Juggling a Sale and a Purchase

Selling one home and buying another at the same time requires solid financing, careful planning and creative crisis management.

Always sell before you buy. It may sound like common sense, but if you're like many seller/buyers, you started attending open houses before you even thought about what it would take to sell your current home. While most experts agree that you should always close the sale of the current home before buying another piece of property, circumstances can place you in the opposite situation. Your goal in either case is to make two transactions close at the same time. It can be a stressful process with complicated financing. As in any real estate transaction, the trick is to stay calm, focused and flexible.

Why sell first?

Selling the current home first virtually eliminates the financial risk. You'll know how much money you have for the next purchase. You also don't have to arrange interim financing or save extra funds for a down payment. If you can negotiate a sale/leaseback, you can stay in your current house while you look for your next house. If you can't arrange to rent your current house, you will probably have to rent a home temporarily. But it is usually cheaper to pay two months rent and moving costs than to pay two mortgages, taxes and insurance for several months. It is almost always better to sell your current home first, and your lender may require it if you can't qualify for interim financing. Start managing the two transactions in tandem.

Step by step: A simple look at managing two transactions

If you sell first:

If you've started looking for another house and your own home isn't already on the market, stop and start preparing your house for sale. Consider your timing; spring and early fall are the busiest buying seasons.
Get three comparative market analyses from three prospective listing agents--or an appraisal if you're selling the house yourself--and determine the home’s approximate value.
Estimate the minimum amount of cash you can expect from the sale and get pre-approved for a loan. Now you know the price range for the new home and you have pre-approved financing.
Order a pre-sale inspection and start making any necessary repairs and decorating changes.
Launch your sale and start shopping in earnest for your next home.
Accept an offer and negotiate a long escrow or a sale/leaseback to secure extra time if you have not found a new home. If the buyer wants to close quickly, arrange temporary housing. Avoid putting an offer on another house until most of your purchase contract's contingencies have been satisfied.
Close sale and deposit the proceeds while you look for your next house.

If you buy first:

If you have found a new house and your current house isn't on the market, structure your offer to include a long escrow or make the purchase contingent on the sale of your current home. Such a contingency is a seller's nightmare, but in a slow market the seller may be willing to accept the offer. More important, it gives you an escape if your house doesn't sell.
Start preparing your house for sale. Consider pricing carefully. You may need to list at a lower price to speed your sale. You also may have to offer incentives such as a home warranty.
Find a lender to secure interim financing to cover purchasing your next house while your current house is for sale. So-called bridge loans are made against the equity in your current house and cost more than traditional home loans.
Focus on selling your house. Help the agent any way you can, and maintain the home’s appearance. If you get an offer you want to accept, verify the buyer's creditworthiness, avoid any contingencies that could delay closing and try to schedule a closing date before the closing of your other purchase contract. You may be able to avoid interim financing. When your buyer has secured financing, notify the seller of your next home that your house has a buyer.
If you have not sold your house and your purchase contract on your next house does not have a contingency that allows you to back out, you are still committed to the purchase.
Close on both sales or close on your home purchase only. If it is the latter, continue sales efforts until market slows. Consider taking your home off the market until the next shopping season and rent out the home.

The long-distance deal

Juggling two transactions can be much easier if the homes are in the same town. But what if you're relocating and the other house is 2,000 miles away? Your top priority should be to have a trustworthy representative at the other end. A real estate agent who has handled relocations is the best option. Most legal documents can be handled by facsimile; you don't even have to be at the closing. You may, however, be faced with renting out your current property if it doesn't sell, although some employers who offer relocation services will actually purchase your current home for its appraised value if it doesn't sell.

Stretching the money
Be prepared to deal hard with your money when you manage a home purchase and a sale at the same time. First, it's wise to have cash reserves available to cover your down payment and two or three months of mortgage payments. If not, you may have to take out a loan or borrow your down payment. In order to qualify for a second mortgage, you need enough income. Some lenders are more lenient on your qualifying ratios if you use the loan to purchase another home.

TIP: If you have a 10 percent down payment for your next house, consider applying for a 90 percent adjustable rate mortgage with a payment option. With this loan, if rates go up, you can pay the minimum payment, interest only or the fully amortized amount. This can save several hundred dollars per month, which can help cover your existing mortgage.