How to Buy and Sell at the Same Time

Over the past few years, one of the biggest challenges facing homeowners who would like to sell is the mechanics of how to be both a buyer and seller simultaneously while also taking risk out of the equation. This is one of the contributing factors to the housing shortage which then leads to continued low inventory and perpetuates the problem.

For most people, they either need the money from the sale of their current home to finance the new home or they don’t qualify to carry two mortgages at once, or both. If you have the money for a down payment for the new home or can just pay cash, you probably aren’t reading this article.

So assuming someone is not intending to sell and then become a permanent renter, here are some solutions to solving this challenge, These fall into two main categories. The first is how to use the available clauses in the purchase contract to structurally make things work. The second bucket are the available programmatic solutions which primarily use financing as a means. Let’s get started.

CONTRACTUAL SOLUTIONS

CONTINGENT OFFERS

1) Making a contingent offer on the house you want to buy. This is probably the least effective strategy because in today’s super competitive market, why would a seller accept an offer based on the buyer selling their house when there are ample offers for ready, willing and able buyers who can just purchase? But if a property has been on the market for a while and is not selling, this can be an effective strategy even if it is not likely to get you the best price.

When making an offer contingent on the sale of your current home, it is more likely to be accepted if your current home is in escrow and all the buyer contingencies are removed. If a property is not in escrow or not even listed for sale, this approach is not likely to get too far.

2) Making the sale of your current home contingent on finding an “up-leg” property. This is not likely to get you the highest selling price because you are, in fact, saying to the buyer that you will sell your home if you can find a place to buy. And there has to be a time frame - it can’t be open ended. This also puts you in the position of having both a seller and buyer contingency simultaneously which really compounds the matter.

Both of these approaches assumes that as buyer you have the available liquid funds to make your 3% earnest money deposit and pay for whatever inspections come up.

LEASE BACK AFTER CLOSE OF ESCROW

The lease back allows you to stay in your current home - sometimes for up to 60 days, while you find and close on a new home. If you wind up with a super competitive bidding war, you might even be able to stay in your home for free but expect to pay the buyer’s carrying costs for the time you occupy the property after the close of escrow. As carrying costs, it is most common to pay for the new owner’s PITI - principle, interest, taxes and insurance. If there are HOA charges, that is also usually included. As with any tenancy you would most likely pay for your utilities and gardener. Typically escrow deducts this money from the seller’s proceeds and it is handed over to the buyer.

There are specific forms available to use in California transactions. For periods less than 30 days in duration, there is the SIP - Seller in Possession form while for periods over 30 days you would use the Residential Lease After Sale (RLAS).

So assuming you have up to 105 days to find a new home (45 day escrow plus 60 days lease after sale), that should be enough for most people to secure their new home. But you still will be making contingent offers and there is risk that you do wind up in a (short term) rental. That’s why we are going to look at specific programs that address this issue.

PROGRAMMATTIC SOLUTIONS

As with the contractual approach, if you are planning to avail yourselves of specific programs. you might have to combine a few of these approaches to come up with something that works for your situation. For the examples below, departing residence means your current primary residence that you are living in and will ultimately sell. Please note, this website or the author, Ellis Posner - a licensed real estate broker, are not making any offer to provide loans. The information is for your reference and is intended to educate the public,

EXCLUDING THE DEPARTING RESIDENCE FROM YOUR DTI

There are a number of variations of this theme.

In the most basic version, the lender simply doesn’t count your departing residence against your debt to income ratio (because most people will not qualify for 2 mortgages at once). There might also be a requirement that you have reserves to cover payments on the departing residence (6 months is most common) and there will certainly be a requirement that the departing residence is listed for sale in the MLS. It doesn’t have to be in escrow.

In order to be able to use this option, you will need to have the down payment for the new house in liquid funds and the required reserves. If the loan amount is high enough you may also need to have further reserves. If you don’t have the required funds you can explore…..

OBTAINING A HELOC FOR THE DOWN PAYMENT

Some people will get a Home Equity Line of Credit (HELOC) for all or part of the funds for the purchase of the new home and then combine that with the program referenced above to exclude the departing residence. Please note, not all lenders offer a departing residence exclusion. Some require that you have sold and closed on the current home before they will fund the new loan.

There is also a limit to how high lenders doing HELOCs will go based on the equity in the current home and the qualifying ratios.

BRIDGE LOAN COMBINED WITH EXCLUDING THE DEPARTING RESIDENCE

This is a highly specialized program and truthfully for most people it is hard to meet all the criteria.

It starts with a bridge loan for your current home provided that you have at least 40% equity to start with. The bridge loan may cap the total loan to value at 70% for the departing residence unlike HELOCs which may go up to 90%. There is also often a maximum loan amount on this program such as a cap that you can’t pull out more than $400K. Usually the bridge loan is at 6% interest only.

Additionally you have to get the loan for the new home from the same lender doing the bridge loan and like with other departing residence programs you would need to have the house listed for sale.

Here's an example.

Let's say your current home would sell for $1,250,000 (it may well sell for more) and you owe $500,000. You have enough equity (check that box). You will need $300K cash for 20% down on a $1,500,000 purchase, $300K plus $500K = $800K now owed. Then when it comes time to calculate your qualifying for the new home, this particular lender will not include either the current payment or the payment on the bridge loan so you can qualify.

You then would have 6 months to sell your departing residence which these days is very doable.

This is just an example of one possible program. There are many variations of this theme.