Buy new house, sell the old with minimal stress
BAY AREA REAL ESTATE AGENTS SHARE ADVICE ON FACILITATING A SMOOTH HOME TRANSITION
By Sue McAllister
Mercury News

Every year, thousands of Bay Area homeowners try to maintain their sanity while selling one home and buying another. It's a somewhat universal challenge -- about every six years, statistics say, homeowners get tired of the same four walls, or are prompted to move because of a new job, a divorce or a growing family.

Fortunately, plenty of experts have opinions on how to do the sell-buy dance with minimal anguish on the part of the homeowners. In some cases, homeowners may want to borrow against equity in their current home to make the deal happen smoothly. In other cases, making a purchase that is contingent on the sale of the current house will work well. Sometimes, sellers will be able to rent back their original home from new buyers, giving them time to look for the next home.

In the Bay Area, conditions have favored sellers for the past few years. Interest rates were super-low, and buyers were on the hunt for properties. It wasn't unusual for five or 10 buyers to bid on the same house.

But with rates climbing and prices increasingly out of reach, sales have slowed this year. Multiple offers are less common. About half the houses sold in Santa Clara County between early March and early April fetched more than their asking prices. In other words, buyers and sellers are closer to sharing the balance of power than they have been in a couple of years.

Using your equity

One popular option among homeowners with substantial equity in their homes, real estate agents say, is to borrow against that equity to make a sizable down payment on the new place.

Homeowners take out a home equity line of credit before putting their existing home on the market, then go shop for a new home. When they find one and their offer is accepted, they draw on the line of credit to make the down payment. They buy the new place, move in, then sell their old home and pay off the mortgage and equity line.

``I can't even think of anyone I've done a move-up for that hasn't done it that way,'' said Marcie McPhaul Soderquist, a Coldwell Banker agent in Los Altos.

She recommends that homeowners consult with both a mortgage lender and a real estate agent first to make sure they have enough equity in their home to make the plan practical; that they can determine about how much their existing home will sell for; and that they can comfortably make the payments on both properties for as long as they expect it to take to sell their home -- or maybe a bit longer.

Contingent offers

With the market more balanced now, buyers might, might be able to purchase using the easiest of strategies, which is known as ``making a contingent offer.'' This means you find a home you want to buy, then make an offer on that home that is conditional (or ``contingent'') on finding a buyer for your existing home within a certain amount of time, say 30 days.

In the best of scenarios, the seller accepts your conditions and you sell your home, and you -- probably with the help of your real estate agent and escrow officer -- manage to get both transactions to become final on the same day. The proceeds from the sale of your old home can be transferred directly into the escrow account for your new home, to serve as the down payment if necessary.

What happens if you can't sell your home during that contingency period you negotiated? Either the seller goes looking for another buyer, or you negotiate an extension to your contingency period.

``Contingent offers are the best, but they're the least likely in this market to be accepted,'' said David Martz, an agent with ReMax in San Jose. ``Last year you were lucky if it would ever work.''

In a seller's market, buyers can't make contingent offers and expect to beat out competition from other buyers. But they can try to carefully control the sale of their own property, and time the transactions so their old home closes escrow the same day as their newly purchased home, or a few days earlier.

This technique -- which can be nerve-racking if something goes sideways in one of the transactions -- typically involves getting one's existing home repaired and ready to sell, then finding a new home, and getting an offer accepted. Once they are in escrow to buy the new place, homeowners put their old home up for sale, and try to find a well-qualified buyer who will agree to a relatively rapid escrow period, so that the proceeds from the sale of the homeowners' old home will go directly toward the financing of the new home.

Most homeowners can benefit from the assistance of a real estate agent who has wrangled with all these details before, said Vivian Wang, an agent with Coldwell Banker in Cupertino.

Many move-up buyers she's helped also take out a ``just in case'' home equity line of credit, to use to help finance the new house if the timing doesn't work out as planned.

Xiao Ming Zhang and his wife, Holly, went through the move-up process with Wang twice, once in 1999 when they moved from their first home, a Sunnyvale townhouse, to a Campbell house, and again when they moved back to Sunnyvale in 2004.

Both times, they avoided taking out a home equity line (``I just didn't want to deal with the hassle of that,'' Zhang said) and instead relied on Wang to help them time the closings of the dual transactions.

``A lot of it would hinge on the real estate agent -- whether the agent has priced your house competitively, so your house will generate enough offers to close on time,'' said Zhang, who works for a pharmaceutical start-up in South San Francisco. Wang ``pointed out where all the bottlenecks could be. We totally understood what the risks were,'' he said. Luckily, the couple's home sales and purchases ``went totally uneventfully.''

Sell, then rent

Some homeowners opt to sell their existing home first, then move into a rental home while they look for the next home to buy. Pro: Owners have cash in hand when they are ready to house-hunt. Con: the annoyance of moving their possessions, children and pets first into a rental and then into another home.

Others sell but include a requirement in the purchase contract that they be able to rent back their former home from the buyers for a month or two after the sale becomes final. They avoid having to move all their belongings to a rental, and they have some time to look for the next home.

But this technique works best in a real seller's market, when buyers will concede to all kinds of conditions if it means getting the house they want. As the market slows, buyers will be less likely to bid on houses whose sellers want to stay put.

And then there are the last-ditch miracles that a mortgage broker may be able to work.

For example, homeowners who had hoped to time their sales to close concurrently and suddenly find that the buyers of their home have failed to qualify for a mortgage could need a ``bridge loan'' to help them keep the purchase of their new home on track. Such a loan allows borrowers to afford to make the payments on both the new home and the existing one for some predetermined period of time. The loans must be obtained from the same lender that is providing financing for the home the borrowers are trying to buy.

Bridge loans are usually ``kind of a last resort,'' said Jess Gabaldon of Princeton Capital in Los Altos, because they carry much higher interest rates than regular mortgages. For instance, most are set at the prime rate plus 1 1/2 percentage points, meaning a bridge loan might have an interest rate of 9.5 percent.

``Bridge loans may become more in vogue as the market softens, as people who thought they'd sell their homes in two weeks can't,'' Gabaldon said.
Contact Sue McAllister at smcallister@mercurynews.com or (408) 920-5833.

 

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