Q: We are moving and plan on buying before we sell. We know this is risky, but we are pretty confident our current house will sell relatively quickly. Is there a way to buy a home with, say 5% down, and then increase that down payment as soon as our current home sells? We’d like to keep the monthly mortgage payments on our new home as low as possible.
— Confused about transaction timing, Toronto, Ont.
Answer No. 1 from Monika Furtado, Calgary residential realtor:
There are a number of factors to consider when moving between properties. The first consideration is cost. Can you afford to hold two properties should your current home sit on the market and not sell for a few months? If you can afford this option you are best to move forward with a 20% down payment to avoid unnecessary CMHC fees—fees that would be added to the purchase price of your second home if you put down less than 20%. However, by opting for an open mortgage or a home equity line of credit on the new home you could then put more money against the purchase of that home once your present house sells.
Another option to consider is to put in an offer on your new home with a condition that stipulates that you can back out of the purchase should your current home not sell. This option is called a “Subject to Sale Offer” and considered a standard clause in most markets, except really hot markets where competition can heat things up.
No matter what you decide, make sure you have a detailed conversation with a mortgage broker and your realtor, so that you can truly understand your options and their related costs.
Monika Furtado is an award-winning Calgary residential Realtor with Royal LePage Foothills serving the Calgary marketplace, providing exceptional personal service and real estate advice. Proud supporter of the Royal LePage Shelter Foundation.
Answer No. 2 from Romana King, senior editor at MoneySense:
You own and live in your current home, but you want to move. Now the question is: should you sell your current home before you buy your next house, or buy first, then sell your existing home? This is a common question among move-on-uppers and, truth be told, there is no right answer.
But that doesn’t mean there aren’t ways to find the right answer, for you. To help you make this decision, ask yourself these three questions:
1) Are you prepared to sell? It’s human nature to focus on the most daunting task: trying to find a new home. But when straddling between your current place and the next, you really need to pay particular attention to how ready you are to put your current home on the market.
For instance, are there small (or large) repairs that need to be completed? Because you certainly don’t want to find that the home is only 50% ready to sell after you’ve signed the papers to buy your next home. Why? Because repairs and refreshing takes time, as does staging and listing a home for sale. Time you don’t want to waste when you’ve got an impending moving date fast approaching.
The aim is to be 98% ready to sell. That means you’ve already decluttered, repainted and talked to a real estate sales agent about market comparisons for your current property. The last 2% should amount to nothing more than a good clean and the signing of the “for sale” documents.
Part of the rationale for approaching the buy/sell combination this way is that you don’t want to feel even more pressure when the move-date clock starts ticking. This type of stress can prompt rushed or poor decisions—such as accepting a low-ball offer or refusing to accommodate a buyer’s request. Ideally, no more than 48 hours should go by between signing the papers to buy your new home and signing the papers to list your current home.
If your current home is already prepared for sale, then you’re a good candidate for buy first, sell later.
2) Can you live with uncertainty? Buying before selling means living with uncertainty. You won’t know exactly how long or how much your home with sell for, nor will you know the timeline and conditions set by these new buyers. While most of this is negotiable, the timing of it all can be quite stressful. For those that hate the uncertainty of it all, it may be better to sell first. That way you know your moving date and the amount of money you can use for the next purchase. While this may mean temporary accommodation until you find the next home of your dreams, it does eliminate the need to time transactions and the risk of holding two homes at the same time (just imagine: 2 sets of mortgage payments, 2 sets of utility bills, 2 sets of property taxes!).
If you don’t like uncertainty when it comes to closing dates or the amount of money you’ll get from the sale of your home, you’re a good candidate for sell first, buy later.
3) Are you comfortable haggling? Of course, there’s another option open to you when trying to negotiate a buy and sell combo: add a condition to the purchase contract for your new home.
The condition states that the new home purchase will only be finalized once your existing home sells, within a specified time period. (In realtor language, it’s the: “the subject to the sale of your existing home” conditional clause.)
This condition was once considered the gold-standard in buy/sell transactions, but hot housing markets quickly put a stop to this when buyers with less restrictions put in offers with little or no conditions. While you can word this condition to allow the seller to entertain other offers while you’re waiting for all transactions to finalize, it can also mean another round or two of negotiations, which can increase your purchase prices.
But, perhaps the biggest drawback is that sellers now tend to take conditional-upon-sale-offers less seriously. Rather than haggling and negotiating with buyers, sellers prefer a firm offer in hand and choose, instead, purchase offers with more straightforward conditions or no conditions at all.
If you’re comfortable haggling and don’t mind the risk of conditional offers, you’re a good candidate for buy first, sell later.
5 factors to consider when financing that new home
If, as you state, you decide to buy first and then sell here’s four factors to keep in mind when sorting out your financing:
1. An open mortgage will allow you to pay as much of the outstanding mortgage as you want, without penalty. If, at that point, you’d rather not pay the premium on an open mortgage you can then consider refinancing and locking into another, lower rate. (Just be sure you read the fine print; not all open mortgages allow you to break the mortgage, but will allow you to pay as much as you want against the principal, without penalty.)
2. If you expect to use the proceeds of your current home to pay down the future mortgage, you may want to consider a mortgage that has good pre-payment options, such as 20% annual pre-payments, as well as the ability to double-up on monthly payments.
3. You could also negotiate a shorter term mortgage, such as a 1-year-fixed, with the understanding that you’ll negotiate a new mortgage, reduced by the proceeds from the sale of your former home, when that mortgage expires.
4. You could always opt for a variable-rate mortgage. If you end up making more on the sale of your home and have enough money to pay off 50% or more of the new mortgage, you could break your mortgage, pay the three-month interest penalty and negotiate a new lower mortgage at pretty much the same rates.
5. Finally, you may need to look into bridge financing. While rates for bridge loans are often much higher than traditional mortgage rates, this type of financing is flexible and can help you straddle the financial leap from your current home to your new home. Talk to a mortgage professional for more details.
Romana King is the senior editor and real estate specialist at MoneySense. She is also a licensed real estate sales agent. Follow her on Twitter (@RKHomeowner) or on Facebook.
If you have real estate concerns or questions, please email Romana directly at .