How to “trade up” in a sellers market

Current house isn’t quite right? Can’t bear a remodel? Here are four ways to sequence a sale and purchase in this sellers market.

A number of our clients are “trading up” in this sellers market. Many reasons: a view, an extra bedroom, a more walkable neighborhood, a yard for the dog, etc. Others are motivated by appreciating home values—fueled by tech companies that are expanding operations to Seattle where the lower cost of living amounts to a substantial pay raise for workers. Plus, interest rates are going up (possibly faster than expected), so buying now means a larger percentage of their mortgage payment goes towards the house instead of financing the debt.

But “trading up” in a sellers market can be tricky. Sure, you have the advantage when you sell, but then it’s your turn to be the buyer…

Understanding the context

Each client brings their own attitudes and needs to the table. While every client has unique needs that make our strategy more nuanced, our counsel usually starts with these three factors:

  1. Timing. What deadlines are in play for you personally? (For example, “We need to be in the house before the baby is born.”)
  2. Financing. Can you afford to buy before you sell? If so, you are obviously in a stronger position with tight inventory, but it is not a deal breaker.
  3. Market Awareness. How familiar are you with the market? We have clients who are looking for the “diamonds in the rough.” Unfortunately due to low inventory “deals” are scarce. (They for sure require outside the box creativity to identify them.) Your motivation and familiarity with these dynamics will influence our advice.

Four paths

Once we understand your parameters as a buyer, four options emerge:

1. Buy First. When our clients can buy before selling, they have the most flexibility to find the right home before they sell. If this is an option, it is ideal for many reasons. For clients who can temporarily afford two mortgages but get stuck on the down payment, options exist such as:

  • Home equity line of credit (HELOC) to tap equity in their current home, and
  • Short-term loan borrowed against retirement/investments to be repaid with proceeds from the home sale.

2. Buy Contingent. In this scenario, a buyer proposes to purchase a home on the condition that they sell their home in a certain amount of time. Although rarely used in a sellers market, it does happen with unique properties or properties that have been on the market for a long time. When we represent contingent buyers we make the strongest possible case to the seller that the contingency is no problem—that the buyer’s home will sell quickly and easily. Sellers sometimes agree, though most prefer the certainty of fewer contingencies. To bolster confidence in our offer, we provide:

  • Comprehensive plans for prep, staging, and marketing;
  • Detailed market analysis to show that our pricing is realistic, and
  • Highlights from our track record to lend credibility to our judgments.

3. Buy First, Sell Without Contingency. Sometimes lightning strikes and your dream home unexpectedly comes on the market. In this scenario we persuade lenders and sellers that the buyer’s home will sell in short order. We structure the purchase offer with a longer close. Then we quickly sell and arrange simultaneous closing. This strategy entails some risk because the buyer’s options are limited if their home doesn’t sell in time to close on their purchase. The keys are realism regarding the home’s value and decisiveness. We frequently use this approach in this market and have amassed a wealth of experience working under these constraints.

4. Sell First. Some clients opt to sell first to know exactly how much they can afford, to increase their financial leverage to make the most competitive offer. The downside of selling first appears if you can’t find the “right house” to buy. But if you are familiar with this market, it usually works out. We negotiate a longer close on the sale often with a rent back arrangement (to minimize the chance of moving twice). If the right house does not come along, we have lots of experience helping clients navigate that transition.

Parting thoughts

If we are indeed on the trajectory of San Francisco, you might find yourself saying, “Wow, I wish we had made that move back in 2017.” If you are having any inklings of moving, we should talk. You might be surprised what small projects you might want to tackle now so you are ready if McDreamy (house) comes along. You might be even more surprised by what does not need to be done!

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