Selling a home is almost always a stressful experience. From cleaning, de-cluttering and staging to negotiating with potential buyers about who gets to keep the curtains in the living room, the process is not a fun one. Not to mention having strangers wander through your space!
Additionally, over the last 13 years that I have worked in financial services, I have consistently seen home sellers make a choice that makes the entire process significantly more stressful than it needs to be. Almost everyone signs an agreement to purchase a home before listing their house for sale. I am here today to make the case that this is backwards and undermines your ability to negotiate!
There are several reasons why you should prefer a signed sale agreement in place before you start making offers:
Most of the time, the biggest factor determining the price that you will pay for your next home is the price that you sell your existing home for. Having a signed sale agreement in place means that you know exactly what you have coming in and when the funds will arrive. Knowing what you have in the bank allows you to budget accurately for your next home.
Selling after buying increases risk. If the market in your area slows and the offers come in below your listing price, you may be forced to stretch your budget by taking on a bigger mortgage or making up the difference from your own cash/investments.
Selling your home prior to purchasing gives you greater ability to negotiate your sale price.
Imagine this: you signed to purchase your dream home after running your numbers. As part of this process, you assumed your existing home will sell at a certain price by a certain date. What happens if those offers aren’t coming in? Suddenly, you have found yourself in a race against time to try and find someone willing to purchase your home, and the lowball offer that comes in starts to look attractive.
By waiting until you have sold before making an offer, you have avoided painting yourself into a corner. You can walk away from the lowball offer and wait for something better. When it comes to negotiating, whoever needs the deal less is the one with all the power!
This will also be advantageous when negotiating your buy transaction, as you won’t have to worry about including a condition of selling your own home which may make your offer less attractive.
Being unable to sell your current home can lead to one of two situations:
Walking away from a purchase agreement can result in losing your initial deposit and being sued for breaching the purchase agreement contract.
Having to carry two houses will put a significant dent in your cashflow, and you will need to find cash from other sources to replace the funds that were supposed to be coming from the sale of your home. If you are thinking of renting your old home, make sure you understand the tax implications we have described here.
This is the one obvious risk to signing a sale agreement for your current home before making your next home purchase. Perhaps your vision of the “perfect home” is one that has unique features that may not come around very often. Isn’t there a risk that you won’t have a place to live if you sell your existing home and can’t find a new place that meets your needs? This could be a possibility, but there are some strategies that you can consider to mitigate this risk:
This will give you more time and less stress while you search for the next house to purchase. You will have more flexibility with closing dates and greater leverage when negotiating the purchase price. While this will come at a cost, being willing to rent for the short term increases your runway by removing the pressure of having to buy a house that may not be totally perfect just because you agreed to sell your existing house. You can be patient as you search for your next home, make sure that you find a house that is just right, and negotiate from a place of power.
Be familiar with the real estate market in the neighborhood that you want to live in next. Check listings in the area and confirm the sale prices of the most recent real estate transactions in the area. This will help you create a realistic budget for your purchase price, which can be adjusted if needed, once you have a firm offer in place for your existing house. Just make sure you don’t fall in love with a house before you are actually ready to make an offer! If you are familiar with the listings in the neighborhood and the recent sale prices, it greatly reduces the chances of not being able to find a home to purchase after you have agreed to sell your existing house.
If your current home isn’t meeting your needs and you are looking to change, I encourage you to get your existing home ready to sell first. Get your house listed on the market and wait for the offers to start coming in before you sign on the dotted line to buy the next home. This will save you stress, improve your negotiation power, and potentially help you save a lot of money as well!
