Buying a house is a huge investment and many times buyers will purchase the most expensive house they can afford. When you buy the most expensive house you can qualify for, it makes it very tough to buy another house without selling the house you own first. It can be tricky, but it is possible to sell the house you own now and buy another house on the same day. This allows you to avoid moving all of your possessions temporarily while you wait to buy a new house. When you are selling a house at the same time you have to make sure you have awesome real estate agents and lenders to make everything work as it should. One complication or oversight can cause delays, which can cause huge problems for both the seller and buyer.
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Why can’t many home buyers buy a home before they sell their current house?
Most buyers will get a loan when they buy a house. The amount the can qualify for will based on many factors like credit, down payment, work history and debt to income ratio. The amount of the loan you can qualify for is based on your debt to income ratio and down payment. If you have bad credit or a short work history you may not be able to qualify for a loan at all even with great debt to income ratios and huge down payments. A super high credit score will not allow you to qualify for more money, but it will allow you to qualify for different loan types and interest rates.
As a home buyer you do not have to figure out these complicated equations to see how much you can qualify for. A lender can look at everything and tell you, this is how much you qualify for and this is about what your payments will be. Most buyers see these figures and buy a house that is close to the most they can qualify for. The problem is when they buy a house that maxes out what they can qualify for, they cannot qualify for another home when they own the first house. When buyers do this and want to invest in rental properties it can be very tough to buy more houses.
If you want to move up, move to a different area or even downsize, you will most likely have to sell your current house before you can buy the new one. Most lenders will not give you a loan assuming the house you have now will sell, they want to see it sold and the loan paid off. Some of you may be thinking that you can rent your current house instead and that will satisfy lenders. Most lenders will not count rent income until it shows up on your taxes and many will not count all of your rent as income, because renting a house comes with many expenses. If you want to rent your house instead of sell it, you will have to have it rented for a certain period of time before being able to qualify for another home.
How can you buy and sell a house at the same time?
Many people have to sell their current house, before they can buy another. There are different options as far as short-term housing, but it is also possible to sell one house and buy another without moving in between. Here are the basics on how this works:
- Either find a house you want to buy or list your house for sale and then find a house you want to buy.
- Write a contract on the house you want to buy, which is contingent on you selling your house.
- If you price your home well you should get an offer right away.
- Try to time the closing on the house you are selling just before you close on the house you are buying.
- Close on the house you are selling. Move all your stuff into a moving van. Close on the house you are buying and move into the home.
It is actually very common to see this scenario pan out. Many times it works out great, but in some cases one delay on any side of the transaction can cause serious problems. I also see chains of contingent sales, which can make everyone involved very nervous. For example:
- You have a contract to buy a house contingent on your house selling.
- The contract for the house you are selling is contingent on those buyers selling their home.
- The sellers of the house you are buying are buying a new house and their contract is contingent in their house being sold to you.
I have seen chains like this longer and if one thing gets messed up, everyone’s deal can fall apart. If the buyer of your house lose their buyer on the house they are selling, they can’t buy your house anymore. Now you don’t have a buyer for the house you want and the seller’s of that house lost their buyer too!
What does a contingency mean and how do they work with selling and buying houses?
A contingency means that a contract can terminate if the contingency is not satisfied. A contract can be contingent on a satisfactory inspection, appraisal, loan approval, survey and many other things. When buying and selling a house at the same time the contract is often contingent on the seller finding a buyer for their home by a certain date.
It is common to see a contingency worded like this:
- This contract is contingent on the buyers home at 123 main street going under contract by October 20th, 2015. If the buyers home is not under contract by this date this contract will terminate.
If you get to this date and the buyer’s home is not under contract yet, you can try to amend this date out further if the seller agrees. If the seller does not agree they can terminate the contract and look for a new buyer. You can also see first right of refusal clauses in contracts for buyers who have to sell their home first. Some seller’s may not want to tie up their home for a contract that is contingent on a house that is not under contract yet.
- This contract is contingent upon the buyer’s home going under contract by October 20th, 2015. If the seller receives another acceptable offer the buyer’s have 36 hours to remove the contingency on their home or this contract will terminate.
This allows the seller’s to continue to market their house to new buyer’s until the buyer’s with the contingency can get their house under contract.
How can you make your offer with a contingency more likely to get accepted?
If you have to sell your house before you can buy another house you are at a disadvantage compared to buyers who do not have to sell. A contingent contract is less likely to perform and seller’s and real estate agents know this. If I am a seller and I see two contracts that are same except one buyer has to sell a house and the other does not, I will take the offer that does not have to sell every time. There are things as a buyer you can do to make your offer more likely to be accepted.
- Have your house listed on the market before you make offers on another home. If I see a contingent offer come in and the buyer’s have not even listed their house, it tells me they aren’t that serious.
- Get your house under contract before you make an offer on a house. This is risky because there is a chance that you will not find a house to buy, but it makes your offer much more attractive to sellers.
- Price your home so that it sells quickly! As a real estate agent and seller of many homes I want to see any houses involved in a contingent offer be priced to sell. If they are over priced the chances of the deal going through are very slim.
- You might have to offer more on another house if you have a contingency. If you are competing against other offers that have no contingency, raising your offering price may convince the seller to take your offer.
- Make sure you are pre-qualified! If you are making an offer contingent upon your house selling, you better have a pre-qualification letter showing you can get a new loan once your house sells.
What happens if you have everything lined up to sell on the same day and something goes wrong?
Things go wrong when buying and selling houses all the time. The buyer can get turned down for their loan, because they bought a new car or they lost their job. The appraisal can come in too low on one of the houses or lending troubles can cause delays. If you are selling a home and you as the buyer cannot buy the new house because you are turned down for the loan, you may still be obligated to sell your house depending on how far along the process is.
If you are buying a house contingent on yours selling and the buyers of your house cannot buy it, you will most likely be able to cancel the contract on the house you are buying and get your earnest money back. In the case of delays on the house you are selling, it will push out the closing of the house you are buying, because you can’t buy that house without selling yours first. In the case of delays with the house you are buying, you may be homeless for a couple of days or weeks while you wait for the new house to close. It is best to have some sort of short-term housing lined up in case you need it. Maybe stay with friends, family or a hotel.
It is possible the seller may let you rent the home you are buying before you move in or the buyer of your house may let you rent the home you just sold short-term until you can move into the new home.
How can you avoid a contingency for selling your house altogether?
If you are looking to buy a new home, the best way to do it is to avoid a contingency to sell yours. This is not possible for everyone, but many people may be able to avoid contingencies if they think outside the box.
- You can make an offer than is not contingent upon your house selling. If anything happens and you cannot follow through on your contract because your house does not sell, you might lose your earnest money. If your earnest money is $1,000 or $2,000 the risk might be worth it to get a better deal on the house you are buying or have a better chance at getting a house you love.
- Make an offer without having to sell your house first, by using a co-signor. If a parent, sibling or friend will co-sign on the new loan with you, you may not have to sell your house first to buy the new house. The co-signor will be on that loan until the loan is paid off or refinanced. Make sure they know what they are getting into and that this loan could affect their debt to income ratio.
- Borrow money on a short-term basis from family or a hard money lender. This is risky as well, because the interest rates will most likely be very high. If you borrow money to buy the new home, you can take your time selling your old house. When they old house is sold, you can refinance the new home and pay back the hard money lender or friends and family. I used this technique when I bought a house at the foreclosure sale that I had to pay cash for.
- Be willing to sell your house first and plan to live somewhere for the short-term. You can sell your house first before you look for another. You will not have to stress about selling fast and finding another home fast. You can sell your house, move out, and take your time looking for a new house.
Buying and selling houses when you have to sell your current house first is tricky. There are ways to pull it off and I see smooth transactions happen all the time. I also see seller’s who don’t want to list their home until they find the perfect house to buy. They rarely get their offers accepted because the seller can’t see if their home is priced right and there has been no exposure to get an offer. Try to make your contingencies as attractive to the seller as possible and if you can remove your contingency it will make the process much easier.