For many, it's an enviable situation: You own a house and have the ability to buy a new home before selling your current place.
But even if you have the cash — or can qualify for a second mortgage — you'll want to consider a few pros and cons before making the offer. One big consideration: In a seller's market where houses are going for (or even above) list price, making an offer that’s contingent on the sale of your current home can make it difficult to compete against first-time buyers.
Here are the four crucial questions to ask yourself.
ARE THE BENEFITS WORTH IT?
First, consider what you have to gain. There are several advantages to buying a second home before selling your current one:
- You can do remodeling work before you move in. Holding onto your current home gives you a place to live while you’re making renovations on your new one.
- You won’t have to move twice. That can happen when you sell a current home before buying a new one, forcing you to move into a hotel room or apartment and put your belongings in storage.
- You can compete against other buyers. Since you don’t have any contingencies on the sale of your existing home, you could have a leg up in a seller’s market, when homes receive multiple offers.
CAN I AFFORD TO OWN TWO HOMES?
Some things can stymie this plan, like if you need a mortgage to buy your next house but your lender requires you to pay off your original mortgage first.
If you qualify for a second mortgage, you'll still need to determine whether you feel comfortable shouldering two mortgages at the same time. Experts generally recommend your total house payments (including your mortgage, maintenance costs, taxes, etc.) shouldn’t exceed 28 percent of your gross monthly income. This number is referred to as your housing expense ratio, and it stays the same whether you have one property or several. So, for instance, if your monthly pre-tax income is $5,000, you ideally shouldn't pay more than $1,400 a month on your combined mortgage payments (and that still doesn’t cover other property-owning expenses).
HOW QUICKLY CAN I EXPECT TO SELL MY CURRENT HOME?
If you plan to buy a house before selling yours, look at roughly how long it would take to find a buyer. In a slow market, it could take more time to sell your first house than expected. Consult a local real estate agent who can provide you with data on how quickly other properties are selling in your neighborhood. If homes are selling, on average, within the first 30 days of being on the market, you may be in a pretty good position to find a buyer quickly if you list your home at market value. (A real estate agent will help you determine what that number is.)
Granted, how quickly you can expect to sell your home depends on where you live — and specifically, the supply of homes for sales in that area. In April, the three metro areas with the lowest Days on Market were San Francisco at 20, Seattle at 28, and Denver at 30 days, according to the monthly RE/MAX National Housing Report. You can use Realtor.com's trends tool to find out the median Days on Market in your area.
The condition of your home also matters. Generally, homes in good shape or move-in ready sell much faster than homes that need a lot of repairs or renovations.
COULD I RENT OUT MY CURRENT HOME IF I CAN'T FIND A BUYER?
One potential fallback plan, in the event you have trouble selling your old home after buying a new one, is to rent it out. This is a big decision.
First, ask yourself whether you’re willing to take on the responsibilities of becoming a landlord. As a landlord, you'll be on call when a pipe bursts or a toilet breaks. And you’ll have to familiarize yourself with tenant laws in your state and municipality.
Finally, consider your plans for the long-term. If you’re planning to have your house on the market for sale while a renter is occupying it, you’ll need to find a tenant that’s willing to sign a temporary or short-term lease to ensure they’ll leave when a buyer bites.