The Buy-Sell Dilemma

Wondering how to make the jump from one house to the next without owning two simultaneously--or, perhaps worse yet, owning none at all? You’re not alone.

Most moving-up and trading-down homeowners struggle with the dilemma of whether to buy first, then sell, or sell first, then buy.

Some homeowners are affluent enough to avoid the problem by buying a new house and selling the old one at their leisure; others are mobile enough to sell first, move to temporary quarters and buy later. And some lucky folks are able to negotiate buying and selling escrows that close simultaneously.

But real estate agents say most people either make offers to buy first, then pray for quick sales of their existing houses, or put their houses on the market, then scramble to find new houses before escrow closes.

The primary advantage of buying first is the ability to shop carefully for the new house and feel completely secure in that decision before putting the current house on the market.

Buying first “is a harrowing experience, but the odds of finding a house that fits all your criteria are much greater than they are if your home has been sold and you have a tiny window of time in which to find the right house to buy,” says Michael Greenwald, a real estate agent and estates division director with Coldwell Banker in Brentwood.

The harrowing part is the possibility that the current house might languish on the market or need to be sold at a below-market price.

One way to mitigate that risk is to make the purchase escrow contingent on the sale of the current house. However, it’s a rare seller who will accept such an offer unless the market is weak, the house is a tough sell, the buyer offers an especially attractive price and favorable terms, the buyer’s own house is already in escrow, or the seller simply is in no hurry to move.

Some sellers can be enticed by an escape clause that gives the seller the right to continue marketing the house and requires the buyer either to walk away from the transaction or to waive the contingency if the seller receives another acceptable offer.

“The seller will say: I will take your offer, but I am going to leave my house on the market. In the event that I receive another offer that is acceptable, I will give you, for example, 48 hours to remove the contingency,” explains Roger Ewing, Greater Los Angeles region general manager for Prudential John Aaroe & Associates, Realtors.

If the buyer removes the contingency, he or she may soon own two houses. Accomplishing this feat requires borrowing against the equity in the current house to obtain the down payment on the financing for the new one, unless the purchase is an all-cash transaction.

This two-houses-are-better-than-none scenario can prove costly because the homeowner must not only make two mortgage payments but also cover the interest on the bridge or equity loan. Renting the for-sale house to a tenant can offset some of the cost, but finding a buyer for a tenant-occupied home presents other difficulties.

Buying first can prove costly in other ways as well.

“By buying first and selling second, you are putting yourself in the position of paying more for the up-leg property and probably selling for less on the down-leg because you are under the gun to sell before someone else bids on the [house you are buying],” Ewing warns.

Maintaining Strength on the Sales Transaction

On the flip side, the primary advantage of selling first is a negotiating position of maximum strength on the sales transaction because there’s no pressure to sell quickly. Selling first also eliminates the burden of carrying two mortgages simultaneously.

The downside is the strong likelihood of at least a short-term visit to what Greenwald calls “limbo land,” a nebulous realm of temporary living situations that bridge the gap between selling one house and buying the next.

The notion of limbo land includes having to move at least twice, if not several times, between permanent residences.

“Many times, people list their home for sale, then start looking at a home to buy. They don’t find anything because the home they are looking for is special, unique or tough to find. Then they decide to rent for a while. That requires a double move, which is not possible for some people,” says Neal Weichel, a real estate agent with RE/MAX of Valencia.

The obvious way to avoid the temporary housing scene is to make the sale of the current house contingent on finding a replacement to purchase.

“People actually buy homes [that are sold contingent on the seller’s buying another house]. The only problem is that it puts the buyers in limbo land because they don’t know whether the person they purchased the home from is ever going to find a house to buy,” says Greenwald.

The strategy is most likely to succeed if the market is quite strong, the seller’s house is truly a rare find, the price and terms are highly favorable for the buyer or the buyer is in no hurry.

Selling subject to finding another house puts the seller in a disadvantageous negotiating position because the burden of uncertainty falls on the buyer.

“Some people sell their home subject to their finding another home. That is not too popular with the buyers because they may have their home in escrow and they don’t know whether they have [a purchase transaction] until [the seller] finds another house. That taints the negotiations,” says Ewing.

Many people manage to avoid limbo land by leasing back the sold house for a short period after escrow closes, Greenwald notes. Sellers shouldn’t count on an extended or open-ended lease-back period, however, because if the buyer intends to occupy the house as a principal residence, the lender probably won’t allow a lease-back of more than 30 days, and the buyer won’t relish the possibility of having to evict the sellers if they can’t find a new house.

The seller’s odds of a lease-back are better if his or her next house is already in escrow and the buyer’s agent is permitted to monitor the escrow’s progress.

Choosing to Live in Temporary Quarters

If limbo land proves preferable or unavoidable, the seller will face renting a residence (perhaps with a lease of six months or longer), living with a roommate, occupying corporate housing, moving in with family or friends, or camping in a hotel room until a suitable house is purchased.

These short-term living arrangements tend to be uncomfortable, inconvenient and expensive.

“The double move is expensive. You usually have to store your belongings, and finding a short-term rental can be difficult. You typically end up living someplace where you don’t want to live or spending more for rent than you wanted to spend. If you have children and want to stay in the same school district, that limits your possibilities and you end up living with your in-laws. [Moving into an apartment] is tiresome and stressful, but if you want to maximize your sale and optimize your purchase, it puts you in the best position,” says Ewing.

Real estate agents can be a good source of information about temporary housing options and short-term rentals. Weichel sometimes arranges for clients who are between houses to rent one of his vacant listings for a short time.

“I oftentimes put people into my vacant houses. The seller doesn’t like the fact that the house is vacant and there is no revenue. So my other buyers move into it for at least 60 days and month-to-month thereafter. Usually, they put most of their stuff in storage. They have to cooperate with my showing the house, but I have found them a place to park” until their next house is purchased, he explains.

Several Factors Can Dictate Choice

It’s not uncommon for personal circumstances to dictate how homeowners resolve the buy-sell dilemma, real estate agents say.

Families with children, pets and a strong attachment to a particular school district or community tend to find their next houses before they even think of selling their current ones, while singles, childless couples and seniors typically sell first.

Beyond personal circumstances and all else being equal, a final crucial consideration for homeowners should be the state of the local housing markets.

Real estate agents say a low inventory of homes for sale and demand among buyers tilts the balance toward making a purchase offer first, then putting the house on the market.

Conversely, a large inventory of houses on the market and a scarcity of buyers points toward putting the house on the market, then shopping for a replacement. The expected direction of mortgage interest rates may factor into this complex equation as well.

The other issue worth considering is whether houses are appreciating or declining in market value. If prices are headed up, buying first makes sense. If prices are headed down, selling first is smart. In a mixed-signals or transitional market, the best strategy is far less obvious.

“Right now, it is a gray area. Sellers still think it is a seller’s market, but buyers are thinking it is a buyer’s market. It is a very confusing time,” says Greenwald, speaking of the luxury homes market in Brentwood and surrounding areas.

Not surprisingly, real estate agents say homeowners should rely on professional advice in deciding when to buy and when to sell.

“It all comes back to having a good agent who studies home prices every day and really understands the market,” Weichel concludes.

“Whether to accept a contingent offer, whether to buy first, then trust your agent to get your home sold, or whether to sell first and trust that the market isn’t going to get away from you because prices are rising--all that comes back to the agent knowing what’s happening in the market and giving you good advice.”

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Marcie Geffner is a Los Angeles real estate reporter.