Author Topic: Downsizing strategy- sell & look, or buy then sell  (Read 1221 times)

essjay43

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Downsizing strategy- sell & look, or buy then sell
« on: January 30, 2020, 10:54:55 AM »
My wife and I are looking to downsize in the future. We took on too much by purchasing a home for 560k mid 2016. It's something I regret, but I think I learned a lot from the process. We're trying to be very deliberate when we move again and I need help coming up with a strategy. I owe 418k on a 30 year mortgage at 3.95%. I pay 2893/month (757 for principal, 1380 for interest, 665 for taxes, 91 for insurance).  My goal is to find a new home in the same school district with 2/3 bed, and 1 bath for around 350k (1800/month). I would put a 20% down payment and use the difference to pay off student loans. I've always been stuck on losing money on the deal because of Realtor fees, but I really don't have the time/patience to manage sale/purchase on my own.

My biggest question is how to make that switch without disrupting my family's life. When we sold out last home, we temporarily stayed in a month to month apartment. The situation was pretty bad which led to impulsively overbuying.

My idea was to contact a local realtor, share specific criteria, and then sit tight until the right house pops up. And then make an offer contingent on our house sale or utilizing a bridge loan.

I'm really guilty about screwing up my last purchase and would love some advice on how to avoid similar mistakes.
« Last Edit: January 30, 2020, 11:50:20 AM by essjay43 »

mm1970

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Re: Downsizing strategy- sell & look, or buy then sell
« Reply #1 on: January 30, 2020, 01:11:29 PM »
Another option is rent-back.  You may lose a little on the house sale.  My friends bought their first house, and got a bit of a deal because the people they bought it from wanted to rent it back from them, until they found a replacement house.

happy

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Re: Downsizing strategy- sell & look, or buy then sell
« Reply #2 on: January 30, 2020, 01:44:46 PM »
Just a few thoughts:

- Never be out of  a rising market....ie buy then sell
- In a falling market you can sell then buy.

- Are there lots of houses that might suit you in your chosen market, or very few? ie how long will it take to find your new house? No point in selling up if its going to take a year or more to find the one.

- How quickly will your current house sell...is it very desirable and will go in a flash, or is it one that might take a while?

- Use the time looking to get all ready to put your current house on the market,  declutter, pack things you don't use etc, start collecting boxes. Consider renting a storage unit short term to get all the things that aren't essential out of the house. Start making a moving list with all the things you need to do when you move so you are all primed up ahead of time.

- check out your eligibility for a bridging loan, and keep an eye on the loan market. ( my last move the loan market tightened suddenly and I had very few options for a bridging loan which had never happened to me before) Make sure you can service it.

- At the end of the day, moving is disruptive. Don't waste energy feeling guilty. Barring the rent -back situation, you either buy then sell..and have a mad rush at the end/stress re selling house quickly or bridging loans, or sell with a plan to move out and rent/other temp accommodation such as staying with family.

- Any chance of making some extra money with your current property and avoiding the move? eg granny flat, room to AirBNB, or even room-mate. Building a granny flat is popular here...you could either rent the flat, or, live in it and rent the main house.





essjay43

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Re: Downsizing strategy- sell & look, or buy then sell
« Reply #3 on: January 30, 2020, 01:52:51 PM »
Thanks for your feedback-

There's not much on the market in my area and our target (think starter home) is super in-demand. We have great schools and close to the train to Boston. A house could pop up tomorrow or in 8 months.

I would expect my current house to sell very quickly.

I'm already in the mindset that we'll sell. Will start little interior work this winter and start on the outside this Spring- painting trim, a little landscaping.

I'll try to educate myself on the bridge loans. Sound pretty exotic to me, but could be useful if I could understand it.

There's not much of a chance to make money on our current property. Our town is pretty crazy about zoning/setbacks and granny flats.

happy

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Re: Downsizing strategy- sell & look, or buy then sell
« Reply #4 on: January 30, 2020, 02:18:32 PM »
I'll try to educate myself on the bridge loans. Sound pretty exotic to me, but could be useful if I could understand it.

In my country ( not US) they are used if you buy a house, and need to pay for it before you sell your own house. So suddenly you have a loan for the entire new house amount ( unless you've some extra cash you can throw at it). It gets expensive very fast, so you need to be sure you can sell your house quickly, and be ready to put it on the market as soon as you have bought your next one.  Don't go this route unless you are sure it will work for you.

There is another strategy I just thought of.... sometimes you can buy and negotiate a long settlement period, say 10 or 12 weeks ( 6 weeks is standard in my country). And then sell yours with a standard settlement period or period that ends shortly after that of the new house, minimising the time you are in debt. Again , in my country, you can't time it too tightly, since there is no guarantee settlement will occur on the exact day specified in the contract ( could be a week or more later).


GoCubsGo

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Re: Downsizing strategy- sell & look, or buy then sell
« Reply #5 on: January 30, 2020, 03:03:44 PM »
I would definitely get a competent realtors advice on the "real world" scenario you might face.  In my market, sellers are loathe to take a "Home sale contingency" early in a listing.  If it's a good house that's priced well, they will invariably want to sell to a non-contingent offer and will likely get a non-contingent offer. 

You can sometimes tempt them with a super strong offer but often they will want to wait a few weeks before even considering contingent offers. Reverse the situation, would you take a home sale contingency on your home if you had 10 showings the first weekend?.  They will be more willing to accept a "home close contingency" but that means your house has been listed and is under contract.  My guess is that true starter home competition for a $350K house will be brutal with young couples that have nothing to sell and you might lose a few offers before you have to switch strategies.

I haven't seen bridge loans used since the great recession but lenders may be willing to do that again.  Let us know what you find out about bridge loans.  The good news is that this one time pain could shave YEARS off your retirement date so it's totally worth it.

mozar

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Re: Downsizing strategy- sell & look, or buy then sell
« Reply #6 on: February 01, 2020, 10:36:59 AM »
It sounds like you live in a very popular area. I don't know the setup in your house but I would figure out how to rent a couple rooms or part of the house. Sounds like you have a big house. You could live in the basement or the smallest room.

the_fixer

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Re: Downsizing strategy- sell & look, or buy then sell
« Reply #7 on: February 01, 2020, 12:11:11 PM »
I prefer sell then buy personally as it is less risk of getting stuck with 2 mortgages.

It is less convenient as you might have to put your stuff in a pod for a while.

Knowing you have cash in the bank, no contingency on selling and can close fast can get you better deal on the new house.

Also if you buy then try to sell and it does not sell prior to taking possession of the new house it puts you at a disadvantage. If you move your stuff and the house is empty it will be slower to sell. The longer you are paying 2 mortgages the less leverage you have while trying to sell.

Look at the stats for your area DOM and so forth and it should give you a good idea how long it will take to sell.



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Aunt Petunia

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Re: Downsizing strategy- sell & look, or buy then sell
« Reply #8 on: February 01, 2020, 12:21:52 PM »
Definitely sell then buy. Realtor told me my old house would sell quickly and it took 8 months. We wanted to remodel the bathroom after we moved out and before putting it on the market, since there was only one bathroom. Contractor bailed and we lost out on summer selling season. Market freezes here in winter. Tried to rent out the house but it wasn't up to city rental code and would have been ridiculous to get up to code (stairs too steep and windows too small).

Mortgage wasn't the worst of it. We had a really cold winter and had to heat the house to about 45 so the pipes wouldn't freeze. City advised us to trickle water also, and you can get fined if you don't shovel the snow. So we had to go over there before and after anyone looked at the house to turn heat up and down and shut off the water, shovel snow, etc. And people would track footprints, leave on lights, etc. Took the first low-ball offer I was given.

six-car-habit

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Re: Downsizing strategy- sell & look, or buy then sell
« Reply #9 on: February 02, 2020, 10:16:50 AM »

. If you move your stuff and the house is empty it will be slower to sell.

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 I agree with the rest of this post , but am curious about this section. Why would an empty house take longer to sell ?
 Have been told by RE agents that -
 a] an empty house looks bigger
 b] an empty house is an advantage because potential buyers can envision their own possesions/ furniture in the spaces - rather than concentrating on how the seller placed their furniture/ art / etc.

engineerjourney

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Re: Downsizing strategy- sell & look, or buy then sell
« Reply #10 on: February 03, 2020, 08:30:51 AM »
My experience was the opposite in that we were selling the "starter home" and trying to get into the "dream home".  But we did look into a lot of what is being talked about here.  We had been looking for years for the right home so we knew we were going to be buying before selling because we were looking for a unicorn house.  We didnt think we were in a hot market necessarily but when the right house showed up there were four other offers.  We made our offer without a contingency but were lucky in that the sellers wanted 90 days to close so they could find a new house as they didnt expect to sell so quickly!  We hoped to carry both houses for only a month (had to finish up a couple projects as this happened in Jan which is usually a dead period for housing in our area).

We were told by our mortgage broker that "bridge loans" are not really allowed anymore due to being considered predatory (you could end up with two home loans plus the bridge loan if you cant sell your original home).   There were three options we considered:
- A home equity loan on the original home to get the equity out (this has to be done before listing the home for sale though and would count on your debt to income ratio for mortgage rates).  Fees and interest rate depended but wasn't too bad.
- Do two mortgage loans on the new house, one for 80% and one for 20% with the 20% one being paid off once you sell your original home.  A friend did this but we decided against it due to the extra closing costs and that the rate for the 80% wasn't as good as just a regular mortgage.
- A 401K loan, this is what we ended up doing.  We each were able to take 50K out of our 401Ks for a loan originating fee of $50 each.  A 401K loan does not count toward your debt to income ratio and ended up being super easy and quick (literally clicked some buttons online and got the check in the mail days later).  We did have to originate the loan a little earlier than we absolutely needed the money since the mortgage broker needed to see it in our bank account for a statement.  This ended up being the easiest, less stressful, and cheapest option for us but I would not recommend if your employment isnt super stable or in general.   We paid off the loan as soon as the check for our original home cleared.  That money was out of the market for about a month but we were charged 6.5% interest into our account so it wasnt too far off what it would have made if it stayed in the market so total cost was about $100. 

We ended up selling our original house on the second day it was listed to a cash buyer who wanted to close in 3 weeks.  So we magically only held both houses for only 1 week.  We did have backup plans as far as renting out the first home or even refinancing it (we had a 12yr aggressive mortgage on it so refinancing would have made it VERY easy to not cost us money to hold if renting). 

Overall it was still stressful but worked out well.  Good luck!

Dicey

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Re: Downsizing strategy- sell & look, or buy then sell
« Reply #11 on: February 03, 2020, 09:00:26 AM »
Nice post, @engineerjourney! Lots of food for thought there.

I live in a hot market. Contingent offers get laughed at. Essjay43, I believe you're in a strong market, too, so expect the same.

Besides checking with a Realtor, make an appointment with a Lender. Get pre-qualified and approved based on your actual numbers, not the Realtor's "experience".

SimpleCycle

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Re: Downsizing strategy- sell & look, or buy then sell
« Reply #12 on: February 03, 2020, 03:20:40 PM »
Like others have said, you are unlikely to have a contingent offer accepted in a hot market.  In our market, we also once had a 10% down offer rejected in favor of someone who was more of a "sure thing" (bigger down payment).

We bought and then sold, and used the 401k loan trick (even though we technically had the money I did not want to sell stock).  But we were ready to go on the market the minute our offer was accepted, and were pretty certain we'd be able to sell quickly.  @engineerjourney laid out the options very well.  A final option if you can swing the debt-to-income is to purchase with a small amount down and refi once you sell the house.  More transaction costs, similar to the home equity loan option.

As far as selling an empty house, most people have no imagination and need to see how rooms are used/laid out to picture themselves living there.  We staged our house with our existing furniture and waited to move into our new house until we were sure our sale was going through.  Worst case scenario in a major metro, you can hire a staging company to stage the house.  Honestly it's not much more expensive than DIY staging when all is said and done.

Laura33

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Re: Downsizing strategy- sell & look, or buy then sell
« Reply #13 on: February 04, 2020, 05:57:54 AM »
Sell first.

If you are in a hot market, a contingent offer will be laughed at unless you offer substantially more than everyone else.

If you are in a slow market, you run the risk of covering two mortgages for an unknown period of time (ask me how I know -- 13 months and $75K in price cuts).

Use your past experience to develop a better plan to manage your family's frustration and impatience if you end up in a short-term living situation.

ericrugiero

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Re: Downsizing strategy- sell & look, or buy then sell
« Reply #14 on: February 04, 2020, 01:27:24 PM »
It really depends on your market, finances, priorities and risk tolerance.  There are tons of different strategies. 

We purchased several months before we even put our existing house on the market.  Several factors contributed to this decision. 
- We live in an area with cheap real estate and had purchased our existing home well below our "approved limit"
- The new house was a foreclosure I bought from HUD and it was a great deal. I had been watching the market for several years to find what we wanted for the right price.   
- We could afford the payments on both houses together (our payment on both homes was lower than your cheaper payment) so even though it was more stressful we did that for about 7-8 months and could have done so for several years if needed.  (both homes needed some work before we could move into one and sell the other)
- We had a comfortable emergency fund so we had some "cushion" in case something happened. 

This did include some risk but I felt the discount we were getting was worth the risk (We saved about ~30% on the new home).  I would not do the same thing unless there was enough upside (discount, perfect house, etc) and low enough risk. 

In your case, I would be more reluctant to buy before you sell just because your market is much more expensive and you are (I'm guessing here) less able to afford the two higher payments.  Also, more expensive markets have more room for value to drop while you own two homes.  The safest and easiest way to do this is a contingent offer.  If your market won't allow that, you may need to sell and rent for a while. 

By the way, 401K loans are risky because if you leave your job for any reason it's due in full.  If you can't pay, you are charged the taxes and penalty for early withdraw.  Plus, you miss out on time in the market which may or may not work out for you.  Think about the worst case scenario:
- local market collapses while you own two homes and value drops on both of them
- you lose your job because the market is down
- you can't make payments on the homes so they are foreclosed on and you just lost money from your 401K which is normally protected from bankruptcy
- you still have to pay the taxes and penalty for early withdraw from 401K
If none of this happens, it's a good option.  If things go sour, it's a disaster.