A rising real estate market has been a boon for home sellers and has created new opportunities for owners looking to trade up.
But what if you need to sell your existing home before purchasing another? The same high demand and low inventory that benefits sellers makes the process a bit more challenging on the buy side.
This is a common scenario and creates a tricky timing problem.
As a seller, you have several strategies for dealing with this situation.
Of course, you could sell your home and then rent until you find a replacement. That does mean moving twice, disrupting family and possibly work life, not to mention that rentals are also in short supply.
Strategies For Buying and Selling Homes Simultaneously
Another possibility is to use a sale contingency.
A contingency is a condition that must be met before the sale can continue.
For instance, let’s say you currently own a home on Beachwood and are looking to upgrade to a larger home on Canyon.
In this case, you would sell your Beachwood house with the contingency that you close the sale on Canyon so that you can use the proceeds as your downpayment.
This would actually create two separate contingencies. One for the Beachwood buyer and another for the Canyon seller. You can imagine that the “ifs” pile up pretty fast with a lot moving parts that have to mesh perfectly for the deal to work.
The sale contingency strategy is the most difficult to negotiate and the least likely to succeed.
Another option available to some sellers is the bridge loan. A bridge loan is a short-term, temporary loan that helps “bridge” the financing gap with a simultaneous buy and sell.
The drawback to this approach
is that bridge loans are difficult to get. Lenders demand substantial collateral, that is home equity, and usually reserve these loan for a select few borrowers.
The Sale-leaseback: Your Secret Weapon
One of the most effective strategies for buying and selling property at the same time is the sale-leaseback.
It’s such a simple solution, it’s surprising that the sale-leaseback is not used more often.
Here’s how it works.
You sell your home to a new buyer and when the sale closes, you rent your home back at the buyer’s cost.
The sale-leaseback allows you to free up the cash equity to use toward your new purchase and gives you more time and flexibility to make that purchase.
However, there are downsides to this approach as well.
First, the rental rate will probably be higher than your current costs. Buyers who agree to the sale-leaseback provision will generally want a rental rate at least equal to the cost of their principal, interest, taxes, and insurance (PITI). Since the sale price is, by definition, those costs will be higher.
In addition, although sellers enjoy more negotiating leverage in the current market, many buyers may be reluctant to accept a sale-leaseback.
One reason is timing. This would be true if the buyer’s move is governed by an outside time table such as the start of a school year.
Another concern is that once the sale is completed and funds are transferred, the seller may not vacate the property as agreed. Fortunately, this is not common but it can make buyers hesitant because of the legal mess it would create.
A successful sale-leaseback is well-planned and backed by a solid written agreement that provides protection for all the parties.
Finally, every real estate deal is made up of two parts: price and terms. These two parts work together. A gain on one side usually requires some compromise on the other.
If you want more flexibility on terms, such as a sale-leaseback, you may have to concede somewhat on price. However, in many cases the added flexibility and negotiating power you gain by not being tied down to your existing home will often more than make up the difference.
How To Make Sure Your Sale-leaseback Succeeds
- Make sure your sale-leaseback is agreed upon before entering escrow and is part of the written contract.
- Consider any maintenance items such as pools or landscaping and be sure to include those items in the agreement.
- Consider including a home warranty in the sale to give both sides peace of mind.
- Do your homework. Know where and what you want to buy before placing your home on the market.
- Be mindful of seasonal movements of the real estate market. For example, spring is the most active time of year for home buyers and even more so for buyers with school-age children.
Have a question about sale-leasebacks? Drop us line.