Two safe ways to trade up

by Hugh Hardy

Available Articles

• Article Index
• Are you "signing your life away"?
• Buying new versus resale
• Choosing a Realtor - What does it take to sell your home?
• Don't push the river!
• Getting the most from your Realtor
• Home ownership is part of smart money management
• Knowing your strengths and weaknesses
• Let's talk about commissions
• Open vs Closed? Making the most of your mortgage
• Prepare your home to command a premium price
• Real estate trivia
• Recognizing the paper tiger
• The easy way to buy a custom home
• The importance of pricing right
• The value of a buyer's agent
• Two safe ways to trade up
• What does irrevocable really mean?
• What to expect from your agent when you buy
• What's a Chattel, What's a Fixture (and why should I care)

Today I'd like to discuss the mechanics of "trading up - or, for that matter, trading down or trading even. Basically, any situation where you might be selling a home and then buying. For families who have guaranteed sale programs - the military for example - this column may not be relevant. But for "Joe Average", who can't own two houses at the same time, things can get complicated.

When the market was red hot back in 1989, many people would find the house they wanted, buy it with, say, a 90 day closing, and then sell their own home with the same closing date required. But these days that's a bit risky. It's not guaranteed that your house will sell before the closing date on your purchase - and that can be a disaster unless you've just won the "649".

But there are two basic safe ways that we can approach the trade up scenario these days. The first way goes like this: You find the house you want, put in an offer conditional on the sale of your existing home, and wait for your home to sell. The second way goes like this: Vou put your house on the market and start looking casually for a house to buy. But you don't make any offers until your house is sold. When the house is sold, you shop for a home and buy it with the same closing date as your sale.

Both of these approaches are safe because there is no possible way that you can end up owning two homes. But they each have their advantages and disadvantages. Let's look at those now.

If we take the first scenario - where you buy a home conditional on the sale of your home - there is one major advantage over the other scenario. The advantage is that you can search for a home until you find exactly the right one. You can take all the time you like. This is a significant advantage. Unfortunately, this scenario is fraught with problems. 99% of the time, the seller of the home you want to buy will require that you put an "escape clause" in your offer. What is an escape clause? An escape clause says that the seller can continue to offer his property for sale and if he receives another offer that he likes better, he can give you a specified amount of time (usually 48 hours) to firm up your offer - to remove your condition about selling your home This is reasonable. Why would a seller want to have her home tied up and unsaleable while she waits months for a potential purchaser to sell his home. The downside for you, the prospective purchaser, is that you can find your dream home and then be "bumped" before you have sold your home. This is especially likely to happen when the market is busy and homes are selling well.

Other disadvantages of this approach can be listed as follows:

1. You don't know how much you will get for your home before you make the offer on your purchase, so accurate calculations of final mortgage amounts that you will carry in the new house are not possible.
2. You have to pick a closing date on your purchase and try to make the date on your sale the same - but sometimes this doesn't work out - especially if it takes longer than expected for you to sell.
3. You can't negotiate as good a purchase price if your offer is conditional upon sale - firm offers and offers conditional upon financing approval are much more certain and thus will be looked at with more seriousness. After all, your home may not sell.

So let's look at scenario number two - where you sell first and then buy. The trick here is to negotiate a long enough closing on your sale that you can find and purchase a suitable house with the same closing date. So, if you sell your home with a 90 day closing, this allows a minimum of 30 days for you to find a home and buy it with a 60 day closing to match the closing date on your sale.

The major disadvantage to this method is that you have a limited amount of time to find a home to buy. It's definitely not for those who have a narrow and inflexible range of possible home purchases. This method works well, however, with people who are definite about selling and who have a fairly wide range of possible purchases in mind.

The advantages of this method are:

1. You know the closing date of your sale and can buy accordingly.
2. You know how much money you are getting for your sale and thus what you can spend.
3. When you find the right home you can buy it firm - you'II never lose a home that you want by being bumped.
4. You have already sold, so you can negotiate a better price with a firm offer.

Well, that's a quick overview of the two safe methods of trade up buying. Your Realtor can discuss these scenarios in much greater detail.

REALTYGUY.com