How to make the transition from first- to second- home?
I’ve been in real estate for about 6 years and recently I’ve been seeing some familiar faces. Some of my earliest clients have outgrown their first homes and have come to me for help in making the move to a second home. The question becomes how to sequence the transactions with minimal inconvenience. Financial circumstances will determine which of the three options — buy first, then sell; buy and sell simultaneously; or sell first, rent, and then buy — is the right way to go for a given client.
Buying first and then selling is certainly the most ideal situation — there is no timing pressure and just a single move to coordinate. However, this is also the most difficult financially as most people are unable to cover the downpayment and monthly expenses of their new home while continuing to carry the old. This is particularly true if the second home is going to be a co-op since co-ops require prospective buyers to meet certain debt-to-income requirements which would almost certainly be based on the carrying costs of both apartments. So while buying first and then selling is clearly the simplest option, it's just not feasible for many folks.
A second option is to buy and sell simultaneously. If it's too expensive to carry both homes at once, you could - theoretically - close on the sale of your current home and then, minutes or hours later, use the sale proceeds to close on your new home. In reality, closing dates are very difficult to line up, and the proceeds may need to be liquidated to meet other approvals along the path to purchasing the new home (such as for clearance on the loan or approval by a co-op board), so there will usually be some gap between the sale and the purchase. However, since this period is limited and there is reasonable certainty about how long such housing is needed, many inconveniences related to the move can be avoided without great expense.
The downside with attempting to sell and buy simultaneously (of course assuming a proper home is found during the pendency of the sale) is that the offer on the purchase may be much less competitive if there is any doubt about whether the sale on the existing property will go through in time. If a buyer lacks the funds to cover the new downpayment without the proceeds from the sale, a “sell first” contingency could be included in the offer, which would allow the buyer to back out of the purchase (and get the 10% deposit back) if the sale falls through or is delayed. A “sell first" contingency significantly weakens an offer, however, so it is generally reserved for purchases where there is little to no competition from other prospective buyers or the buyer is willing to substantially overpay. It can be possible to avoid a “sell first” contingency and still have minimal risk depending on the timing; if there are no conditions left (board approval, bank commitment letter, etc.) for the closing on the sale, it may be worth the risk to move forward without a contingency.
The most common option is to sell first, rent for a set period of time (usually we recommend a 6-12 month lease term), and then buy. This way the proceeds from the sale are liquid and can be used without any financial constraints or contingencies on the next purchase. Of course this option requires multiple moves, and there is also the unavoidable uncertainty about how much time to commit to the rental. While this can be a hassle, selling first provides the most flexibility for the next purchase by making the seller-turned-buyer more financially qualified (i.e. competitive) and by removing any pressure on having to find the perfect "forever" home before a deadline.
Clearly there are numerous routes available when transitioning between a first and a second home, and the right answer will depend on individual, personal, and financial circumstances. If you currently own and are thinking about making the move to a new home, I would more than happy to speak with you about your options. Together we can figure out the best way to make your transition as seamless as possible.