Buying or selling a property can be stressful, no matter the circumstances. If you need to do both simultaneously, it can escalate from “stressful” to an extremely daunting experience. You want to find the best offer for your current home while ensuring you have enough of a down payment for your new property. All while the timelines need to match up, so you’re not left without a roof over your head.
First: Do your researchBefore you begin choosing the best way to buy a house while selling your own, talk to a real estate agent who can explain and break down all of your options.
Here are some factors they’ll consider as they walk you through the first few steps:
- Your current financial situation: The biggest challenge you’ll likely face is coming up with a down payment for your new home while your equity and investment are still tied up in your current house. Your agent will likely ask for the budget you could have available to put down if you were to buy a home today. They’ll also introduce you to options, such as a bridge loan to assist in your sale if needed.
- The condition of the house you own: This will factor into how fast your home will sell in the current market and if you might encounter any issues as you list your home.
- Your timeline: Do you have any flexibility around moving and closing dates? Do you have a limited amount of time to complete both sales? These are all questions your agent will consider. There will likely be some overlap between sales, so preparing an easy-to-follow timeline will make things a bit less stressful.
- Equity of your current house: This ties back to your current financial situation, but it will give your agent more information in helping you decide if you should sell first or buy. If you sell your home first, your equity can assist in a down payment for your new property.
Next: Understand the timelineA real estate transaction can be a complex process by itself. But if you decide to buy and sell at the same time, even more steps are added that can disrupt or delay either sale.
Let’s take a look at a standard timeline for buying and selling your home, assuming there are no issues or hiccups.
- Prepare your home for sale (4 to 6 weeks): Your agent will help you price your listing and assist in staging your home if needed. During this time, take a look at your home’s condition to see if there are any potential issues.
- Shop for a new home (8 weeks): Once you comb through the market and find your ideal home, it’s time to create the perfect offer. Your agent might suggest adding a sales contingency, which states your purchase is dependent on you selling your current home first. If your offer is accepted, your agent may also recommend a longer closing time, so you’re able to sell your home and use your equity for the down payment if possible.
- List your house for sale
- Accept an offer (2 to 3 weeks): The average number of days it takes for a listing to go under contract is 19 days, as of October 2022.
- Get to the closing table (4 to 6 weeks): This is most likely where you will see some overlap between selling and buying your home. As you finalize the sale on your property with a home inspection, appraisal, and all other necessary steps, you will most likely be doing the same for your new home.
- Close on your new home (4 to 8 weeks): The exact timeline for your closing will vary, depending on what contingencies you have and if there are any delays with financing. Ideally, you are hoping to close on your new home at roughly the same time as your current house, so your moving van can go straight from your old home to your new home.
Buying before sellingThe first approach to buying while selling is simply purchasing a new house before letting go of your old home.
The danger, of course, is that you may be responsible for two mortgages and could get stretched financially if something doesn’t go according to plan. And because you’re waiting to sell your current home, you typically can’t use your equity to pay for the down payment on the new property (at least, not without taking out an additional loan).
But don’t worry. There are reasonable ways to go about this route. Here’s an overview:
Option 1: Buy a new house and cross your fingersWith a balancing market, homes are sitting on the market for longer, making it less likely your home will sell quickly than if we were in a strong sellers’ market. However, each local market is unique, so consult your real estate agent for conditions in your area.
If you don’t feel confident your existing home will fly off the market, this option can be scary. If you’re willing to take a calculated risk, however, this might be a good option for you.
Option 2: Buy with a sales contingencyWhen you buy with a sales contingency, it means that a contingency in your offer states that if your current home doesn’t sell by a certain date, you can back out of the purchase contract without penalties.
There are situations when a seller might consider a contingent offer. One is when your agent can explain to the seller’s agent that your current home will likely sell quickly. In that case, the sellers may take a chance and accept it.
Option 3: Buy with a bridge loanBecause many sellers use the funds they make from selling their home to finance the purchase of their new house, they can often find themselves in a situation where closing dates don’t align. In that case, the money they need from their current home’s equity isn’t quite available yet. That’s where a bridge loan comes in.
A bridge loan is a relatively high-interest loan — often secured by your current home — that can be used to fund the down payment on your new house and cover expenses if you’re juggling two mortgages. The loan is then repaid after selling your current home, usually within six months.
Option 4: Use a home equity loanA home equity loan is a loan in which the borrower uses the equity in their current home as collateral. The loan creates a lien against the borrower’s house — and it also reduces the actual equity the homeowner has in their home.
Buyers don't go this route very often, since it can affect their ability to qualify for a mortgage on the new home.
A home equity line of credit (HELOC) is slightly different. While a HELOC also uses your home as security, you don’t receive your money all at once. Instead, you can draw on your line of credit as needed — similar to a credit card — until you reach your determined limit. HELOCs usually carry lower interest rates, but those rates are variable, increasing and decreasing depending on certain factors.
If you have a lot of equity built up in your current house, especially if you are trading down, buying with a home equity loan or line of credit might be a viable option.
Option 5: Borrow from your investment fundsYou can use your 401(k) and other retirement funds to fund your purchase, either through a 401(k) loan or a withdrawal, but it can be a riskier option.
If you withdraw from your retirement account — either a 401(k) or an IRA — before you hit 59 ½ years old, you’ll have to pay a hefty fee. Typically, the IRS will charge a 10% penalty and require you to pay income taxes on your withdrawal.
However, there is an exception for individual retirement accounts (IRA) if you are a “first-time homeowner,” meaning you haven’t owned a property in the past two years. If you qualify, you can withdraw up to $10,000 without penalty. But it’s important to note this only applies to IRA accounts, and a 401(k) withdrawal will still have a penalty if you’re a first-time buyer.
A 401(k) loan, where you borrow from your own retirement account, won’t have a penalty fee or require taxes. But you will have to pay yourself back with interest within a certain amount of time (typically five years). And if you default, it will be considered a withdrawal, and you’ll face those same penalties.
So, while borrowing from your retirement accounts may be a suitable option if you’ve exhausted all other possibilities, it does come with serious risks. Not only do you risk the penalty if you withdraw the money permanently or don’t pay back the loan, but you could also be losing out on significant future investment gains.
Option 6: Consider your alternativesDo you need to sell your home to buy a new one? If you live in an area where rent is relatively high, and you can make it work financially, perhaps you can arrange to rent your house.
Selling before buyingIf you want to play it safe, you can always sell your home before buying a new one. When you go this route, you don’t have to worry about the challenges of temporarily financing two homes or buying with a contingency.
If you sell your home first and cannot find a new house, you may worry about being left stranded. One option, in that case, might be moving into a temporary rental home or bunking up with a relative until you’re able to find a new property, but that may cost you more down the line.
You have several options that can make selling before buying an attractive route.
Option 7: Sell and trust the processIf you live in an area with a hot buyer’s market, meaning buyers have more power, this could be a good option for you. In this situation, the market will likely help you find the right place, and you won’t have to wait too long to buy a new house after yours sells.
But, as we mentioned already, selling your home before buying a new one is not without danger. If you’re in the middle of a seller’s market, you might be left with little inventory to choose from and high prices attached to those homes. You might not find a house you like after yours sells — or, if the market is extremely hot, more competitive offers might beat you out.
Option 8: Stretch out the closing processYou can close on a house in about a month… but you don’t have to. As the seller, you can ask the buyer for a longer closing period, which will give you more time to find a new home.
While some buyers won’t agree to an extended closing period, others might find it advantageous.
Option 9: Ask for a rent-back clauseIf you sell your home and can’t find a new one to buy right away, consider asking for a rent-back clause in the sales contract. In this scenario, you’ll be able to rent your home back from the new owner for a certain period of time after the sale closes — let’s say three months — enabling you extra time to search for a new home while keeping a roof over your head.
We know that buying a house while selling your current one can be a challenge, but hopefully there’s an option here that will be a great fit for you. If you’re unsure which would be the best fit for you, we can help you figure it out!
Please consider The Myers Team your resource for all things real estate. We have over 35 years of real estate experience, specializing in (but not limited to) the Montgomery County area. If you are refinancing, want a recommendation, need a service provider or just have a home related question, please give me a call at 301-910-9910 or email me at email@example.com.