House and Mortgage Juggling: One Tough Financial Act

by Silicon Valley Blogger on 2010-12-1214

In many homes across the nation, this scenario is repeated quite a bit: Imagine yourself in the midst of a house upsizing effort during a waning housing market — that is, you could be thinking that now is a good time to get a bigger, nicer residence. So you sell your property, and have found a buyer for your home at a little over list price. You feel like the luckiest chap on earth to be able to navigate the market successfully before any further price weakening. You’ve also found your dream home and your offer for it just got accepted. You have a bridge loan lined up to cover the little bit of time you need to swing from one jungle vine to the next. You’re simply waiting for all the papers to be signed and for financing to go through. The stars have aligned and you’re sitting on cloud 9.

But then…

the bottom drops. Right when you’re about to move into your new castle, which you’ve scoured 2 years to find, your buyers back out. Their financing falls through and now you’re stuck with two places to maintain for now in a faltering market . What would you do?

  1. Cut your list price in the hopes of getting a new buyer quick!
  2. Grin and bear it, set up more open houses and wait patiently for new offers at your current price.
  3. Sadly back out of your dream home contract and play it safe.

There may be more options for the beleaguered homeowner, so let’s explore this situation more closely.

Are You Holding Two Mortgages? Tips On Mortgage Juggling

Many people have been caught in a bind right at the start of a slump in the housing market. Some homeowners get stuck holding two mortgages for an extended period of time, right as the market gets soft. Nobody will disagree that this situation can be pretty risky. My local paper discussed some of the elements behind house juggling and double mortgages and made these great points:

1. Homeowners juggle mortgages because moving is inconvenient.

For families with children, for whom moving twice can seem egregiously inconvenient, “buy now, sell later” has become increasingly common. What’s more, in the era of bidding wars, the buying process was so time consuming and unpredictable that buyers who sold first sometimes found themselves stuck, unable to find a new home at all.

Here’s why people decide to take this particular risk: they want to avoid the inconvenience of having to go through the moving process more than once. Who wants to move into and rent a place for the short term after selling off a house only to have to move again after buying a new one? Why not buy first and move only once?

2. Creative financing makes home juggling easy for anyone.
Those who can’t normally afford to hold onto two homes are able to do so if their lender allows it. Creative financing was the name of the game before the debt crisis hit, as homeowners were handed loans without too much question. Also, people just couldn’t resist moving up even when it was not in their best financial interest (e.g. they couldn’t afford it).

3. Double mortgages will put you in a position that lacks leverage.
By holding two mortgages, you could be putting yourself in a precarious financial situation. You’ve lost your leverage. Those who aren’t able to sell their homes in a declining market will have to accept a different outcome from what they were expecting. Those properties that languish in the market end up with their listings pulled and instead, are transformed into rentals. Either that, or the properties are repriced much lower. When you buy before you sell, you’re in a bit of a bind and may end up being backed into a corner to accept a price you aren’t going to be happy with unless you lower your expectations from day one.

4. The happiest buyer-sellers lower their expectations from the get go.
The best way to unload a property in a weak or declining market is to adjust your expectations before you even list your property. The recommendation is to price your home just a little under market rates to see what the market can bear. Use comparable sales in the neighborhood to determine where your list price should fall, rather than base things on a refinance appraisal. If you’d rather buy first then sell later, be prepared to price your original house “well”.

Stuck With Two Homes: A Case Study

Unfortunately, this sort of thing happens quite often — in fact, it just happened to someone I know. Here was his story:

My friend relayed to me his concern over the purchase of his 3 bedroom residence in the outskirts of San Francisco, in Contra Costa County. He’s owned it for two years and in a year and a half had a total gain of 20%. But lately, his gain had evaporated and he was now just sitting on a 5% gain. His plan was to somehow acquire equity from this house, sell it and then be able to buy closer to the city of San Francisco where he works.

I told him that it sounded rather tricky — you would need to sell the house at just the right time and buy a house near or in the city at just the right time to make it work. Two transactions have to be done right for it to work out, and what are the chances of making this work exactly? Netting a gain on the sale is one thing, but being able to buy at a more affordable price into a location of higher demand may not even be possible. So would he be resigned to living far and away from work…ever?

Then there’s the issue of having an ARM for a mortgage that will expire in a few years. A lot of folks are in denial about what they’ll do when that point arises, but time flies!

If you are in this position, what should you do? Here are a few things to do in this case:

1. Stay put. Ride the slump out, love your house and hope your employer feels generous enough over the next few years to supply you with salary hikes that match your mortgage rate increases later.

2. Sell your house later and just start renting again. Personally, I don’t see anything wrong with this option. One thing to watch out for though, is rising rents. When the market turns soft, cautious buyers resort to renting again due to market conditions — and wait for the opportunity to fetch a new home at a more attractive price.

3. Rent out your current home while you seek other housing arrangements. You can also rent out your original house, while allowing yourself to rent elsewhere (say closer to work). You may also use this time to hunt for a house that you prefer to live in. That may be a reasonable option if you really really hate the commute but still want to ride out the downturn.

When is it ever easy for the average person to switch homes? When the market is hot, we’re frustrated by the multiple offers on the homes we hope to snag; when the market slows, we get caught between a bridge loan and falling prices. Ah the perils of becoming a homeowner: this just shows how much luck and timing play a part in this money dance and determine, ultimately, how much you’ll be in the hole for.

Created December 12, 2006. Updated December 12, 2010. Copyright © 2010 The Digerati Life. All Rights Reserved.

{ 14 comments… read them below or add one }

Steve Leung December 13, 2006 at 7:07 pm

Ouch, this is an all-too-real scenario but one thing I can offer an ounce of prevention: don’t get financially drawn-and-quartered.

If you’re already in this scenario, you need to assess your cash flow and risk tolerance.

If you can effectively market your property and/or are willing to sacrifice 8% of your collected rent for a property management company, leasing your house will buy you some time. You may still be underwater per month, but it will be less than if you carry both properties. You can get “any” price you want for your house as long as you’re willing to wait long enough. Just remember that no buyer sees buying a house that’s been rented before as a plus.

It may only cost you a small amount (compared to a potential back-breaker of two mortgages) to back out of your new home purchase. Investors do this already but home buyers should also take heed: becoming emotionally attached to a property before the deal closes is a sure fire way to hurt yourself financially. Moving into your dream house mentally before the furniture gets there will lead you to do things like overpay or over-extend yourself.

Andy December 18, 2006 at 2:28 pm

I think people who try this kind of stunt really set themselves up for failure. It’s a bummer, but not totally unexpected. Hopefully those home buyers will think things through a little more carefully in the future.

arthur mcbeth February 6, 2007 at 10:34 pm

It is almost always better to sell your current home first, and your lender may require it if you can’t qualify for interim financing. Start managing the two transactions in tandem.

Paul February 18, 2007 at 8:09 pm

I’m not sure I want to sell my current house. What about leasing current house as an option. Of course, lease has to be greated than monthly PITI for this to work – OK for me. The other part is getting financing for the new house. Just pondering….

LivingAlmostLarge April 5, 2007 at 7:22 am

Why do people think they were going to buy homes and flip them asap? My plan was 5-7 years, it could happen short or bit longer. But when I bought in 2005 the idea wasn’t to make money, it was to live somewhere I didn’t have to move, keep my dog, and pay a mortgage instead of rent.

Which was about the same a little less. There was less than a 5% difference in renting versus buying. So I figured even if I lost a little on the houes, it wouldn’t be as bad as renting for 5 years.

Steve April 20, 2007 at 3:05 am

Luckily I don’t have that problem. I’m renting!

Uk home mortgages May 30, 2007 at 10:12 am

This is a problem in the UK also. Many people seem obsessed with “moving up the property ladder” and feel that as soon as they can afford a better/bigger/more expensive home in a more desirable location, then they have to buy it asap! The days when families would purchase a property in their 20’s and perhaps retire still in the same property have gone. Too many people treat property as a short term investment plan rather than a long term strategy to purchase a home!

Selling Home Help June 5, 2007 at 6:55 pm

Renting is the best way to go. Or if you don’t like mowing lawns you can get an apartment! 😉

Adventures In Money Making July 18, 2007 at 11:32 am

I actually tried this out.

I bought 2 condos in San Diego – 1 in 2001 and another in 2003. in the summers of 04 and 05 I sold both for pretty much the same price. I now rent back the nicer one.

They’ve both dropped around 20% from the peak price. I’m renting so I have lots of time to wait until I see the declining prices firming up.

I expect it’ll be at least 18-24 months before that happens though.

Rita B March 25, 2008 at 10:58 pm

Hope you don’t mind a piece of advice for your friend.

I don’t know how deep his pockets are but I’d get out of that ARM ASAP if I were him. His property value may go down to the extent where he may not have the equity to re-finance in a couple of years. (There are very few 100% loans available anymore) Then he’ll be stuck with higher payments for a home he doesn’t want to live in.

If he ends up upside down in the loan (owing more than the property is worth) and he wants to sell, he will take a loss.

I’m an appraiser and a loan consultant — those of us in the real estate industry have seen this predicament over and over again.

JGVFinance November 18, 2008 at 5:50 pm

Far too many people seem to be greedy and want to live in their dream Mansions and Castles even if these homes are beyond their means. I know of one person who exactly fits the bill. Stuck with two mortgages and no one wants to buy the older house which was supposed to be use for his down payment. Mortgage rates are way low right now but world economy and financial markets are nose diving and nobody knows when this will bottom out.


dean graziosi December 5, 2008 at 8:14 am

Consulting with a financial advisor is recommended when dealing with housing investments with the housing market slump. Being well advised is the way to go!

Glenn Torres June 28, 2009 at 5:29 am

As much as I would like to crawl under a rock, I prefer to live in a house. If I can’t afford to pay for one, I will probably do the obvious thing and rent.

– Glenn

Adam S December 11, 2011 at 1:29 pm

I wish all would-be sellers well… it is indeed a trapeze act to try to ditch one house for a new one like when you are trying to upsize in a down market. Your timing needs to be more precise when attempting this since to sell the house you’ll need to undercut the competition with a lower list price, leaving you with possibly a much smaller downpayment for your planned purchase. Upsizing in an up market seems easier as you buy a new house while keeping the old one. In an up market, you can carry two mortgages and apply for a bridge loan, usually at much lower rates, which is usually the reason for the up market in the first place. With that loan, you could theoretically be able to cover the 2nd mortgage, while preparing to sell your original home without as much pressure.

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