In many homes across the nation, this scenario is repeated quite a bit: Imagine yourself in the midst of a house upsizing effort during this waning housing market — that is, you’re thinking 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?
- Crawl under a rock and die.
- 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.
I thought about this when I came across our paper discussing some of the elements behind house juggling and double mortgages:
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.
Yes who wants to have 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? Buy first and move only once!
Creative financing has also made the practice more accessible to all; less-than-affluent homeowners can easily get loans for new homes before selling their old ones.
Sounds like people just can’t resist moving up even when it’s not in their best financial interest (e.g. they can’t afford it).
John Asdourian offered a wild guess that 10 to 15 percent of San Francisco listings were languishing on the market or being pulled from the market to become rentals. All the real estate agents stressed that sellers who had already bought new homes were increasingly having to accept offers that fell short of their expectations.
When you buy before you sell, you’re a bit in 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.
Indeed, the happiest buyer-sellers I spoke to lowered their expectations from the start. In a declining market, it’s better to have a house hit the market at a little below the going rate than play catch-up later. Either way, it’s probably wise to think twice before using a refinance appraisal as a benchmark for a listing price.
So if you’d rather buy first then sell later, be prepared to price your original house “well”.
Unfortunately, this sort of thing happens quite often — in fact, it just happened to someone I know. 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.
On a personal level though, I’m asking again… in this situation, what should we do? At this moment, that’s really more of a lament than a question.
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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.
http://www.1siliconvalley.com/dont-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.
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.
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….
Luckily I don’t have that problem. Im renting!
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!
Renting is the best way to go. Or if you dont like mowing lawns you can get an apartment !
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 downpayment. Mortgage rates are way low right now but world economy and financial markets are nose diving and nobody knows when will this bottom out. A good mortgage rates predictions could have made a liitle bit of help before dipping yourself into another mortgage.
Thanks,
JGVFinance.com
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