Pros and Cons of Buying a House Before Selling

Even though the housing market has slowed during the global COVID-19 pandemic, the industry has adapted to the challenges and is taking advantage of online tools to accommodate people who are still interested in buying or selling. Buyers who already own a home will need to decide whether to buy a new house before selling the old one, or vice versa.

Here’s what you need to know about how to buy a house while selling your own in Canada.

Key Highlights

• Deciding whether to buy a new home before selling your old one or versa can be a challenging decision in the real estate market.
• Buying a home before selling allows you to have a place to go and avoid the expenses of temporary housing.
• Selling your home before buying a new one gives you a set budget for your new home and reduces the risk of carrying two mortgages.
• Understanding market conditions, such as whether it’s a buyer market or a seller’s market, can greatly your decision.
• Financial considerations, such as mortgage payments and home equity, play a significant role in determining whether to buy first or sell first.
• It’s important to assess your financial stability and consider the risks of carrying two mortgages before making a move.

Understanding the Dilemma

When it comes to buying a new home and selling your current one, timing is critical. Ideally, you would be able to sell your old home and buy a new one at the same time. However, in reality, the timing doesn’t always align perfectly. You may find yourself in a situation where you need to decide whether to buy a new home before selling your current one or vice versa. This dilemma arises from various factors, including the current state of the real estate market and your own financial stability.

The common scenario and initial considerations

A common scenario is that you currently own a home and wish to purchase a new one. Before making a decision, there are several initial considerations to keep in mind. Firstly, you need to assess the value of your existing home and determine how much equity you have. This will affect your financial position when it comes to buying a new property. Additionally, it’s important to consult with a trusted real estate agent who can provide guidance and assist you throughout the buying and selling process. They can help you understand the current market conditions and make an informed decision based on your specific situation.

Setting the stage: Main advantages and disadvantages

Before diving deeper into the pros and cons of buying first or selling first, let’s set the stage by discussing the main advantages and disadvantages of each scenario.

Advantages of buying a home before selling:

• You have a place to go, avoiding the hassle and expenses of temporary housing.
• You can avoid the costs of storing furniture and moving multiple times.
• You can move quickly if you find a home you love in a competitive market.
• You can negotiate confidently, as you are not under pressure to sell your current home quickly.

Disadvantages of buying a home before selling:

• Financing can be a challenge, as you may need to carry two mortgages.
• There is a risk of not being able to sell your current home quickly and being stuck with two properties.
• Sellers may be skeptical about your ability to afford a new home without selling your current one.
• Carrying two mortgages can put a strain on your finances and increase your monthly expenses.

Financial Considerations

When deciding whether to buy a new home before selling your old one or vice versa, financial considerations play a crucial role. It’s important to assess your financial stability and understand the potential risks involved. Consider the following financial factors:

• Mortgage Payments: Can you afford to carry two mortgages at the same time?
• Home’s Value: Do you have enough equity in your current home to use towards a down payment on a new home?
• Financial Risk: Are you comfortable taking on the financial risk of owning two properties simultaneously?
• Home Equity Line of Credit: Can you qualify for a home equity line of credit to bridge the gap between buying and selling?

Assessing your financial stability before making a move

Before deciding whether to buy a new home before selling your old one or vice versa, it’s crucial to assess your financial stability. Start by reviewing your credit score and ensuring it is in good standing. A higher credit score will make it easier to obtain a mortgage and secure favorable loan terms. Additionally, consider your overall financial stability, including your income, debt-to-income ratio, and savings. This will help determine if you have the financial resources to carry two mortgages or if it would be more prudent to sell your current home first. Evaluate your home equity and determine if it will provide enough funds for a down payment on a new home. If needed, explore the option of a home equity line of credit to bridge the gap between buying and selling.

The risks of carrying two mortgages

Carrying two mortgages can be a significant financial risk. While it may seem advantageous to buy a new home before selling your old one, you need to carefully consider the potential risks involved.

One risk is the financial burden of having to make mortgage payments on both properties. This can put a strain on your monthly budget and increase your overall debt. Additionally, if your old home takes longer to sell than anticipated, you could find yourself facing increased financial pressure and possibly even foreclosure.

Moreover, there is a risk of not being able to sell your old home for the desired price, which could result in a loss of equity. It’s essential to carefully evaluate your financial situation and assess whether you can comfortably handle the financial obligations of owning two properties simultaneously.

Impact on Mortgage Approval

Deciding whether to buy a new home before selling your old one or vice versa can also have an impact on mortgage approval. Lenders consider various factors when approving a mortgage, and your decision can affect their assessment. Here’s how it can impact your mortgage approval:

• New Mortgage: If you choose to buy a new home before selling your old one, you’ll need to qualify for a new mortgage in addition to carrying your existing mortgage. Lenders will carefully evaluate your financial stability and debt-to-income ratio to ensure you can handle the financial obligations.
• Credit Score: Your credit score plays a crucial role in mortgage approval. Carrying two mortgages can increase your debt load and potentially impact your credit score if you’re unable to make timely payments.
• Home Loan: If you’re carrying two mortgages, it may be more challenging to qualify for a home loan due to the increased financial risk and debt load.

How buying first affects mortgage approval and financing

Buying a new home before selling your old one can have implications for mortgage approval and financing. Lenders assess various factors when approving a mortgage, and your decision to buy first can impact their evaluation.

Firstly, carrying two mortgages increases your debt load and may affect your debt-to-income ratio. Lenders consider this ratio to determine if you can comfortably manage your mortgage payments along with other monthly obligations.

Additionally, buying a new home before selling can put a strain on your credit score. Missing or making late payments on two mortgages can negatively impact your credit score, potentially affecting your ability to secure favorable loan terms.

Lastly, lenders may be hesitant to approve your mortgage if they see that you haven’t yet sold your old home. They may be concerned about your ability to handle the financial obligations of two properties simultaneously.

Potential complications with lenders explained

When buying a new home before selling your old one, there can be potential complications with lenders. It’s important to understand these potential challenges and be prepared to navigate them.

One potential complication is getting mortgage approval from a lender. Some lenders may be hesitant to approve a mortgage for a new home if you haven’t yet sold your old one. They may view this as a financial risk and be concerned about your ability to handle the additional debt.

Another complication is securing a home loan for the new property. Carrying two mortgages can make it more challenging to qualify for a loan, as lenders will closely evaluate your debt-to-income ratio and overall financial stability.

To mitigate potential complications, it’s important to communicate openly with your lender and provide them with all the necessary documentation and information. Working with a trusted mortgage broker can also help streamline the process and increase your chances of obtaining financing for your new home.

Market Conditions and Their Influence

Understanding market conditions is crucial when deciding whether to buy a new home before selling your old one or vice versa. The state of the real estate market can greatly influence your decision and its potential implications. Here’s how market conditions can impact your decision:

• Seller’s Market: In a seller’s market, there is high demand and limited inventory. This can make it challenging to find a new home quickly if you sell your old one first. You may face stiff competition and higher prices.
• Buyer’s Market: In a buyer’s market, there is more inventory and less competition. This can provide more flexibility and options when searching for a new home after selling your old one.
• Housing Market: The overall state of the housing market, including factors such as interest rates, can also influence your decision. It’s important to monitor market trends and consult with a real estate agent to get a clear understanding of the current conditions.

Analyzing Toronto’s real estate market conditions

When considering the impact of market conditions on your decision to buy or sell first, it’s essential to analyze the specific market you’re in. Let’s take a closer look at Toronto’s real estate market conditions as an example.

Toronto’s real estate market has been highly competitive in recent years, characterized by high demand and limited supply. This has led to significant price increases and multiple offer situations for desirable properties. In such a competitive market, it may be more challenging to find a new home quickly if you sell your old one first.

However, market conditions can change over time, and it’s important to monitor trends and consult with a local real estate agent who has a deep understanding of the local market dynamics. They can provide valuable insights and help you navigate the market effectively.

Buyer’s market vs. seller’s market: What does it mean for you?

Understanding the difference between a buyer’s market and a seller’s market is essential when deciding whether to buy a new home before selling your old one or vice versa.

In a buyer’s market, there is more inventory and less competition among buyers. This can give you more negotiating power and potentially lower home prices. It may be advantageous to sell your old home first in a buyer’s market to avoid the risk of carrying two mortgages.

On the other hand, in a seller’s market, there is high demand and limited inventory. This can drive up prices and create a more competitive environment. Buying a new home before selling your old one in a seller’s market allows you to secure a new property before prices potentially increase further.

Understanding the market conditions and their impact on home values and competition can help you make an informed decision based on your specific circumstances.

The Upside of Buying Before Selling

Buying a new home before selling your old one can have its advantages, especially in an ideal or “perfect world” scenario. Here are some upsides to consider:

• Flexibility in finding your perfect home: By buying first, you have the freedom and flexibility to search for your dream home without the pressure of a pending sale. You can take your time to explore different neighbourhoods, visit open houses, and find a property that meets all your criteria.
• Strategic advantage in a competitive market: In a competitive real estate market, being able to make an offer on a desirable property without a sale contingency can give you a strategic advantage. Sellers may be more willing to accept your offer if they see that you are a serious buyer who can close the deal quickly.

Flexibility in finding your perfect home

One of the key advantages of buying a new home before selling your old one is the flexibility it offers in finding your perfect home. In an ideal or “perfect world” scenario, you have the luxury of time and peace of mind to explore different neighbourhoods, visit open houses, and thoroughly evaluate properties without the pressure of a pending sale.

Buying a new home before selling allows you to take your time and find a property that meets all your criteria. You can consider factors such as location, size, amenities, and price without feeling rushed or constrained by the need to sell your old home quickly.

This flexibility can bring peace of mind and ensure that you make a well-informed decision when choosing your next home. It allows you to find a property that truly meets your needs and preferences, enhancing your overall satisfaction and happiness with your new home.

Securing better deals: A strategic advantage

Buying a home before selling can provide a strategic advantage when it comes to securing better deals. In a strong seller’s market where competition is high, sellers often prefer buyers who do not have any contingencies, such as the need to sell their current home first. By purchasing a new home before selling, you can make a cash offer or provide a quicker closing timeline, which may entice sellers to accept your offer over others. This advantage can lead to negotiating a better price or terms on your new home. Additionally, buying first allows you to sell your current home at a later time when the market may be more favorable, potentially earning you top dollar for your property.

The Downside of Buying Before Selling

Buying a home before selling does come with its downsides. One of the main concerns is the financial risk involved. Carrying two mortgages can be financially burdensome, especially if your current home doesn’t sell quickly. This situation can put a strain on your budget and impact your financial stability. Additionally, timing challenges may arise when it comes to coordinating the sale of your current home with the purchase of your new one. The housing market can be unpredictable, and the timing may not align perfectly, potentially leading to additional stress and complications.

Financial risk and the pressure of dual mortgages

One of the main downsides of buying a home before selling is the financial risk and the pressure of carrying dual mortgages. When you buy a new home before selling your current one, you’ll need to manage the financial responsibility of two mortgages simultaneously. This can put a strain on your budget and increase your monthly expenses. If your current home takes longer to sell than anticipated, you may find yourself in a financially challenging situation. Additionally, if you’re unable to sell your current home at the desired price, you may need to consider lowering the asking price or accepting a lower offer, further impacting your financial situation. It’s important to carefully evaluate your financial stability and ability to manage dual mortgages before deciding to buy before selling.

Timing and coordination challenges

Buying a home before selling can also present timing and coordination challenges. The housing market can be unpredictable, and the timing of selling your current home and purchasing a new one may not align perfectly. This can result in a period of time where you’re responsible for managing two properties simultaneously. Coordinating open houses, showings, and negotiations for both homes can be challenging and time-consuming. Additionally, if the sale of your current home is delayed, it may impact your ability to close on your new home or result in additional costs, such as bridge financing or temporary housing. It’s essential to carefully consider the timing and coordination challenges before deciding to buy before selling.

Exploring Alternatives and Solutions

If the downsides of buying before selling seem too risky or challenging, there are alternative solutions to consider. One option is bridge financing, which provides short-term funds to bridge the gap between buying a new home and selling your current one. This can help alleviate the financial burden of carrying two mortgages. Another alternative is temporary housing, such as renting a place until you sell your current home and find a new one. Additionally, rent-back agreements allow you to sell your home but remain as a tenant for a certain period, giving you more time to find your next home. Exploring these alternatives can provide flexibility and peace of mind during the transition between homes.

Bridge financing as a viable option

Bridge financing is a viable option for those who want to buy a new home before selling their current one. This type of financing provides short-term funds to bridge the gap between buying and selling. Bridge loans are typically secured by using the equity in your current home as collateral. These loans can help cover the down payment and closing costs of your new home while you wait for your current home to sell. However, it’s important to carefully consider the financial implications and risks of bridge financing. Make sure you have a plan in place to sell your current home within the specified time frame to avoid the potential burden of carrying two mortgages. Working with a financial advisor or mortgage professional can help you determine if bridge financing is the right option for your financial stability.

Rent-back agreements: A temporary solution

Rent-back agreements offer a temporary solution for homeowners who want to sell their current home but need more time to find a new one. In a rent-back agreement, the seller becomes a tenant of the buyer for a specified period after the sale of the home. This arrangement allows the seller to remain in their current home while they search for a new one. Rent-back agreements provide peace of mind by eliminating the need for temporary housing or the pressure to find a new home quickly. However, it’s important to carefully negotiate the terms of the rent-back agreement, including the duration of the rental period, rent amount, and any other conditions. Both parties should consult with their real estate agents and legal advisors to ensure a smooth transition and protect their interests.

Expert Tips for Homebuyers

When navigating the process of buying a home, it’s essential to seek guidance from experts in the real estate industry. Consulting a real estate lawyer can provide valuable legal advice and ensure that all contractual obligations are met during the home purchase process. An experienced real estate agent can offer insights into the local market, negotiate on your behalf, and help you find the best investment property or home for your needs. Working with these professionals can increase your chances of a successful and smooth home purchase, whether you choose to buy before selling or sell before buying.

The importance of consulting a real estate lawyer

Consulting a real estate lawyer is crucial when buying or selling a home. A real estate lawyer can provide valuable legal advice and ensure that all aspects of the transaction are handled correctly. They can review and explain the purchase contract, ensuring that your rights and interests are protected. Additionally, a lawyer can advise on any legal requirements or obligations associated with the sale or purchase of a property. In case of any disputes or complications, having a real estate lawyer on your side can help resolve issues and navigate the legal process. Working with a real estate lawyer demonstrates good faith and ensures that you are making informed decisions throughout the home buying or selling process.

Benefits of working with an experienced real estate agent

Working with an experienced real estate agent can make a significant difference when buying or selling a home. An experienced agent has in-depth knowledge of the local housing market, understands market trends, and can provide valuable insights into the pricing and negotiation process. They can help you determine the right purchase price for a home or advise on the proper pricing strategy when selling. Additionally, an experienced real estate agent has a network of industry professionals and can connect you with other experts, such as mortgage lenders, home inspectors, and contractors. Their expertise and guidance can help navigate the complexities of the real estate market, ensuring a successful transaction and a smooth home buying or selling experience.

Frequently Asked Questions

Should you buy or sell first in a competitive market?

In a competitive market, the decision to buy or sell first depends on your specific circumstances and risk tolerance. Buying first allows you to secure a new home but carries the risk of carrying two mortgages. Selling first ensures that you have funds from the sale but may require temporary housing while finding a new home.

How do bridge loans work, and are they right for you?

Bridge loans provide short-term financing to bridge the gap between buying a new home and selling your current one. They are secured using your home equity and can be useful for those who need funds for a new home purchase but haven’t sold their current home yet. Consider your financial stability and goals before opting for a bridge loan.

Choose Zinati Kay for Real Estate Buying and Selling in Toronto

Regardless of whether you wish to buy a house before selling or sell your home after buying your next one, it is wise to work with an experienced real estate lawyer who can offer guidance as you make these big decisions.

If you are in the Toronto area, Zinati Kay – Real Estate Lawyers is available to help you with your real estate transactions. We have been working in this industry for over 25 years and we are a full-service residential real estate law firm that offers reasonable fixed closing costs to buyers and sellers. Contact us at (416) 321-8766 for more information on what we offer and how we can bring our experience and knowledge to the process.