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Here is the dilemma in today's fast-paced, competitive housing market; no seller needs to accept an offer contingent on the sale of a home. If a seller gets 10-15 good offers and one of them asks the seller to risk their own sale by waiting for the buyer’s current home to sell, they will do the logical thing and take another offer for the same money. This means that if you have a home to sell and you want to buy another home you’d have to sell your home first, move to a temporary home, then find your new dream home and ultimately move into it. That is a lot of moving. Another option is to find the new dream home first (without any contingency to sell yours) and then sell the current one. That only works, however, if you have enough cash on hand (i.e. you do not need the equity from your current home) to buy the new home AND can qualify for the mortgage on the new one and your current at the same time. Most sellers can’t swing that. There are two other ways to make the buy/sell transaction. In total there are essentially three ways to sell and buy a new home in our current market:
1)The traditional method is to hire a realtor.
2)Use a bridge loan
3) Sell using a program called i-buy
TRADITIONAL
With careful planning, skilled negotiation, and luck, the traditional method will net you the highest return and can sometimes be structured in such a way as to prevent a double move. In a seller’s market, the seller controls the transaction. If you are selling your home you can often negotiate a rent-back (after you settle, you stay in your home and pay rent, typically equivalent to the buyer’s new mortgage payment). This gives you 30-90 days after the sale of your home to win a bid on your next home and close on it. As a listing agent, I have negotiated the first month of rent back for free for my sellers.
BRIDGE LOANS
The second option is to get a bridge loan. In the scenario, you would identify the home you wish to purchase before you sell your current home. This approach essentially lets you borrow against the equity in your current home while using the home as collateral. A lender will typically lend up to 80% of the value of both homes (the current home and the new one). To qualify the lender will assess how much equity you have, your credit score, income, and income to debt ratio. It is not easy to qualify, the interest rate is high, and you’ll pay high fees and costs. If used strictly as a short-term solution with an extremely high probability of selling your current home this can bridge the selling buying gap. The mistake I see sellers make is trying to get a higher price for the home they are selling then the market will bear to compensate for the costs of the bridge loan. You have to calculate a less than market value sale on your current home to reduce the risk of selling short of the equity needed to repay the bridge loan. All in all bridge loans are costly and riskier. You could also consider refinancing your current home to pull the equity out for the down payment and closing costs on the new home if you think you’d qualify for both loans. A HELOC (home equity line of credit) would even be a better option if you can qualify for both loans.
I-BUY
What is ibuying? There are a number of companies who will simply buy your home from you. This ends up being a guaranteed sale once the company has done its preliminary work such as valuation and, in most cases, an inspection of the property. Some of these companies will ask the seller to do some repairs on the home, but most will discount the offer price for needed repairs. They will charge a fee of up to 7% for their service and then turn around and sell the home. Of course, they are expecting to make money on the sale so they have to buy it with enough margin to profit. That margin comes out of what you would have made selling the home on the market yourself. Ibuying now accounts for 1% of total sales. If the maximum return on your home is your primary objective, this is not a good option. If selling your home with certainty, speed, convenience, and a timetable you determine is your primary goal, this could be a good option.
When I have a listing presentation, I will show my clients all three options and the net sheet associated with each one. Re/Max has a program that allows me as an agent to offer all three options, of course, the numbers will vary depending upon various agents, lenders, and ibuy companies. Here is an example that does NOT include closing costs such as transfer tax, title, or other variables.
Traditional method using a Realtor:
Home value: $640,000
Cost of selling: $53,400
Net to seller: $586,600
Bridge Loan:
Home Value: $640,000
Cost of selling: $71,792-$87,528
Net to seller: $552,472-$568,208
Net difference compared to traditional: -$18,392-$34,128
iBuy
Home Value: $640,000
Instant offer price: $$579,000-$640,000
Cost of selling: $49,954-$81,965
Net to seller: $547,742-$558,419
Net difference compared to traditional: -$28,181-$38,585
As you can see the most profitable approach is to hire a good agent and put your home on the market, but other options can be convenient and easier to control. I think it is important to know your options and select the one that is best for your family.
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