The Move-Up Juggling Act

by Broderick Perkins DeadlineNews.Com Simultaneously buying one home and selling another is a tough enough task. It also can be a deal killer in a hot housing market if you include in your offer to buy a new home, a contingency to sell your existing home. Sellers will simply take their pick of offers not burdened by the contingency. On the other hand, if you sell your existing home first without signing for a new one, you could wind up homeless or spending exorbitant amounts on hotel rooms or other high-priced temporary quarters. You do have some alternatives. The best-case move-up scenario is for those who can afford to own two homes, if only temporarily. If you can, you'll be able to put market cycles to work reaping some key financial benefits. Buy-low, sell-high Most markets have up and down seasonal cycles when buyers and inventories tend to push prices up or down. In regions with traditional weather seasons, buyers come out of hibernation in the spring. If they have kids they hope to settle back in before school starts in the fall. That general trend pushes prices up during the spring and summer months and down during the fall and winter. Buyers get the most for their money when the market is glazed in a sugar-plum haze. At that time, there are fewer competing buyers and sellers are more motivated to sell. In recent years, mortgage rates also have cooperated trending lower during the cooler months. That effectively stretches your buying power. So, buy when it's cool and hang on to what you've got until the spring or summer and you'll benefit financially from the best of both worlds. Rent back For those who can't afford to own two homes, a more common move-up strategy is what's called a "rent-back". In a rent-back, the seller sells the home, but stays put paying rent to the new buyer. The rent is typically the same as the new buyer's mortgage payment, including principle, interest, taxes and insurance. The deal is useful when the seller is waiting for a newly built home or is about to close or enter escrow on another home. Rent backs can be as long as 60, 90 days or longer -- but not much -- whatever is agreeable to both parties. The agreements, which can be an addendum to the sales contract, are written like month-to-month rental contracts with a 30-day or shorter notice of cancellation, should the move-up buyer's new home become available sooner than expected. In hot markets, where inventories are low, or during peak buying periods, sellers will have fewer problems finding buyers willing to put up with a move-in delay, especially when the seller is effectively paying the mortgage during the rent-back period. The rent-back also eliminates the need for a sale contingency, which puts the move-up seller's offer to buy at the top of the list. Chances are, the sale leg of the transaction won't be a problem in a hot market, but the key to making the rent-back work, of course, is finding a new home to buy within the rent-back period. Plan B A back-up and much riskier strategy is what's called a "bridge" or "swing" loan. Using your existing home as collateral, you take out a bridge loan for three months to five years to use as the down payment on your new home. Once you've purchased your new home, you sell the old one and pay off the mortgage and the bridge loan. Such a loan is less risky in a fast appreciating market where appreciation can cover the extra payment on the old home. Even in the best market, however, swing loans can be expensive, last ditch propositions that are fraught with caveats. Typically private money from investors, bridge loans can cost 5 to 10 percentage points more than a typical equity loan. Your home must be lien free. Excellent credit is mandatory, as are good income-to-debt ratios. It may be a better idea to get a cash out refinance, second mortgage or equity loan to use as a bridge loan. Traditional financing is cheaper and less risky, but that could preclude you from landing another mortgage for a new home should the lender consider you stretched too thin. A combination of the strategies mentioned above is another alternative, based on your tolerance for risk. Broderick Perkins, is executive editor of San Jose, CA-based DeadlineNews.Com, an editorial content and consulting firm. Perkins has been a consumer and real estate journalist for more than 25 years.