Buying gap or overlap?
IT’S a quandary: Should a buyer sell an existing home first or make an offer on a new place and hope the old one sells fast?
In today’s tight market, purchase offers made contingent upon the sale of another home often are dismissed out of hand. This leaves home buyers to consider such questions as: Can they afford two mortgages if their old home doesn’t sell quickly? Should they apply for a home-equity line of credit or a bridge loan to see them through the transactions? Are they willing to move into a rental temporarily, if they must?
And, if they sell and don’t find a house to buy, how unhappy will they be sitting on the real estate sidelines while the market appreciates without them?
These considerations add angst to the home-buying ordeal, and people handle it in different ways.
Take Alison and Brian Geib of Manhattan Beach, who were committed to a strategy of “buy first, then sell” when they found a 1950s Cape Cod-style home in the tony “tree section” of Manhattan Beach. The two-story 1,863-square-foot house has three bedrooms, a loft, and two bathrooms, for which they paid $1.35 million.
Because most desirable homes attract multiple offers, their bid was about $50,000 above the asking price and wasn’t contingent on the sale of their current home. The week after their purchase offer was accepted, the Geibs put their three-bedroom, 2 1/2 bathroom townhouse in northern Redondo Beach up for sale. The first weekend on the market, they received seven offers, six of them above the asking price of $719,000.
“If you have property you feel would sell quickly, there’s nothing wrong with buying first and then selling, like we did,” Allison Geib said. They solved their small timing gap by renting back from their buyers for two days before closing on the new house.
Lori Bendetti took a different approach. She sold her three-bedroom, two-bath Malibu home and is leasing in the same neighborhood while she continues to look.
Bendetti, who prefers not to be rushed, said: “Selling first buys us time to find the right house. And then when we do, we’re cash-ready. And we would have time to do any work that the new house required.”
The downside: Mortgage interest and property taxes are deductible, but rent isn’t.
Some people choose to either tap into a home-equity line of credit or get a traditional “bridge loan.”
“Once your property is listed, you won’t be able to get a line of credit on it,” said Philip X. Tirone, executive loan officer at United Pacific Mortgage in Los Angeles. Banks don’t want to extend credit that is going to be paid off quickly. So he recommends that buyers establish their lines of credit before listing their properties.
Interest rates for equity lines of credit are tied to the prime rate plus a variable amount that is determined by the borrower’s credit score, income and the home’s value. Equity lines today are costing borrowers about 8%.
Robert Weiss, founder of Rockland Financial in Woodland Hills, advises prospective buyers to set up a home-equity line of credit before they even go house hunting.
“They are flexible, there’s no cost to set it up, and you save thousands over what it would cost to do something like a bridge loan,” he said.
A traditional bridge loan is a short-term loan (three, six or 12 months) that covers the gap between the purchase of a new home and the sale of the old one. Borrowers can use a bridge loan to finance the down payment on a new house. The current home is used as collateral.
A bridge loan will typically finance up to 75% of the loan-to-value -- the ratio of the amount of the loan to the value of the home. For example: If you own a $1-million home and have a $500,000 loan, you can get a $250,000 bridge loan to use as a down payment on another house.
The prime rate -- currently 7% -- is typically used, plus 5%, so the interest rate today would be on the order of 12%, plus borrowing costs.
Mortgage banker Tirone said bridge financing can be a “knee-jerk reaction” when a homeowner finds himself or herself in the uncomfortable position of buying a new home before having sold the one they already own.
For some, it’s just a matter of biting the bullet. When Chris and Judy Lancaster stumbled on a four-bedroom, four-bathroom, 3,900-square-foot home in a gated community in La Verne, it was love at first sight. They were in a bidding war, which they won to the tune of $975,000.
“We learned later that our bid was the same as another bid, and I believe that because we were noncontingent buyers, our offer was more solid,” Chris said. “The purchase of our new home was not conditioned on the sale of our existing home, and that gave us power from the standpoint of negotiation in purchasing the new home. It made us very appealing to the seller.”
It took them a month to sell their three-bedroom, 1 3/4 -bathroom, 1,600-square-foot home in Covina, for $550,000. They had more than $350,000 in equity, which allowed them to make the move up. And although they paid two mortgages for a month, they used the time to make improvements on their new home.
Some say that sale contingencies in purchase offers are a thing of the past, a throwback to the days of flush inventory when buyers had their choice of properties and sellers were thrilled when theirs was picked.
“Most people aren’t going to wait for you to sell your house, because they have a line of people waiting to buy if you don’t,” said Heidi Schenk, who sold her Bel-Air home and lived in two rentals before buying a house in Pacific Palisades 18 months later.
She still regrets the stress, the upheaval of her family and what she calls the “thrown-away” rent money.
Knowing what she knows now, what would Schenk do differently next time?
“Move to another state, because this is crazy!”
