Homeowners in a seller’s market face a conundrum: on the one hand, their home is worth more than it has ever been before, but on the other hand, if they decide to sell it and buy a new one, they’re going to face stiff competition, high prices and a market where homes are selling in record time.
Fortunately, with the right strategy, it’s possible to take advantage of sky-high home values and find a home that’s a better fit for you and your family. Here are a few tips from Redfin real estate agents on how to navigate this tricky situation.
Step 1: Start Looking for Your New Home First
In a neighborhood with high demand and a lot of motivated buyers, homes can sell within a month. You don’t want to get stuck in a position where you are making a rushed decision on a home because your current one is about to sell.
“Homeowners need to take into account what they’ll get for their home when they sell it, but they also need to take into account what they’re giving up. I always advise potential sellers to look at the homes on the market, and if they don’t see anything they like, I recommend that they wait to list until they do,” said Rebecca Walter, a Redfin real estate agent in Portland. “That’s one of the things I love about being a Redfin agent; since we’re paid a salary, I can have an honest conversation with clients about whether or not it’s in their best interest to sell their home at that time, without worrying about losing my commission that month.”
Step 2: Work with Your Agent to Plan Your Next Move
Option 1: Buy BEFORE You Sell
To compete against other potential buyers, you want to put the least amount of contingencies on your offer as possible. In a seller’s market, Redfin agents don’t recommend that you put an offer on a home that is contingent on the sale of your current one, because it will turn sellers off. Instead, you should look into gap financing.
“Talk to a lender about getting a Home Equity Line of Credit (HELOC) or a Bridge Loan, which will give you the funds you’ll need for the down payment on your next home before you sell your current one,” said Ruby Manuel, a Redfin real estate agent in Seattle. “However, keep in mind that just because you have home equity, doesn’t mean you’ll necessarily qualify for these loans. Lenders will take into consideration your current mortgage, how much you want to borrow with the HELOC or Bridge Loan, and the new mortgage you’ll need for your next home. It’s essentially three different loans that you need to qualify for.”
Option 2: Sell First, But Work Out a Deal with the Buyer
When you own a home in a seller’s market, you have the upper hand. Buyers are often willing to offer incentives to close the deal, and they’re flexible on the timing. That means you can ask for more time if you need it.
“To give yourself more time to find a home to buy, you can request a rent-back agreement from the person making an offer on your home,” said Manuel. “With a rent-back agreement, the buyer will purchase your home, and then you rent it from them for an agreed upon period of time. That way you don’t have to move as soon as they take ownership.”
Option 3: Make a Contingent Offer, But Make it Strong
If you don’t qualify for a HELOC or bridge loan, you can make an offer on a home that is contingent on selling your current one, but it needs to be as strong as possible.
“If you HAVE to make a contingent offer, then offer a higher price than what the home is listed for. You could also offer to pay for repairs, and put down more earnest money. In addition, you could waive the inspection and appraisal contingency. Be sure to discuss the options with your agent to come up with as strong of an offer as possible,” said Walter.
Option 4: Turn Your Home Into an Investment Property
In hot real estate markets, it’s possible to find renters who will pay more than what you owe each month on your mortgage. But you’ll need to talk to a lender first to make sure renting your home is an option; if the home isn’t completely paid off and you need another mortgage to purchase your next home, it means you’ll be taking on two loans at once.
“If you’re in a situation where you can rent out your existing home, and it’s profitable, that’s the dream scenario,” said Arto Poladian, a Redfin real estate agent in Los Angeles. “You can continue to build equity in your home while your mortgage is being paid by someone else. But there’s always a trade-off. You can be suddenly stuck with having to pay large expenses with repairs or problems at the property. Even if you use a property management company, they’ll take a cut. It can be very rewarding, but also very challenging.”
Option 5: Don’t Buy… for Now
If you’re open to moving into a rental, then you can sell your current home and save the money for when the time is right to buy, taking the pressure off. Sometimes the inconvenience of moving twice in a short period of time can be worth it, if you can find a rental in your price range.
“Some of my clients have no problem finding a rental that meets their needs, but others with specific requirements – like staying within a certain school district – can find it challenging,” said Poladian. “If you’re open to renting, I suggest that you start looking for rentals once you have an offer on your home and any contingencies on the offer are cleared, which means the deal is most likely going to go through. If you don’t want to commit to a one-year lease, you should explore short-term corporate housing-style apartments that offer three to six month stays.”
The Good News
Even though the market is competitive, Redfin agents report that there are fewer all-cash offers being made by foreign investors this year. And even when there are all-cash offers on the table, they haven’t necessarily been winning. “I’ve been involved in deals where the seller rejects an all-cash offer and chooses a buyer based on the letter they wrote with the offer,” said Manuel. “In one example, a cover letter was worth $10,000; the seller appreciated that the buyer wanted to come in and start a family there.”
If you’re thinking about buying or selling soon and would like to discuss your options with a Redfin agent, you can get in touch with us via the form below.