Sell First, Buy Later?

Question:

Marsha, my family has outgrown our current home and we are ready to upsize to another home. Is it better to sell first and then purchase, or vice versa? Or is there any way to do both at once?

Answer:

I wish there were an easy answer to your question. There isn’t. The answer to this question depends on your particular financial circumstances, the current housing market and your family’s tolerance for temporary displacement.

The ideal in a stable or appreciating market is to buy your replacement property first and then sell your current home. In a depreciating market it’s better to sell your home first and then buy. Over the decades, with the notable exception of 2007-2012, we are generally in a stable market or one that’s appreciating. Currently we are in a stable market.

Unfortunately for most people the ideal of purchasing first and then selling is simply not possible. To buy your replacement home first means you must have the ability to qualify and pay for two home mortgages. You also have to come up with another down payment. The majority of home owners need the equity from their current home to purchase the new home.

You do have the option of making an offer on a replacement home contingent upon selling your current home. I don’t recommend this because it puts you in a weak position in two ways.

First it weakens you when making your offer. You lose negotiation power. To entice the seller to accept your contingent bid in a stable or appreciating market you will need to make a strong and generous offer. When the sellers accept your high offer they’ll continue to show the property to other buyers. If they receive another attractive offer they’ll give you 72 hours to remove your sale contingency. If you can’t, you’ll lose your replacement property.

The second way a contingent sale undermines your position is in the sale of your own property. Again you sacrifice negotiation power. Knowing that your replacement property could be lost to another offer you’re pressured to get your home under contract as soon as possible. This fear of loss can motivate you into accepting a lower price for your current property. Now you’ve overpaid for your replacement home and are likely to net less than you should for the home you’re selling.

The ideal of purchasing and selling homes concurrently is not realistic. In my experience simultaneous closes of escrows are rare. The inconvenience and displacement of selling first is temporary and you will keep your negotiation power intact. You’ll receive top market value for your current home and not overpay for the replacement.