It’s one of the biggest gambles homeowners can take: They find a new house they want and, because of the tight housing market, they forgo traditional wisdom and buy it before selling their first home.
In their minds it’s a good bet, figuring the current buyer frenzy should make it easy to find someone to take the first house off their hands.
Well, maybe not.
The real estate climate is slowly returning to normal and even softening a bit. Interest rates are higher than they have been for some time. Though many still describe it as healthy, the chance that a buyer might get stuck with two homes and double expenses–two down payments, two mortgages, two tax and insurance bills–is becoming a bit more common.
But there are tactics a buyer can use to avoid getting stuck with two homes:
First, take a casual look at what’s available in the desired location, condition and price range to see if buying or staying put makes more sense, says Jennifer Ames, an agent with Coldwell Banker’s Hancock Center office.
Second, get financing in place to know what can be purchased and how quickly, says Rick Bechtel, a vice president and the Chicago regional manager of Chase Manhattan Mortgage Corp.
Third, consider a number of strategies, all with pros and cons. Here are the most popular of these options:
– Sell your house for less to move it fast. Is a bird in the hand worth two in the bush, or, in real estate parlance, is a quick sale better than owning two homes?
It depends on an owner’s anxiety level and wallet and on the market. Rather than own two properties and carry associated costs, some owners sell for less in order to move forward.
Homeowners Lisa and George Spathis took that route several years ago when they were moving from a condo in Lincoln Park to a single-family home in Highland Park. “We figured we’d sell fast since we were in a hot neighborhood, but we didn’t,” says Lisa, a public relations specialist.
Expecting their second child, the couple became nervous. When a buyer materialized but offered less than they hoped for, “World War III erupted,” Lisa recalls. The couple finally decided to take less and ended up only owning two properties for a month.
– Write a contingency into the contract. The contingency should state that if you don’t sell your existing home you won’t have to proceed with your new purchase. Whether the seller of your potential new house will agree to this depends again on the health of the housing market. In the strong market of recent years, few sellers would risk taking their house off the market for a “maybe” offer when they thought a “clean” offer, without a contingency, lurked around the corner, says real estate agent Fred Carmean of Coldwell Banker’s Lincoln Park Plaza office.
Of course, some sellers may agree to a brief contingency or, if they can, add to the contract that if a clean offer materializes, the first potential buyer has a set number of hours–typically 24 or 48–to remove the contingency or bow out of the deal.
A slightly different variation is to ask a seller to delay the closing for several months, which gives the buyer more time to sell his home, says Honore Frumentino of Koenig & Strey’s Deerfield office, recently purchased by GMAC Corp. “It’s a bit of a gamble but sometimes more appealing to the seller,” she said.
– Take a bridge loan.A bridge loan allows you to get from your existing home to your future home with temporary financing if you don’t have enough liquid assets to pay for the second down payment, closing costs and old and new mortgages. Timewise, it’s done during the mortgage process, Bechtel says.
But, here’s one big rub, says Bechtel. “Although it’s meant to tide you over, a bridge loan is really a third loan or a lien on both your old and new houses until a seller comes forward, and a lot of homeowners don’t have that much money,” he says. It’s also meant as a short-term aid, typically not more than six months, though it often can be renewed for another three months or so.
Other things to consider: The market may turn and you still may not be able to sell; a bridge loan can be expensive; and the criteria used to evaluate the borrower are stricter than with other loans.
To secure a bridge loan, the borrower must have listed his current house with a broker who has access to the MLS directory and the property must be priced reasonably. Many experts view it as an option of last or almost last resort.
– Pull some equity from your existing home. Taking a home equity loan on your house is another viable strategy and somewhat more appealing to many buyers who have built up value in their first residence. “You can get up to 90 percent of your home’s value minus your existing mortgage in what you borrow,” Bechtel says.
Getting this line of credit is relatively quick–and easier than a bridge loan–because it involves less paperwork. The approval can occur in a day or two.
While there are associated costs, including an appraisal and title and recording fees, most lenders absorb them, says Doug Wiand, a mortgage broker with River Valley Financial Inc.’s Chicago office. Also, if you sell, you incur no prepayment penalties.
The biggest caveat is that you can’t get home equity from your current house once it’s listed for sale in the MLS, Wiand says.
– Rent out your current home. If you can’t afford to own two homes and no offer seems imminent, you might consider renting it out for a short period to get extra income.
If you do, you should keep it on the market, take a good security deposit in case your tenants aren’t as careful with your dwelling as you are (and few are) and specify what they must agree to regarding potential showings.
What’s reasonable? They should have 24 hours’ notice to tidy up the place, says Ronda Abrams of Coldwell Banker. However, many tenants are not terribly cooperative, adds colleague Fred Carmean. Many co-ops don’t allow renting at all, so check building rules.
If possible, you should try to get a tenant to agree to a 60-day kickout clause, which means that if you find a buyer, the tenant must vacate within that time frame, Abrams says.
The downside of renting goes beyond wear and tear. If a real estate agent finds a tenant, you’ll have to pay a commission, typically equal to one-month’s rent–a big bite of profits.
What’s the possibility of finding a renter? Unfortunately, it’s tougher, says Ames. A lot of potential renters bought their own properties as interest rates dropped, so they’re not looking, and many owners bought a second place for investment, seeking to rent it out so there are more rental properties, she says.
– Keep some furnishings in your first home. When you move into your new home, but are still showing your original abode, keep some furnishings there, advises designer Leslie Stern. “Houses look better with some furniture,” she says.
– Sell and move into a rental temporarily. Here’s a slightly different twist on avoiding dual homeownership. Sell and become the renter while you house-hunt.
There are short-term furnished rental properties available throughout the city. Oakwood Housing Properties had 600 listings available in River North and on the Gold Coast late last year. They can be rented for as few as five to 30 days, though most leases run 30 days or longer, a spokeswoman said. The buildings have nice amenities, including fitness centers, 24-hour-doormen and pools.
One caveat: You must rent for less than two years if you later buy to avoid paying a possible capital gains tax on the proceeds from the sale of your first house, says attorney Rob Glantz of the Chicago law firm Shaw Gussis Domanskis Fishman & Glantz.
You also have to close on the sale of the new home within that two-year period, he says. Other Internal Revenue Service rules may allow you to exclude from your income a certain amount of gain, he adds.
