Whether in a buyer’s market or a seller’s market the question that’s top of mind for any home seller is whether or not they should buy their next home first, or sell their current home first?
For some, the decision is more about personal choice, but ignoring the possible risks inherent with both options could leave you blindsided and regretting your decision.
For instance, in a seller’s market, it’s typically more advantageous to buy before selling. Since the market favours the seller, your buying process may be quite challenging particularly if you’re trying to find a suitable place within a specific budget. Select this option, however, and expect to take time as you search for your next place — and time and seasonality play important roles in real estate. Wait too long and your seller’s market could disappear prompting a lower sale price for your current place.
To help you make the best decision, let’s consider the benefits and drawbacks of each move.
Advantages of buying your new home first
The real estate market can be confusing, at the best of times, and this uncertainty means that most of us want to wrestle as much control and certainty as we can out of the process.
When you buy first, you remove one uncertainty: Where will you go once you sell your current home?
So, from a risk perspective, buying first can often feel like the safest move. It’s also why most people opt to buy first when faced with the “buy or sell first?” dilemma.
Another advantage is that it enables you to book movers and schedule utility hook-ups without feeling rushed or stressed.
In a seller’s market, buying first can also eliminate the risk of not being able to secure a new home. Since inventory moves quickly, and prices creep up, in a seller’s market it’s nice to secure a place and remove that uncertainty.
Disadvantages of buying your new home first
Despite the advantages of buying first, there are some risks that need to be taken into consideration before proceeding.
For instance, if you buy first, you will be required to make a deposit on that new home. Unless you’re buying in smaller urban markets, this deposit is no longer a few thousand dollars but can reach tens of thousands of dollars. As such, buying first could strain your cash flow. It will take some planning to make sure this financial requirement won’t put a strain on your budget.
Another drawback is that once the seller accepts your offer to buy the home, you will become the owner of two houses and this can lead to scheduling overlaps. That’s because there are few occasions when the closing date of your current house matches the possession date of your new house (and then you still have to get movers for that specific date, at those specific times).
While this scheduling conflict is a nuisance for moving, it’s a potential financial downfall if not handled right. That’s because when you buy a new home and take possession before the current home closes, it could leave you without the full down payment you owe for the new home — because your money is currently tied up in your current home as equity.
Not only that, but you’ll be legally responsible for paying expenses, making mortgage payments as well as paying insurance and property taxes on both properties until you sell or close on your current home.
While there are solutions to this dilemma — such as bridge financing — these solutions come at a cost. Be sure you factor these additional expenses into your budget so you don’t hit a cash crunch while transitioning between homes.
Finally, you could try to hedge your bets by adding a contingency clause into your offer to buy your new home. A “contingency clause” stipulates that the purchase of this new home will only go through if you end up selling your current home. The addition of this clause can alleviate the danger of buying a new home and being unable to sell your current home. However, most sellers don’t like this condition. It introduces a lot of uncertainty and, for that reason, your offer on the new home may be rejected.
Advantages of selling your current home first
While buying first does have its appeal, there are some sellers and situations where selling the current home prior to buying the next home becomes the ideal situation.
For instance, if the current market conditions favour the buyer — known as a buyer’s market — you may not have any assurances that you can sell your current home for the price point that you want. Sell for significantly less and this will impact the amount of equity you have available to help purchase the next home. To avoid these budgeting problems, it makes sense to sell first and get a clear picture of how much money you have to work with when shopping for your next home.
There may also be an advantage to selling your current place first, even in a seller’s market. When in a competitive environment, sellers like to have assurances and being able to put down a large down payment or removing a financing condition in your bid can go a long way to signalling how serious — and well positioned you are — to buying the home. Having cash in the bank from the sale of your former home really helps give you this confidence.
Another advantage of selling your current home first is that you avoid the two-mortgage dilemma or the need for bridge financing.
Disadvantages of selling your current home first
While there are advantages to selling your current home first, there are also disadvantages. For instance, you may be unable to find a new place in the short time before the new buyer gets possession of your current home. This may force you into finding temporary living arrangements, such as short-term rentals — a cost you need to add to your house-finding budget.
Then there’s the cost of storage. In order to keep all your furniture, decor and personal belongings in one, safe place you may need to rent a storage locker. Given that the standard cost is about $200 a month, this additional cost will also quickly add up.
What if your current home doesn’t sell?
Of course, there is another option. You could always buy your next home and rather than sell your current home you could rent it out. The key to making this strategy work is to do your homework. The idea is that your new rental property should earn you positive monthly cash-flow and, over the long-term, build equity even it only appreciates moderately.
The advantage of turning your current home into a rental property is that you can often work out an arrangement with your lender to cover the costs of buying your new home and to keep your current home. While this will require borrowing more money — you will have two mortgages on two homes — the monthly income from your rental property should cover at least one mortgage (preferably more).
The potential disadvantage is that you will be increasing your debt, which will hurt your debt ratios and may prevent you from acquiring additional properties. You will also be taking on the responsibility of becoming a landlord — or, as some people view it, a small business owner. You will need to familiarize yourself with landlord and tenant regulations and laws, learn the art of marketing, the business of screening potential tenants and the process of dealing with maintenance and upkeep on two properties.
Despite these potential drawbacks, however, many Canadians opt to become “accidental” landlords. The idea is that they will add to their nest worth by keeping an appreciating asset.
Sum It Up
Selling your old property or obtaining a new one first is a tough decision to make. If you want to go for the safer option, consider buying before selling. If, however, you want to open up your options and home shopping timeline while solidifying your the amount of money you’ll be working with, consider selling before buying.
What’s best for your unique situation? Only you can determine that.