Selling a Home then Buying Can Be Costly

by Kristin McKenna, CFP® on August 17, 2016 in Home buying, Real estate

Selling before buying is the way most people buy a home. Equity from a current home is often needed to purchase a new one, and even if the down payment is not an issue, it is much harder to qualify for a new mortgage while carrying the existing home. The problem with selling then buying a home is the "limbo" time in between and the risk of not being able to secure your next home in a competitive marketplace.

Home_buying_considerations.jpgSelling then buying isn't ideal for everyone 

Cost and logistical considerations when selling first.

Where to live? Selling first means you need somewhere to live after you close until you purchase another property. Moving in with family is the cheapest, most-flexible solution. However, this may not be an option for everyone. Short term and flexible rentals are not common in all areas and the monthly rent may be much higher than your old mortgage. Other options include a longer-term Airbnb rental or trying to negotiate a better rate with a hotel.

Buying in a seller's market. In hot neighborhoods, you may be afraid you can't get what you want with the new budget and will be stuck in the rental trap. Although using a contingency such as the sale of your existing home or a seller to find suitable housing are options, these stipulations may drastically reduce your ability to compete with other offers (or properties) that don't come with any limitations.

6 Step Guide to Buying then Selling a Home

Transition expenses. While it is advantageous to make an offer with cash in the bank, selling then buying can become quite expensive. As you break down your options, develop a budget for each scenario. During your time in between houses you'll have moving expenses (twice), and likely need to rent a storage unit. If you're not living with family or rent-free, consider the costs of securing temporary housing. Do you expect to have realtor fees? What's the cost for terminating a lease early? Does your new housing situation require you to eat out? 

New Call-to-actionBuying then selling a home

Buying a new home before selling your old one can be financially risky and difficult to accomplish. There are two big roadblocks individuals in this situation often face:

  1. Raising enough cash for a down payment
  2. Staying within an acceptable debt to income ratio while carrying the old and new home

Unfortunately, just like a balance sheet, many of the common options that will help you raise cash (e.g. taking out a loan or using your home's equity) will also increase your monthly debt.

Should You Tap Your Home's Equity?

Work with your financial advisor to review your options and discuss how a particular strategy may impact your overall situation before taking action.   

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