Consolidating Your Home's Sale and Purchase - dummies

Consolidating Your Home’s Sale and Purchase

By Eric Tyson, Ray Brown

Suppose you don’t want to sell your house first and then buy a new one. Nor do you want to buy a new home before selling the old one. What then? You can use a third option to sell your old house and buy your dream home without terror, chaos, pain, or privation. Your best alternative is to consolidate the sale and purchase into a seamless whole.

Determine your house’s current value

The ultimate success or failure of your transaction depends on accurately determining your house’s present fair market value. Don’t kid yourself. This isn’t a place for wishful thinking. Overpricing is bad in any real estate market — in a weak market, overpricing is a sure prescription for disaster. You must be realistic when pricing your house, or the sale of your present property and the purchase of your new home may flounder.

In a nutshell, you can either pay to have your house appraised or get a written opinion of its fair market value (called a comparable market analysis) from several real estate agents who fervently want to represent you during your sale.

Check your buying power

Buying power is a function of the amount of cash you put down on your new home and the size of the mortgage you get. Both numbers are easy to figure out. Here’s how:

  • Calculate your cash position by subtracting the probable expenses of sale from your house’s estimated resale value.
  • Have a lender evaluate your creditworthiness. Find out the size of the mortgage you can get based on current interest rates, your income, and the probable down payment you can make on a new home if your present house sells at its estimated resale value. If you’re nearly ready to sell your current house and buy another, now is a perfect time to get prequalified or, better yet, preapproved for a loan.

Lenders can’t tell you how much money you can afford to borrow — just how much money they’re willing to loan you based on their assessment of your ability to repay the mortgage. Lenders don’t know or care about your other financial goals and objectives, such as providing for your retirement or socking away money to help your kids through college.

Familiarize yourself with the market

Harry S. Truman, our country’s 33rd president, was a renowned skeptic. He was fond of saying, “I’m from Missouri. You’ll have to show me.” Folks from the “show me” state don’t value silver-tongued talkers. They live by the doctrine that seeing is believing. When buying or selling houses, everyone needs to adopt Missouri’s principle.

To properly educate yourself about property values, you must tour comparable houses. No amount of book smarts beats good old shoe leather and eyeballing.

You have to wear two different hats during your property tours:

  • Seller’s hat: A good comparable market analysis (CMA) prepared by a real estate agent to determine your house’s current value contains two lists. One documents houses comparable to yours in condition, size, age, and location (called comps) that have sold within the past six months. The other shows comps that are currently on the market. You probably won’t be able to get into properties that have already sold, but you should make a point of touring each comp currently on the market to verify your house’s resale value.

If you’re working with an agent, have him or her tag along when you tour properties. As you walk through a house, ask the agent to point out similarities and differences between it and recently sold properties that you haven’t seen. This “show and tell” greatly speeds up your discovery process. After visiting a few comps, you start to see which houses are priced to sell and which houses are overpriced.

  • Buyer’s hat: The house you intend to sell and the home you want to buy may be different — different neighborhoods, styles, sizes, ages, conditions, and prices. Your new home may not even be in the same city or state. You won’t, however, have to reinvent the wheel as a buyer because most principles of valuing property apply whether you’re a buyer or a seller. Smart buyers also use CMAs. Seeing is still believing, and nothing beats touring property currently on the market so you know what’s available when the time is right.

Pick up a copy of Home Buying Kit For Dummies (Wiley).

Take action

Now you’re ready to start the action phase — selling your old house and buying a new one. Timing is critical. If you structure your transactions properly from inception, you’ll be in firm control of the process instead of the process controlling you.

Putting your house on the market

First things first. Let the world know that your house is for sale. You must, however, continue looking at any new comps that come on the market after yours as well as other new homes being offered for sale. The market constantly changes. New property becomes available. Houses currently on the market sell. A good real estate agent can keep you posted regarding important changes that may affect your situation.

Push your hands deeply into your pockets whenever you tour prospective dream homes. Untimely dreams have a way of turning into nightmares. As long as your hands are safely out of harm’s way, you can’t sign any purchase offers.

Don’t make an offer to purchase your next home yet, for the following reasons:

  • Your asking price may be too high. Even though you try your best to price your property to sell, you may inadvertently overprice it. You know that you’ve overpriced your property if purchase offers fail to appear. Because the amount you can afford to spend for your next home probably depends on the amount you net from the sale of your current house, knowing how much money you’ll have available may be critical. If your budget provides little wiggle room and you’re forced to reduce your asking price, you can simply make a commensurate adjustment in the amount you eventually pay for your new home.
  • You aren’t a real buyer until you have a solid contract on the house you’re selling. For now, trust us; any offer you make on a new home that depends on first selling your present house (if your house isn’t in contract yet) won’t be taken seriously. Real sellers refuse to tie up their property indefinitely while you attempt to sell your house.

Structuring your terms of sale

Concentrate on one extremely important aspect of the deal you make — structuring your terms of sale to provide enough time to purchase your new home. You shouldn’t need a ton of time because you’re already familiar with prospective new homes currently on the market, and you’re probably either preapproved or, at least, prequalified for a mortgage.

Here’s how you can give yourself the time you need to make a well-planned and executed purchase:

  • Schedule close of escrow on your old house to occur 30 days after the buyers remove all their conditions of purchase and increase their deposit. Buyers may take three or four weeks to remove the two most common conditions of nearly all house purchases — mortgage approval and property inspections. Getting loan approval usually takes somewhat longer than completing the various property inspections. Thirty days is your magic number, because lenders normally won’t hold their loan commitment more than 30 days after they approve a mortgage.

Some lenders may be willing to hold mortgage commitments more than 30 days. One quick call to the buyers’ loan officer is necessary to determine the lender’s policy on this issue. If, for example, the buyers’ lender guarantees a loan commitment 45 days after the loan is approved, schedule your close of escrow accordingly. The more time you give yourself to close your other transaction, the better.

  • You can get even more time by putting a “rent-back” clause in your counteroffer to the buyers’ purchase offer. This clause lets you rent your house back from the buyers after escrow closes. It can buy you an extra month or two (or more) if the buyers agree to a rent-back. Sellers usually pay rent equal to their buyers’ actual cost for principle, interest, taxes, and insurance. For example, if the buyers pay $1,500 a month for mortgage payments plus their prorated property tax and insurance payments, that amount is your rent. Although the rent may be more than you currently pay to live in your house, the amount is probably less than it would cost you to move into a motel for a month or two and much more convenient. Sellers are wise to prepare a formal lease agreement that covers the rent-back.

No standard rent-back clause exists. Check with your real estate agent or a lawyer to determine how rent-backs are best handled where you live.

Timing the offer to buy your new home

You may be tempted to rush out and make an offer on your dream home while the ink is still drying on the contract you just signed to sell your present house. Don’t. Give yourself time to shake out deal-killing glitches in your sale before you make any offers on a new home.

  • Don’t present an offer to buy your next home until the contract on your present house resembles the Rock of Gibraltar. If you want the sellers of your new home to treat your offer with respect, delay making an offer until your buyers remove all their conditions of purchase and increase their deposit on the house you’re selling. Until you know the buyers’ mortgage is approved and you resolve questions related to handling corrective work discovered during the property inspections, your contract is as solid as a bowl of pudding.

You may think that we’re overly cautious when we urge you to wait until the contract for the sale of your house is rock solid before making an offer to buy your new home. The real estate gods can be cruel and fickle.

  • Make the offer to purchase your new home subject to the sale of your present house. This step protects you from being forced to buy a second home. Your offer should specify that if the escrow for the sale of your house doesn’t close within the time specified in your contract of sale, you have the right to cancel the contract to purchase the new property. If for some utterly unforeseen reason the sale of your house falls apart, at least you can get out of the contract to buy the new home.

Combining a 30-day close of escrow with a two-month rent-back clause gives you a three-month comfort zone in which to close the purchase of your new home. Ideally, you can simultaneously close the sale of your present house and the purchase of your new home. If you can’t, however, then sell before you buy. You’ll sleep better.