How Do You Buy a House Before Selling One?

The COVID-19 pandemic turned Canada’s housing market on its head. Many had anticipated a significant crash in the early days of the public health crisis, but the opposite transpired, with a big change in consumer buying and selling patterns.

Many Canadian homeowners, eager to take advantage of enormous equity gains on their residential properties – and with remote work an HR-sanctioned option for accomplishing most day-to-day tasks – chose to sell and move elsewhere in search of a bigger place or a quieter way of life. The resulting increase in the demand for homes and a shortage of listings created strong seller’s markets across the country. With the home-buying process suddenly more challenging, many homeowners decided to play it safe by committing to buying a house before selling theirs. But how does buying a second home before selling the first actually work?

How to Buy a House Before Selling Yours

Can you buy a home before selling yours in a timely manner, or do you risk paying for two mortgages at once? There are definitely risks as well as pros and cons involved with buying a house before selling, so let’s examine those, as well as the pros and cons of the reverse situation, so you have all the information you need before deciding what to do next.

The Pros & Cons of Buying a House Before Selling

Pros:

Provided you have the downpayment ready and the funds needed to close the deal, opting to purchase a new home before selling your current one creates a more relaxed move-in timetable and gives you the opportunity to do pre-move-in cleaning, repairs, renovations, appliance switchouts, painting and decorating.

Buying first allows you to wait for optimal market conditions to sell your current home and maximize your sale price. However, buying first will mean you risk carrying two mortgages simultaneously, increasing your financial strain while you wait for those conditions to materialize.

You’ll also be on the hook for double the monthly utilities, property taxes, maintenance, and other expenses if you own two homes simultaneously. If you wait too long to sell your old home, these expenses could end up eating away at your profit.

Cons:

Selling a home first provides funds that can be used for a down payment and other costs associated with buying a home. By buying first, you won’t have this financial windfall.

You run the risk of carrying two mortgages if your old home takes a while to sell or if you can’t coordinate the closing date of your newly purchased house with the closing date for the sale of your old house.

If you get nervous about being able to coordinate closings, you might be tempted to “price or negotiate to sell,” resulting in money being left on the table versus in your pocket.

If your old home sells for less than anticipated, you could come up short concerning the monies needed for your new purchase. If it sells for more than you expected, you might regret missing out on buying a new house that was a better fit, albeit more expensive.

Bridge financing is expensive and can typically only be obtained if you have a firm offer on both your purchase and sale.

Four Tips for Making Buying a House Before Selling Smooth Sailing

Here are four tips designed to help make buying a second home before selling the first as smooth a process as possible:

Enlist the Services of an Experienced Real Estate Professional

Working with an experienced real estate agent will help you navigate all the moving parts involved in buying a house before selling and keep each deal on track and moving forward. This is especially important if you’re trying to coordinate two closing dates for both buying and selling parties.

Ask your agent to show you market data for recent home sales in your area and the number of listings available in the area you want to move to in order to help you understand whether you have a real chance of coordinating closing dates or if your current house is likely to sell before you can buy.

Your real estate agent will also discuss:

Your personal financial situation (home equity, down payment, whether you should apply for a line of credit if you don’t already have one, and other financial matters).

Timeline (see below)

Repairs, upgrades and staging that might be required to get the best price on your current home.

Get Pre-Approved for a Mortgage

You’ll want to do this early on so you can start house-hunting as soon as possible. When reviewing possible mortgage lenders, ask if they offer bridge loans and their rate, in case you need one.

If you’re unable to coordinate closing times, once you move into your new home, explore renting out your old house instead of selling it for less. While you’ll be taxed on the rental income when year-end comes around, you’ll also be able to deduct costs for utilities, etc., and you’ll be less tempted to take a significant hit on price just to get the deal done.

Understand Your Timeline

The timing involved in buying a second home before selling the first can be the most challenging part of a simultaneous buying-and-selling process.

Typical steps include:

Preparing Your Current Home for Sale: Making your home as attractive as possible to prospective buyers is critical, so staging your home might be necessary.

Shopping for Your New Abode: The next step is shopping for a new home, be it a single-family detached, a condominium suite or one of the many other options. Consider adding a condition of sale into the purchase agreement of your new home, so if you haven’t sold your old one, you can back out of the new purchase without losing your deposit or incurring other penalties.

Have a Real Estate Lawyer Prepare/or Review All Contracts: Always ensure a real estate lawyer creates/or reviews the contracts involved in your various transactions.

Timing Your Closings: Depending on your agreement of purchase and sale, the length of your closings could range from a few weeks to a few months. Make sure you build in enough time for both you and the buyer of your old home to conduct your home inspections and appraisals and complete the myriad of tasks involved with buying and selling a home.

Closing the Deals

In a best-case scenario, on closing day, your attorney will organize all financials, pay off the mortgage and disburse moneys for real estate commissions, lawyers, etc., using the money paid by the buyer of your old home. Then, the entire remainder of the profit from that sale, a designated portion of it or a combination of both the profit and monies from the new mortgage will be sent to the lawyer representing the seller of the new home you’re purchasing. This results in everyone involved in the transaction getting paid – usually on the same day – allowing both deals to close simultaneously.

Here’s how it works:

Suppose your old home sells for $500,000, the remaining mortgage amount on it is $300,000, and the new house you’re purchasing is $600,000.

The real estate lawyer receives the $500,000 from the buyers who purchase your old home. He then makes the necessary payments to all parties, including himself.

Let’s say you are left with $150,000 profit after costs, fees and disbursements. Depending on your direction, your attorney will then transfer all or some of the $150,000 to the lawyer representing the property you are buying, and your new mortgage will cover whatever final amount is owed.

Although complex, it’s not uncommon for all these transactions to be completed on the same day.

If the closing dates do not align, your lending institution can extend you a short-term “bridge loan” at a high interest rate. This is a valuable tool if the deal on the home you are selling closes after the deal on the home you are purchasing.

How Does the Market Factor into Buying a Second Home Before Selling the First?

In a competitive market, you can use the equity in your current home to secure bridge financing that will allow you to make a down payment on your new home. When you sell your old house, you can use the proceeds to pay off the bridge loan.

Can You Buy a Home Before Selling Yours?

Even the most straightforward real estate processes can be confusing for most. Hopefully, you now understand the basics about how to buy a house before selling yours, and because you will soon have two real estate transactions under your belt, you’re likely more knowledgeable than many on the subject. Of course, one of your most-valuable resources in the home-buying and selling process will be a professional real estate agent, ready to guide you through the nuances of your particular transaction.