By Dian Hymer
Selling a home has been relatively easy the last few years. The challenge has been finding a new home to buy. With inventories at record lows, many sellers refused to sell their existing home until they found a replacement.
Buying first worked well for most sellers in recent years. They often found buyers lining up to buy their home as soon as it hit the market. The risk of owning two homes for long was low.
Now there is anecdotal evidence to suggest that the real estate market is changing-at least in some areas and in some price ranges. If so, is it still a good idea to buy before selling?
First, consider the alternatives. If you buy first, you will know where you're moving, what it will cost and when you can move. Families with small children often find it easier to market their old home after they have moved out. Their home can then be prepared for sale and kept that way with little, if any, effort.
The downside to this approach is that it's expensive. You must come up with cash for a down payment and closing costs before your home is sold. Few homeowners have this amount of extra cash in savings. Some homeowners tap into their equity before selling by using an equity line of credit.
House Hunting Tip: In a changing market, it's wise to factor in a longer marketing period for the home you'll be selling. You could get lucky and sell quickly. But, if the market softens, it usually takes longer for homes to sell. It's better to err on the conservative side than it is to be caught short of cash during the period that you'll own two homes.
The biggest risk you face in buying before selling is that your home doesn't sell in the desired time frame and the market worsens. In this case, you could be forced to reduce your list price in order to speed up the selling process.
It may be an option to rent your old home until the market changes again. But, keep in mind that to take advantage of the federal capital gains tax exemption on the sale of a primary residence (a $250,000 exemption for single sellers and $500,000 for married sellers who file jointly), you need to have occupied the property for two of the last five years.
Homeowners who can't qualify to buy before selling, or who can't stomach the anxiety of owning two homes, have other options. The most appealing is to buy the new home contingent on the sale of your home. Unfortunately, sellers of the most desirable homes usually don't look favorably on contingent sale offers. A local real estate agent will be able to tell you if contingent sale offers are a viable option in your area.
If not, consider selling your home with an option to rent it back from the new owners for a time after closing. This will give you extra time to find a home to buy if you haven't found one by closing.
Typically the seller's rent covers the buyer's costs of ownership during the rent back period. This may be more than you paid to own your home, particularly if your home has appreciated substantially and the buyer is taking out a large mortgage.
The Closing: Renting your home back from the buyer after closing is done for convenience sake. If you want to pay cheaper rent, you can always move to a temporary rental until you find your dream home.
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