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.
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?
- Cut your list price in the hopes of getting a new buyer quick!
- Grin and bear it, set up more open houses and wait patiently for new offers at your current price.
- 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.