Sell Before You Buy
With home prices at an all-time high, I am getting a lot of clients who are thinking about downsizing. However, a lot of homeowners do not realize the order in which to search for a new home. If you are going to use the proceeds from your current house to afford your new home, you must sell first.
THE PROCESS
As a Realtor when I submit an offer in addition to the contract of sale, I need to include documentation of funds. Either a pre-approval letter if you are using a mortgage, or proof of funds (POF), a screenshot of your bank account with your name on it, and the account number blacked out. By definition, homes are illiquid assets therefor I can’t submit an appraisal as proof of funds since there is no guarantee of when the home will sell or for how much.
LIST & GET AN OFFER
The first step is to list your home and get an offer. A homes’ value is what a buyer is willing, able, and ready to pay for it. Typically that monetary number is correlated to an appraisal value but there are exceptions of buyers waiving appraisal and of course cash buyers who may pay over the appraised value. Conversely, there are homes that for a variety of reasons such as poor marketing, difficult sellers, incompetent real estate agents/loan officers/lawyers, sell below the appraised value. The only way to know the true value of your home is to have an offer that is under contract.
*IMPORTANT: We will make the sale of your home contingent on you finding a new one. This ensures that if you can’t find a new house you will not be obligated to sell your current home.
Use The Offer On Your Current Home As POF
Once you have an offer that is under contract, it is essentially a legal promise from the buyer to purchase your house. Unfortunately, deals can fall through. To protect everybody involved the lawyers state that the purchase of your new home is contingent on the sale of your current home by a specified date. If the buyer for your current home backs out and you cannot find a new buyer and close by the specified date, the sale of your new home will not move forward.
NET GAIN BUYERS VS MORTGAGE BUYERS
If you are upgrading and need to take out a mortgage to afford your new, more expensive house, we will use the offer on your current home in conjunction with your pre-approval as proof of funds. Your loan officer will help you calculate how much you need to set aside for your downpayment and closing costs on both transactions.
If your real estate transactions are going to result in a net gain, meaning that you are going to be left with money at the end of both transactions, you are essentially taking the money from the sale of your first home and purchasing your second home in cash. As a result, the property you are buying does not need to appraise. There is also nothing the seller has to do in order for the property to conform to loan guidelines.
NET GAIN DOWN PAYMENT
The one issue net gain buyers sometimes run into is the downpayment. Within 10 days of going under contract, you need to submit a down payment, which is held in escrow until closing day. If you have the money, obviously writing a check is the best option. If not you can take out a small home equity loan or borrow against your 401k since you will be repaying it within 2-3 months.