The Chicken or the Egg (Updated)

SteveBerg05.jpgSo, you’re family is growing and you need more space. You decide to buy a larger home, but you need the equity out of your current home to make it happen.

What do you do first? 

Scenario “A”: Find a replacement home and make an offer (subject to the sale of your home);

 or

Scenario “B”: List/Sell your home and then find the replacement home.

This is not meant to be a trick question, but it can be tricky. It’s a classic “Chicken or the Egg” scenario (well, almost). The answer depends upon several factors including your needs, timing, flexibility and, to a certain degree, how lucky you are.

Let’s look at the main advantages and disadvantages of each –

Scenario “A” (Purchase new home subject selling exisitng home)- Today, as the market has slowed down, you may actually have a better chance at this scenario than during the previously heated market. The main advantage, of course, is that you get to find the perfect home on your time schedule and if you are successful in getting your offer accepted, you have the chance to sell your home and shift your equity to the new home at close of escrow. HOWEVER, their are several disadvantages, as well. One is that your offer will most likely (if the listing agent has a brain) be accepted by the seller subject to a “48 (or 72) hour clause”; meaning that your new dream home will remain an “Active” listing in the MLS. If the seller subsequently receives and considers accepting a non-contingent offer from another buyer while you are still trying to sell your home, you will receive a written notice from the seller giving you 48 hours to remove all of your contingencies including, among many other things, having sufficient funds for your down payment, which due to the fact that your home has not yet sold, you don’t have. The reality is that you risk getting blown out of the transaction and having to start over in the search for your new home :-(. Another disadvantage is that a contingent offer is, inherently, not perceived by the seller to be as strong as a non-contingent offer (obviously, because it’s CONTINGENT). Therefore, you will likely have less leverage in the negotiations of the price and term. 

Scenario “B” (List/sell home prior to offering on new home) -This scenario is more about “huevo’s”! You list your home for sale and start looking for your new home. You wait to make an offer until your home is in escrow (preferrably with all buyer contingencies waived). You now have the advantage of leverage due to the non-contingent nature of your offer for your new home. Wonderful! Except what if you don’t find your perfect home in time? Are you homeless?? Are you a renter?? This depends upon your agent and how well he/she protects you. For example, one way to protect yourself from joining the ranks of the homeless is to include the term…”Subject to seller finding suitable replacement housing within (blank) days” (in your listing and in the terms of the  Purchase Agreement. But the disadvantage is that you may scare off buyers who need to close escrow within a certain timeframe. You and your agent should also be prepared for how to handle a contingent or non-contingent offer. With a contingent offer on your home it gets really tricky because you now have 3 homes that need to close concurrently or sequentially. A choo-choo train! We’ve done it (with as many as four homes in the train), but it is certainly not the preferred scenario.

But there is also a Scenario “C” – This one involves a “bridge” loan arrangement (“bigger huevo’s”). If you have sufficient equity available in your home to obtain a line of credit (or the availability of other funds) equal to the down payment on your new home AND you can qualify for the new home without the need to sell your existing home, you may decide to proceed with the purchase of your new home and list/sell your existing home concurrent with or after you vacate the home. An advantage of this scenario is that you may proceed to buy your new home on a non-contingent basis and not be a slave to timing of the sale of your existing home. A disadvantage, of course, is that you may be saddled with two mortgage payments for the period of time it takes you to sell you old home.   

We have successfully handled all of these scenarios and I can say with confidence that they all can work. However, I have just scratched the surface of the many implications you need to be aware of when engaging in any of these transactions. Timing of escrows, due diligence, contingency waivers, and many more purchase contract terms must be well thought out by your agent and yourself in order to best protect your interests and, not to mention, keep you from becoming homeless.

Steve B.

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