O’Connor: Selling a home? Find a new one first — please
Now that the real estate market has caught fire again, I want to provide a valuable public service to those of you jumping into the market, which is: When you sell your home, you will have to live someplace else.
This advice seems like the kind of blatant obviosity that should be completely unnecessary, except to a total nimrod. But, in at least one case, that is absolutely correct — mine.
The first home I ever bought in Michigan actually is the second home I ever bought in Michigan, because the dim-bulb selling the first one took it off the market on the day of inspection. Why? Even though the house had been listed for several months, she’d neglected to find another place to live.
This caused great excitement for me and my long-suffering wife, Mrs. Funny Money, because we were closing on the sale of our home in Florida in just a few weeks, and realized that, when you’re suddenly facing the prospect of being homeless, it is much better to live where it doesn’t snow.
Home hot home
Today’s hot housing market can present the same quandary to anyone selling one home and buying another: How do you time your sale and your purchase so you don’t end up with no place to live? In quieter markets, it was common to make an offer on a new home contingent on selling your current house, then time the closings so that you moved directly from your first house to the second one. But few sellers are willing to take their homes off the market and wait for yours to sell today.
That’s the case in Metro Detroit and Ann Arbor, which both made the National Association of Realtors’ list of 10 hottest real estate markets in the country during June and July.
“It’s very rare to see houses sold with offers contingent on a home sale,” says Tracey Roy, president of the Ann Arbor Area Board of Realtors in Michigan.
Instead, buyers are first finding a house they want, then put their home on the market and, as soon as they’ve got a signed contract, run back to put in a bid on the home they want to buy, Roy says.
Another tactic is one that could have helped me and Mrs. Funny Money is becoming common: leasing back the house you just sold while you find a new place to live. Typically, sellers rent their old place back for 60 days, but even giving yourself an extra two months to find a new place can be tight when homes are selling after just one day with multiple cash offers above the asking price.
“Timing is crucial,” Roy says. “You have to have all your ducks in a row when you put a for sale sign in your yard.”
Just don’t quack up
The sell and lease-back option offers the least hassle and expense, but there are other options, if you’re in the right situation.
If you have a lot of home equity, you can tap that for a down payment on the new home, then repay it after selling the old home. You’ll need to get the equity line before you put your home on the market, and, unless you have lots of savings and great credit, it’ll be tough to qualify for a new mortgage while you’re still paying the loan on your other home, so you’ll be betting that it will sell fast. Plus, you’ll have closing costs on the equity line of credit.
If you have great credit and lots of home equity, there’s also the option of a bridge loan, which were once more common but are very hard to find now. With a bridge loan, you can finance up to 80 percent of the value of both properties, and will need to come up with cash for the rest. You’ll also have to refinance after your first home sells, so you’ll incur another round of closing costs.
It’s also possible to temporarily tap retirement savings with a withdrawal from an IRA or a loan from your 401(k) or similar workplace plan. With a traditional IRA, you can make a withdrawal and repay it in 60 days without facing a tax penalty. But you have to avoid having taxes withheld (file IRS form W-4P). If you don’t, you’ll have less money to spend and have to repay the full amount borrowed, including the tax withheld. And, of course, if you miss the 60-day window, you’ll be hit with taxes and, if you’re younger than 59-1/2, a 10 percent penalty.
With a Roth IRA, you can withdraw your contributions tax- and penalty-free, but you won’t be earning any return on that money until it’s repaid. And tapping either kind of IRA means you’ll be severely crippling your retirement savings if you don’t repay the full amount right away.
Another option is a 401(k) loan, which can cover half your vested balance up to $50,000 under most plans. This is tax-free, but you’ll have to repay the loan, along with your new mortgage and other debt, which lowers the amount you can afford to spend on a new house. Besides that, you’ll be setting your retirement savings back by quite a bit and, if you lose your job, the entire amount must be repaid right away, or you face taxes and penalties.
An option without raiding your retirement is moving to a short-term rental, which can include putting your household goods in storage, and then buying after you sell the first home. This not only comes with added expenses, but you get all the stress and hassle of moving twice, plus the risk of whatever happens to your stuff in storage.
Your best bet is to research the market for your sale and where you’ll be buying, talk to several real estate agents to find out how quickly homes are moving, and sell first, with either a delayed closing or a rent-back option. That also gives you the advantage of buying with cash and knowing exactly how much you have to spend on your new home.
In our case Mrs. Funny Money spent many frantic hours combing online real estate ads, while I trudged through the snow looking at dozens of others homes. Finally, we arranged a private sale after I got a tip about a retired couple getting ready to sell.
What’s more, the house was in a terrific neighborhood —right down the street from the one Lunatic Lady didn’t sell us, which just proves the wisdom of the age-old three rules of real estate: location, location, location!
Still, I bear the seller no ill will and even wish her long life. With incurable diarrhea.
Brian O’Connor is author of the award-winning book, “The $1,000 Challenge: How One Family Slashed Its Budget Without Moving Under a Bridge or Living on Government Cheese.”