Presently, the local real estate market is difficult for the home buyer with a home to sell, or so-called “move-up buyers.” Inventory is limited and buyer activity is high. I’m seeing a lot of folks who want to move onto the next house, but the inventory is so scarce that they don’t want to list their home for fear that they won’t have a house into which they would be movin’ on up (go ahead and click play on the video)! It is a scary thought! The catch-22 is that if this move-up buyer makes an offer and elects a contingency upon the sale and settlement of their present home, they are often not competitive enough and lose out to a competing offer without such a contingency. Sellers are in the catbird seat and may have their pick of buyers, not only looking for best price, but least risk! I will describe four options for the move-up buyer with attention to the advantages for the move-up buyer and the shift of risk. These options are: buy before you sell, buy your home contingent upon sale and settlement, buy your home contingent upon settlement, and sell & settle before you buy
1) Buy before you sell (the risk is on YOU)
This may not be an option for some buyers. The buyer must either qualify to carry both mortgages or qualify for a swing/bridge loan. A swing/bridge loan is not offered by every bank, but essentially can offer the consumer the ability to pay interest-only for a defined period of time on their new purchase until their present home is sold.
While the risk is on the move-up buyer, there may be some reason for comfort here depending on the market-place. If the move-up buyer’s present home is comparable to homes which are consistently selling quickly, there may be good reason to believe that there will be little-to-no overlapping payment. This is not without risk. Things can go wrong or markets can change midstream.
For example, the move-up buyer could agree to purchase a home and settle in 8 weeks. Let’s assume they make this agreement on today’s date of March 7th. Settlement 8 weeks later takes us to May 2nd. Their first mortgage payment may not be due until July 1st. The move-up buyer might wait 3 weeks into their agreement (March 28th) to list their home as the inspections and appraisal could conceivably be completed at this point. It’s a hot market, so let’s say comparable homes are finding a buyer in 2-3 weeks time (by April 18th), and that buyer enters into agreement to purchase the home in 8 weeks just like the move-up buyer. This takes us to June 13th. This hypothetical scenario renders a situation where the move-up buyer has made their last payment on their present home June 1st, and their first payment on their new home begins July 1st.
2) Buy your home contingent upon sale and/or settlement (the risk is on the SELLER of the home you want to buy)
There is a difference between “contingent upon sale & settlement” and “contingent upon settlement.” The former means the move-up buyer hasn’t found a buyer willing to buy their home (and maybe they never will). The latter means the move-up buyer has a buyer under contract to purchase their home. The former is putting more risk on the seller of the home the move-up buyer wishes to buy. As mentioned above, buyers electing this option are finding they are not competitive enough. If one must elect this option, I recommend making a strong case (assuming there is one) that the move-up buyer’s home is worth what they think it is worth and that comparable homes are selling quickly and reliably.
3) Buy your home contingent upon settlement (the risk is still on the SELLER, but less risk than option 2)
A move-up buyer contingent upon the settlement of their current home carries a little more weight than sale-and-settlement and less risk to the seller. This means that the move-up buyer must list their home for sale without having another home! One may be able to alleviate fears by negotiating with any buyer these two things: a longer settlement date & a contingency upon finding suitable housing. This way the move-up buyer has more time to find a place and furthermore, they are not obligated to sell unless they find a home to buy. When sellers are in the catbird seat, buyers may be willing to go with it.
So once the move-up buyer finds a buyer for their home, they have a more predictable amount of money at the end of the sale versus the move-up buyer with a sale-and-settlement contingency. In other words, they are not relying on netting proceeds of some pie-in-the-sky amount. Though more predictable, I suggest the move-up buyer consider that if the buyer of their home is electing inspections and/or a mortgage contingency, there may be some unexpected expenses relating to making repairs. The seller of the home of which the move-up buyer wishes to purchase will still consider the risk of not only their transaction to sell, but the risk of the move-up buyer’s home to sell. The more inspection contingencies and mortgage contingencies, the greater the opportunities for the deal to go awry.
4) Sell & settle before you buy! (no shift of risk)
If the move-up buyer has options for temporary housing whether it is month-to-month leasing or moving in with relatives or friends, this option is the cleanest in regard to the transactions. It may not be the cleanest in terms of logistics (finding a place, moving twice, etc.). But the option places no pressure for the move-up buyer to sell their home, and it may place little-to-no pressure for the move-up buyer to find their next home.
While this list may not be exhaustive, I hope it has offered the move-up buyer options, and that they can understand the advantages of these options as they venture to compete for their move-up home. Best of luck finding your deluxe apartment in the sky!