Buy First, Then Sell?

As Seen In Royal LePage's Real Estate News & Views, Volume 5 Issue 2

You own a house now, but you want to move into a bigger place or a different neighborhood. Should you sell your current home before you buy your next, or should you buy first then sell your existing one? Though this is a common question, there is no "right answer". The answer depends on a number of things, but most importantly on how cautious you are.

Human nature being what it is, once the decision to move is made, people usually put a great deal of effort into finding the perfect home – sometimes without giving much thought to selling their current one. If, for a fleeting moment, they do consider whether to sell first, they figure they won't have trouble finding someone eager to buy their charming home, so they once again focus on buying. Then once their offer has been accepted, their attention shifts to selling their current home. At this point, however, they may begin to feel the clock is ticking because naturally they'd like to sell before they take possession of the new house. Worse yet, fearing that time is running out, they may not be as tough a negotiator when selling their current home.

Selling your existing home before buying another has its advantages. Buy selling first, you know how much money you'll be getting on closing, which helps you establish a price range for the new home. Also, if you've already sold, you don't have to make your offer conditional on selling your existing home. The down side is that you may not be able to find a satisfactory replacement before the closing on your current home, which means you need to find someplace to live temporarily. Or, you may be tempted to settle for something that isn't quite what you want.

Possible Strategies

Aside from your own personality and what risks you're comfortable with, when facing the dilemma of buy first/sell first, don't forget to take market conditions into consideration. Generally speaking, it makes more sense to buy first in a seller's market (that is, when prices are rising). The rationale is that if prices are going up, it is preferable to lock in the price of the home you want to buy, meanwhile allowing you to subsequently sell your home at a higher price (assuming the seller's market continues).

During a buyer's market (when prices are falling), generally it makes sense to sell first. That way you lock in the amount you'll receive for your current home before the market falls further, and you're able to take advantage of further falling prices when you subsequently buy. Of course, knowing whether it's a buyer's market or a seller's market isn't always straightforward and because it depends on a number of factors, the market can change quite quickly. Your real estate professional can help you determine what the market conditions are in your area in the area in which you are looking to buy.

Conditional-On-Sale Offers

One way of hedging your bet is to make your offer to buy conditional on selling your current home. With a conditional-on-sale offer, the offer becomes firm and binding only if you sign an offer to sell your current home in a specified period of time, usually 30 to 60 days.

When making any kind of conditional offer, be sure the offer clearly states the condition that is to be satisfied and how long the buyer has to satisfy the condition. The offer should be phrased in such a way that some positive action must take place for the deal to remain alive. For example, the offer might state that it's conditional on the buyer signing an offer to sell his/her current home within 45 days, otherwise the offer becomes null and void and the deposit is to be returned to the buyer. This way, if after 45 days the buyer hasn't sold his/her current home, the offer is dead and the buyer doesn't need to do anything more.

The likelihood of a conditional-on-sale offer being accepted depends on a number of factors, including the vendor's personality (for example, whether the vendor is cautious and would rather have a conditional offer than no offer) and market conditions. Vendor's are less likely to accept conditional offers in a seller's market because there are generally more buyers than sellers, so they believe another potential buyer is likely to come along pretty quickly. In a buyer's market there are likely to be more houses listed than interested buyers, so vendors may be more inclined to accept a conditional-on-sale offer, because they may be anxious to receive any offer.

Vendors reluctant to accept a conditional-on-sale offer can protect themselves by accepting a conditional offer subject to a condition that allows them to continue listing the house for sale during the conditional period but that requires them to give the person who made the original conditional offer the opportunity to waive the condition if the vendor receives another offer (if the original offer becomes firm and binding). This is an especially attractive way of structuring the deal if a purchaser has asked for a relatively long conditional period.

Your Comfort Level

The bottom line is that whether you buy first or sell first is a personal decision. There are a number of factors that might influence your decision, but there is no right or wrong decision. And, you can always hedge your bet by making a conditional-on-sale offer. If you decide to make such an offer consider getting legal advice to ensure it's phrased properly. As well, if someone makes a conditional offer to buy your home, it's a good idea to get legal advice so that you understand what you're getting into and how you might best protect your interests.

Renters!

Though you don't have to worry about timing the sale of another residence when you buy, you must give your landlord notice of your intention to leave. The amount of notice varies – consider getting professional advice if you are unsure about what notice you must give.