Wednesday, February 1, 2017

Why You Shouldn't Be A Contingent Home Buyer Needing To Sell Your Home First

There are many young couples who have been fortunate enough to have bought a starter home, had that home go up in value, and paid down the mortgage for at least 6-8 years.  These couples are ready to step up to a permanent home because maybe they had one or two children and need the extra space.  Or perhaps they want to move to be closer to family, their jobs, etc.  This was my case back in 2005.
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My ex-wife and I had bought a 2 bed, 2 bath townhouse near downtown San Jose.  After only a couple of years, we decided to move to Southern CA (she wanted to be closer to family).  Well, there are some markets where it is possible to gain over $100K in equity with just two years of home ownership: San Jose (Silicon Valley) during a housing bubble.  We sold our townhouse in late May, and moved into a one bedroom apartment in west San Jose.  Though we had to go through the inconvenience of storing our stuff, and moving, it was still a smart financial move.

Knowing we would be needing the cash we got from the sale of our home to purchase our next home, we placed the $80K we got after realtor fees, etc., in a Money Market account.  1031 exchange rules allow you to park your money up to 45 days before you have to identify the property (up to 3 total) you'll be trying to buy next.  You have up to 180 days to actually purchase the property.  So if you don't win a bid, you can keep going simply by identifying the next acquisition target property.

My ex-wife and I took a trip to So Cal, staying with her family, and shopped around for new homes.  In late July of 2005, we bought the home I'm (she's been long gone) currently still living in.  Now why was it important to have first sold our starter home before making an offer on our second home?  In a hot market, being a contingent buyer makes you very undesirable to home sellers.

1.  Too much risk is involved for the home seller.  The seller has to stress about selling their own home.  Why would they also want to stress about you, the buyer, selling your own home?

2.  Marketing restrictions.  When a seller accepts an offer, they have their realtor list the home as "pending" or "contingent."  Once this change is made, the home listing will no longer show up on many home search sites; this is bad because the seller won't be able to line up back-up buyers who can step up if things fall through.

But even in a regular market, sellers would rather go with non-contingent buyers to get their homes sold faster.  The money is there, and yours as a contingent buyer, isn't!  If you're going to go the route of being a contingent buyer, there are two things you can do to make your offer to the seller a little sweeter and to show you mean business.

1.  Remove the sale contingency on the earnest money deposit and extend your escrow.  Pro: You'll have more time to sell your property.  Con: You give up your earnest money to the seller if you don't sell your property within the new escrow timeframe.  So, to compensate for lost marketing time if you, the contingent buyer, aren't able to sell your house, the seller gets to keep your earnest deposit.

2.  Offer more money than the asking price.  Honestly, if you offer the asking price, and a non-contingent offer comes in also at the asking price, who's offer do you think the seller is going to accept?  Not yours!  Add an additional $2-5K to your offer in a regular market, and even more (talk to your realtor) in a hot market to get the seller to even mind you.

Yet another thing you can do is begin the selling process of your own home and get near the late stages of escrow.  Make sure your realtor communicates this to the selling agent.  The seller may be more willing to accept your offer knowing your process is almost complete.  It still doesn't hurt to sweeten the deal for them if you truly want the home you're after.  Ultimately, however, you are in the best position to make offers to a seller when you have the cash in hand.  So seriously consider renting an apartment before making offers for your step-up home.  You'll have fewer declined offers and emotional letdowns this way.  A little sacrifice goes a long way.

I hope this has helped you young couples out there.  Thanks for reading!  If you liked this post and want to automate getting more like them in your inbox, please subscribe to this blog by entering your email above or here:
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