Buy first or sell first? A homeowner’s catch-22

house on schedule A -- resizedWhen Morgan Knull’s clients received three offers on their Capitol Hill home in Washington, D.C. in December, they were thrilled. However, they knew the task of finding a new home in today’s market would be difficult.

“It’s a real conundrum for people now that inventory is so low,” says Knull, an associate broker with Re/Max Gateway in Washington, D.C. “If you have a house to sell, it’s easy, but then it’s hard to find a place to buy,” he says.

Knull’s clients asked all three potential buyers if they could delay closing for 30 to 45 days and allow them to rent back the property for another 30 days because they hadn’t yet found a home. According to the National Association of Realtors, December saw the lowest supply of resale housing since May 2005. The number of homes on the market dropped 21.6 percent from December 2011 to December 2012.

A chicken-or-egg dilemma

The decision to buy first or sell first is a chicken-or-egg dilemma for most homeowners.

“The best way to do it is to buy your next home first and then sell your current home,” says Knull. “But the only way to do that is if you can qualify to carry both mortgage payments. Unfortunately, this problem disproportionately impacts middle class buyers.”

Buyers who cannot afford to pay both loans will need to sell their home first. If they cannot find a home to buy before the closing, then they have two options:

  1. Rent their current home from their buyers
  2. Rent another property temporarily

Many lenders prohibit a rent-back of more than 30 days because the buyers would be viewed as investors rather than owner-occupants.

Renting your home back is no easy task

“You’re definitely taking a chance at finding a buyer willing to do a rent-back in addition to a delayed settlement,” says Knull. “Your buyer could need to move in by a certain date and then you’ll have even less time to find a place to buy.”

Read: Seller’s remorse? How to back out of a home sale contract

While you might request a contract contingent based on you finding a new place to buy, few buyers will go for that, says Knull.

“Buyers rightly recognize that it allows the seller to unilaterally back out if the seller doesn’t find a home to purchase and it takes the buyer out of commission without any promise of a settlement,” says Knull.

Be truly prepared to sell

Knull says that to truly be prepared to sell your home, you must also know exactly what type of home you want to buy and whether or not those homes are available. Not only must you undergo the normal tasks of home-sale preparation, like staging, home improvements and holding open houses, you must also simultaneously research neighborhoods and properties to see which homes are available.

Knull’s clients were able to delay their closing for 30 days and rent back their former home for an additional 30 days, but ultimately needed more time. Unable to find a home in a particular school district, they’ve decided to rent a home for a year while they continue to look for a new home.

HSH Associates Financial News Blog

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