Buy or sell first?

October 16, 2007 11:46 AM

Home finance question - sell my house first or make an offer first? Much more inside...

I own and live in a house with a paid off mortgage. Lovely Wife (LW) and I have been looking to get more space, and have finally seen a house of interest.

To minimize the risk of either failing to sell in a timely way or selling for a lot less than we anticipate, we have been advised to try and sell first. LW is afraid that this plan will have us losing the house of interest.

Alternatively, we could make the offer first, but this leaves us with the selling risk, and without the proceeds from the current house to use as down payment for the new. I have seen three suggested solutions:

1. Get a home equity line of credit (HELOC) before listing our house, and use it for the down payment. If I do this, I'm concerned about the credit impact of the HELOC application before I try to get a mortgage. Plus I'm paying for both the HELOC and a new mortgage while I wait for the old house to sell.

2. Get a bridge loan for the down payment. Same issues as above, plus more expensive.

3. Try and mortgage the entire new house amount using both houses as collateral, then refinance when the old house sells. Pretty sure we could afford it for a few months.

I'm at a loss to evaluate these for relative merit. I would be content to sell first, but LW is probably not.

Any words of wisdom?

[More details - current house will probably sell for X, new house is X*2, we have liquid investments of X/2, some of which could be liquidated to help finance the purchase (but we'd rather not). No matter which plan we select, the mortgage will be a jumbo. Finally, we're talking western Cook County, IL if that makes any difference.]

posted by ShakeyFingers to work & money (10 comments total)

Can you comfortably afford the payments on X*2 jumbo mortgage (with low downpayment), X HELOC, X*2 property tax & insurance and X property tax & insurance all at the same time?

If so, HELOC X for your downpayment on X*2 and sell X after you've closed/moved into X*2.

As long as your HELOC isn't for more than say 30% of X I doubt it will be a big hit to your credit rating, but I am not your financial advisor.

Be aware that real estate is in a downturn, and X may not sell as quickly or for as much as you might expect.
posted by de void at 12:11 PM on October 16, 2007

I think a big part of the answer depends on how quickly you think you can sell your current house. We did this in a hot market many years ago. Our offer on the new house had a slightly longer than usual closing date and we were able to get our old house on the market, sold and closed by the time the first house needed to close. On the other hand, a good friend did a similar thing last summer and it took six months to finally get an offer on the old house and it was less than he had hoped for. In the meantime, he was paying two mortgages plus depleted his savings in lieu of a bridge loan plus taxes and insurance.
posted by metahawk at 12:18 PM on October 16, 2007

On the other hand, you can always make an offer on the house of interest contingent on the sale of your current house. If the market is slow, the seller might be willing to consider it.
posted by metahawk at 12:21 PM on October 16, 2007

metahawk: I forgot to mention in details that the seller has said that they're not interested in a contingent sale, but the (new) house has been on the market only a month or so.

If time passes, and they become willing to entertain the contingent sale, I assume that that would be the best way to go.
posted by ShakeyFingers at 1:07 PM on October 16, 2007

Also - de void: HELOC would be as large as possible, 80% or more of X.
posted by ShakeyFingers at 1:10 PM on October 16, 2007

Please don't underestimate the cost of emotional stress. If you buy the new house before selling the old one, then it takes six months to sell the old one, can you live with that?
posted by Nelson at 2:30 PM on October 16, 2007

anecdotally, my friend in the nicer subdivisions in Elgin, IL has had his home on the market since last january.

personally, I'm easy enough to please that I'd sell my place before buying the next place in this market since the risk seems high of taking a long time.
posted by garlic at 2:39 PM on October 16, 2007

Count on at least a year to sell your house. My parents' house took over a year, and it's a fantastic house in Libertyville-- great schools, great location, etc. They originally had it priced at $460k and just got their first offer for $310k (not a typo). They settled at $330k and will close next month, but it has been a royal pain for them.

It's just a stinky market, and unless you're willing to sell at a steal of a price, think about what it would feel like to not sell for a year. Could you rent it out and ride out the low market for a year or two?
posted by orangemiles at 4:06 PM on October 16, 2007

I don't think any of the 3 ideas are very good.

The big loan you're trying to originate is a first mortgage on your new house. You want the terms (rates, points) to be as favorable as possible. If you borrow money to make the down payment, those terms aren't going to be as favorable as they could be. I don't think that you'll be able to conceal either plan 1 or 2 from your lender - big home loans get reported to credit reporting agencies so that other lenders can see them, that's why we have credit reporting agencies.

I think that plan three is a horrible idea that you should flee away from, even if someone offers to do it to you. Can you imagine putting a home up for sale and having to tell the buyer that the sale is contingent on being able to refinance a home loan involving another house? Even if that doesn't scare the buyer off, can you now imagine walking up to your lending bank, hand-in-hand with your prospective buyer, and trying to "negotiate" for a new first? What a mess.

Now if you really want to buy this second house because your wife has fallen in love with it, liquidate your investments and use them to make the 20% down payment (if there's enough left over after capital gains taxes.) You can deduct the interest and points paid on either or both of your first and second homes, so the tax benefit from this will help to soften the blow of having to temporarily maintain two homes. You'll also be able to qualify for a decent first jumbo mortgage on your new house - maybe 8% if your credit's good - instead of a usurious 12.99%.

Meanwhile, keep trying to sell your old house; if it takes too long you can always rent it out.
posted by ikkyu2 at 4:59 PM on October 16, 2007

The housing market is bad and getting worse. The mortgage market is bad and getting worse. We were in a good market when we moved (from X to X), and still we sold our house first. Granted, we closed on the house that we bought before the house that we sold closed. That required a bridge loan, and was *way* more stressful to me than to ms. nobeagle.

If either you or your partner get's stressed over financial stuff, make it easy on yourself and sell first, then buy. Especailly consider that prices are falling in this market. Suppose your house sells for 0.9X in 4 months, at least you're new target house should be approximately 2*0.9X, or 1.8X. Congrats, you've saved .1X along with a lot of stress!

Regarding option 3, the mortgage market is bad and getting worse. a lot of people are in trouble because they assumed that they could refinance and couldn't. 3 might be an option if you're considering getting a loan you can live with, and then using the money from the proceeds of the first house to max out the payment options without incuring penalties.

If you have the financial backings that doing either option 1 or 2 won't hurt, and you *need* this house, then you've answered your question. But inventories across the US are at record highs, and they're likely going to be higher in 6 months when people start hoping for a rebound in spring 08. I wouldn't be surprised that you could find another house of interest. I'm not sure that the market will only be down for a year or two; how long did it take prices to recover from 1990 ?

Also as a note of what ikkyu2 says, if selling your house will keep you from getting a jumbo, while the other options wouldn't prevent that, then definitely sell the house. Strongly try not to rent out your home; unless you can do it to people you personally trust. I'm guessing that you're not well versed in property management. If you're picking up month by month renters, damage and/or lack of payment are considerations, as well it will make showings difficult and push back the time until your house sells. Alternately you pick up some slightly more dependable people on a 6-12 month lease, and you can't sell to anyone who doesn't want to wait to boot the renters.

Note, I'm not a realtor, not your realtor, and have never owned property in the US. Some of my relatives are US realtors and (ex)mortgage brokers, but given the location, they're not your realtor nor broker.
posted by nobeagle at 5:32 PM on October 16, 2007