Have you ever found yourself staring at your dream home but feel overwhelmed by the effort it would take to get your current home ready to put on the market? You may even feel defeated as you imagine that dream home being snatched up quickly by someone else before you can put in an offer.
Pulling up stakes and moving from one house to another is one of life’s most stressful experiences. Buying a new house while trying to sell your existing home can be incredibly challenging. It requires careful planning, financial considerations, and creative solutions to navigate the transition smoothly. Let’s explore various strategies and options that can help you successfully manage the dual process of buying and selling a home.
Contingent Offer / Longer Closing Timeframe
The most common method for making an offer before selling your current home is a contingent offer, meaning the sale will only go through if your current home sells first. While this can protect you, it’s common for sellers to reject this type of offer if they believe there may be another buyer without any restrictions and with a faster timeline for closing. That said, a contingent offer can still be valuable in a less competitive real estate market.
One of the keys to making this approach successful is to enlist a real estate agent to give an honest opinion of your current home’s condition and appeal. Having the current home in top condition in the eyes of a prospective buyer will help make the contingent sale process more likely to succeed.
Another option is to ask for a longer-than-normal closing date, which gives you more time to sell your house. Some sellers might reject this offer if they want to close quickly, but it might actually be attractive to other sellers shopping for a new home themselves or those who want to finish the school year before moving.
If you have a non-retirement/brokerage account, you could potentially avoid using a loan and simply sell a portion of your investments to generate some or all of the necessary funds for your new home purchase. Bonds are generally a great asset class to sell as the capital gains tend to be lower, resulting in a smaller tax bill. Moreover, bonds typically have a lower expected return, which, combined with lower tax ramifications, makes them a great candidate to sell. Stocks can also be selectively sold based on the unrealized gains. Using this “bottom-up” approach to selling securities with the least amount of unrealized gains first is a tax-savvy method to use your own money and keep the tax bill lower.
If your goal is to buy the new house first and then sell your current one, this can be an excellent method to avoid a contingent sale and make an “all cash” offer. After settling into the new home, the old house can be sold, and proceeds from the sale are then deposited right back into the original investment account. Part of the appeal of this simple method is that you are essentially borrowing from yourself. If this approach sounds appealing, contact your advisor to discuss before selling any investments.
A bridge loan is a short-term loan that bridges the gap between buying a home and selling your current property. It provides the necessary funds to cover the down payment and closing costs on the new home, with the expectation that the loan will be repaid once the old home is sold.
While bridge loans can be convenient and helpful in certain situations, there are some drawbacks to be aware of:
- Fees: Application fees, origination fees, and processing fees can add up and increase the overall cost of the loan.
- Higher Interest Rate: Compared to traditional mortgage loans, a higher rate is charged due to the short-term nature of the loan and the increased risk to the lender.
Despite these drawbacks, bridge loans can still be worth considering if you have a clear, short timeframe. If you are confident you can sell your current property quickly and repay the loan within a short period, the higher interest rate may not significantly impact the overall cost. However, it’s essential to carefully assess your financial situation before opting for a bridge loan.
Not long ago, I worked with a family who wanted to move into a Continuing Care Retirement Community (CCRC), which required a lump-sum entrance fee. They were given short notice that a unit was available and needed to act quickly. However, they had a lot of downsizing to do after spending 40 years in the same home and needed the equity from their home for the entrance fee.
After carefully examining their financial plan, we decided they should list their current home for sale with the requirement that the purchase and sale agreement contain a leaseback provision with the new owners. The couple was able to sell their home, obtain the funds needed for the entrance fee, and rent back their home from the new owners. This gave them the time and freedom to sell and donate their excess furniture, cars, and belongings before they moved into the new retirement community.
Borrowing on Margin / Utilizing a Pledged Asset Line of Credit
Another borrowing tool is a margin or a pledged asset line of credit. This strategy allows you to access funds quickly without selling your investments, using your investment portfolio as collateral for the loan. However, it’s important to be cautious when using a securities-based loan, as they involve variable interest charges and risks if the markets experience a downturn.
I recently worked with a family who had been dreaming of a small vacation home out on the Puget Sound in Washington. Rather than taking out a mortgage, which at the time had a high interest rate, we explored using a pledged asset line through Charles Schwab. With this approach, we moved about half of their investment portfolio into a pledged account. We obtained a line of credit with an interest rate a good deal lower than banks were offering to finance the vacation home. Over two years, the family gradually paid down the line of credit while their investments remained fully invested and growing. They also avoided any capital gains as they were not required to sell any of their investments.
Again, there could be some drawbacks, so it’s essential to be cautious when considering various financial tools. While the line of credit is collateralized against the investments, the interest rate on the credit line floats up and down. If the margined or pledged assets were to experience a sharp decline, this could cause stress and potentially even a margin call, which would require additional cash or securities to bring the account back up to the level known as the “maintenance margin.”
Home Equity Line of Credit
Adding a home equity line of credit (HELOC) to your primary home before listing it for sale can provide a safety net during the buying process. A HELOC allows you to tap into your home’s equity, providing a line of credit for the down payment and other expenses related to purchasing your new home. Once your current home sells, you can use the proceeds to pay off the HELOC.
This summer, a retired family reached out to me about selling their large house here in Washington to downsize into a smaller house. They wanted to avoid the stress of a contingent sale and also wanted to slowly move into the new house with time to thoughtfully reduce their possessions. Most of their investment assets were in retirement accounts and, as such, other lending tools were not an option. We reached out to a local bank to obtain a HELOC on their current home. The HELOC was approved for $750,000, which provided enough cash to purchase the smaller house, and they had the flexibility to use the HELOC for a cash offer that was even more competitive at the time. After moving in and downsizing over the next few months, they were able to put their old house on the market and pay off the HELOC with the proceeds. Though the interest rate was variable, it was an interest-only loan, and since they had the HELOC for less than six months, the overall cost was modest.
Renting Out Your Current Home
Sometimes when we are helping families purchase a new house, instead of selling their existing home, they decide to convert it into a rental house. This can make great sense in certain circumstances, particularly if the rental market is thin and the prior home could be leased at a healthy rate. If you have the means and desire, renting out your current home can be an excellent option. By becoming a landlord, you can generate rental income to offset the mortgage payments on the new house. However, be sure to familiarize yourself with local rental laws, tenant screening processes, and the responsibilities of being a landlord.
Using Your Individual Retirement Account and the 60-Day Rollover Provision
The 60-day rollover provision for an Individual Retirement Account (IRA) is a rule that allows you to withdraw money from your IRA without incurring any tax or penalty if the funds are reinvested in the same or similar account within 60 days. This provision is governed by the IRS (Internal Revenue Service) and has specific requirements and limitations.
The primary purpose of the 60-day rollover provision is to provide individuals with a short-term option to move funds between retirement accounts without facing immediate tax consequences. However, this provision is generally not recommended for the purpose of buying a home, as it comes with certain risks and limitations that can lead to significant tax implications and potential penalties if not executed properly.
Here are some important points to consider when using the 60-day rollover provision to buy a home:
- 60-Day Limit: You must complete the rollover within 60 calendar days from the date you receive the distribution from your IRA. If you fail to meet this deadline, the amount withdrawn may be treated as a taxable distribution, subject to ordinary income tax and possibly early withdrawal penalties if you are not yet 59½ years old.
- One-Year Rule: Under IRS rules, you can only perform a 60-day rollover once every 12 months, meaning you cannot do multiple 60-day rollovers in a year even if you have multiple IRAs.
- Withholding Taxes: If you request a distribution from your IRA, the IRA custodian may require you to withhold money for federal taxes. If you choose the 60-day rollover option, you’ll need to replace the full amount, including the funds withheld for taxes within the 60-day window.
Some years ago, I helped a family use money from their IRAs to buy their next house. Both spouses had substantial IRA balances of roughly equal amounts, which helped ease some of the time constraints. We essentially had 120 days to sell their old home and replace the IRA funds, as the first spouse could use their IRA funds to purchase the home, and if their old home didn’t sell within 60 days, the second spouse could take funds from their IRA to replace the funds taken from the first spouse’s IRA. It was a bit tricky to manage but worthwhile in this situation.
Given the complexities and potential risks associated with the 60-day rollover provision for buying a home, it’s generally advisable to consult with a financial advisor or tax professional who can help you understand the tax implications and explore more suitable options for funding your home purchase.
Navigating the process of buying a new house while trying to sell your current home requires creativity, careful financial planning, and strategic decision-making. Whether you opt for a contingent offer, a longer closing timeframe, decide to sell investments, utilize a bridge loan, sell your home with a leaseback agreement, use a margin or pledged asset line of credit, choose to keep your home as a rental, or use the 60-day rollover provision from your IRA, there are various solutions available to help you manage the transition successfully. Ultimately, having a great team of professionals around you can be advantageous to explore which tool is best for your situation. If we can help you or your family explore these options, please reach out to us. We are here to support you and those you care about.
Disclosure: All opinions expressed in this article are for general informational purposes and constitute the judgment of the author(s) as of the date of the report. These opinions are subject to change without notice and are not intended to provide specific advice or recommendations for any individual or on any specific security. The material has been gathered from sources believed to be reliable, however Merriman cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. Merriman does not provide tax, legal or accounting advice, and nothing contained in these materials should be taken as such.
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Aaron’s passion for finance developed by age 12, and he worked tirelessly to make his goal of becoming a stockbroker a reality before joining Merriman nearly two decades ago. What he appreciates most about working here is the ability to build close-knit and collaborative relationships both with his clients and his coworkers. He feels his primary responsibility is to protect and defend the families he takes care of from anything life might throw in their way, making sure they are able to live fully.
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