landlord of his first house for a painful eight months, during he drove 35 minutes most weeks between his new house and his old one to make sure things were running properly. The total cost of maintenance, taxes, insurance and utilities for his old house amounted to more than $9,000. Owing not just money, but gratitude, to generous relatives left Neal feeling even more unsettled.
“It was challenging, nerve-wracking, and stressful,” Neal told MagnifyMoney.
This spring, Neal sold the old house and paid back his relatives. Although he liked the perks of buying before selling — namely a (relatively) relaxing moving experience — he said next time he would try to sell a house before buying anything new.
Buying a home the second time around sounds easier — you’ve gone through the process before and understand the ups and downs — but the process of juggling two transactions at once can be daunting. You're both buyer and seller now. The seller in you might want to take advantage of a standout spring real estate market, but the experts we talked to have said that personal circumstances matter more.
May is the best month for home-selling, according to real estate research firm ATTOM Data Solutions. A recent report found that homeowners who cashed out in May received, on average, 5.9% above asking price. June was a close second, with sellers taking home a 5.8% premium. On the flip side, the housing market cools down in the fall and colder months (though homeowners in steamy Miami are reportedly better off selling in January). ATTOM data suggest that October and December are the best months to buy, when sellers received a 1.6% premium on average.
So, buy first or sell first? When is the best time to start the process? MagnifyMoney spoke with real estate experts who analyzed four common scenarios for move-up buyers and listed pros and cons of each.
Selling before buying, timing the market
From a pure economic standpoint, experts said it would be ideal for move-up buyers to sell their homes in the spring, and wait until fall to buy their next house. But real life is often far more complicated. Other factors go into the process of buying besides price, and the stress that comes with two moves may not be worth a better bottom line.
However, for those who can time the market this way, experts said this strategy does work to a homeowner’s advantage. When the two separate transactions are not contingent upon each other, you may enjoy much more freedom and peace of mind than if you sell and buy almost simultaneously.
“When you're selling and you’re not contingent on the front end, it’s a pretty clean sale and you’re not worried about this other purchase,” said Daren Blomquist, ATTOM’s senior vice president. “On the back end, when you’re actually buying a property, you’re a non-contingent offer, which will put you ahead of the line of a lot of other buyers who are continuing on their home-selling.”
George Ratiu, who leads research for the National Association of Realtors, told MagnifyMoney that those who are in a position to sell in the warmer months and then purchase in the fall months may be working professionals without children. They have a lot more flexibility in timing, as they are not tied to the school calendar.
But there’s an inconvenience factor in delaying the time between when you sell and when you buy. You will have to factor in the housing costs during the gap, as well as the pain of moving more than once.
While such a delay could save you some money, Ratiu cautioned that trying to time the real estate market is about as fruitful as trying to time the financial market — both are unpredictable. Plus, local market conditions can vary from regional or national trends.
“I think trying to time the market is a difficult proposition and one which should take a backseat to a buyer’s circumstances,” Ratiu said.
Selling before buying, but almost simultaneously
In most cases, Blomquist said, move-up home buyers sell their old home first and take the profit from that sale and roll it into the purchase of another home later, but not that much later. The processes happens almost simultaneously because people don't want to have an interruption in moving, he said.
But because these purchases are typically contingent upon the selling of the old home, three parties are involved in the process, which adds a layer of complication.
“It's not just you as a buyer qualifying for a loan,” Blomquist said. “It's another buyer qualifying for a loan on your home. That just multiplies the number of things that could go wrong, that would trip up the sale of the home.”
In hot markets, such as the San Francisco Bay Area, sellers fearful of not being able to find that new house wait longer, exacerbating an already tight inventory. And they have good reason to worry: If it takes longer than you thought to find another home, you risk paying more on intermediary housing expenses.
“You are sitting there without a permanent place to live and that is a risk in and of itself, although I would say that’s a lower risk then taking on two 30-year mortgages at the same time,” Blomquist said.
Buying before selling
This could indeed be a risky proposition for those who buy a new home before selling the old one. Upside: You can take your time moving, which offers a certain level of freedom.
“If the market tanks, you may not get as much profit out of that sale later on,” Blomquist said. “Or if you lose your job, you may not be in a position where you’d want to be owning a home” — much less two homes.
But for those who are close to paying off or have already paid off the mortgage on their first home, the circumstances change pretty dramatically: It’s a lot easier to see that old property as an income generator even if you are not able to sell it right away.
Experts say that people who have this flexibility in their timing and finances are most likely to be retirees. (More on them in a second.)
Younger families like the Neals who buy a house before selling the first, but perhaps lack interest-free financial assistance from relatives, may want to consider a bridge loan. A bridge loan provides the short-term funding required to purchase the new home, buying you time to get your current home ready for sale. Ideally, you would move into your new home, sell your old property, then pay off the loan quickly.
However, the strategy is not for every real estate buyer. It comes with risks, and bridge loans are not easy to obtain for many. Borrowers in general need to have excellent credit, a low debt-to-income ratio and home equity of 20% or more.
Blomquist said bridge loans work best in tight housing markets where sellers are confident that their first home will sell easily. Read more about bridge loans in this guide.
Hold onto that first home as a rental instead of selling
Retirees who have paid off their first house, and therefore wouldn’t shoulder two mortgages when they buy their next home, may want to hold onto the first home as a rental instead of selling. Young professionals who have moved for a new job where home prices are significantly lower may also be able to swing two house payments.
“If you're able to hold on to that first home, it can become a rental that can generate positive income for you potentially, if the numbers work out,” Blomquist said. “And over time, if you own it for another 20 or 30 years, it will likely appreciate in value as well.”
To be sure, not everyone can afford to do this. But if you are able to manage it, a lender will likely to count your rental earnings as income, which will also help you to cover the mortgage payment.
However, as we learned in the last recession, home prices don't always appreciate — sometimes they slide. Maintaining two properties is also no easy task. Ratiu has suggested you check your financial goals and time horizon, and think through whether it’s realistic for you to manage all the headaches that may come with renting a residence before deciding to become a landlord.
MORE FROM MAGNIFYMONEY:
MagnifyMoney is a price comparison and financial education website, founded by former bankers who use their knowledge of how the system works to help you save money.