Buy Then Sell Option: Make The Impossible Possible
Buyers typically take out bridge loans so they can buy another home before they sell their existing residence. They are temporary loans, secured by their existing home, enabling them to buy before selling their existing home.
This approach requires:
There be a high probability the existing home can be sold in a relatively short period of time.
Its Fair Market Value, less the mortgage balance, will satisfy the bridge loan’s cash requirements.
Both homes must be independently appraised to ensure there will be sufficient cash to satisfy the bridge loan.
Typical Bridge Loan Scenarios
Must Have That House Now!
You see your dream home, maybe even priced significantly below what you believe is Fair Market Value and you don’t want to miss it but you can’t make a offer without a home to sell contingency but it’s a seller’s market and the seller’s not willing to accept that contingency. The house could be priced below market for several good reasons: divorce, probate, owned by hoarder and seller is looking to save the equity from foreclosure. If the added cost of the bridge loan approximates the amount below FMV, it’s a no brainer if you love the location, house and property.
Have Big Family And House That Needs Work and Staging!
You need a bigger house for your large and growing family but your existing home needs work including repairs, painting and new flooring; and your furniture is not very attractive and you’re concerned about showing the house as it is, and you’re worried about the logistics of doing open houses and private showings. You know how to make the house more attractive and valuable but how do you do that with the family in place?
Then there is the risk of not being able to find the right new home in a timely manner which opens up a real can of worms. What happens if you go into contract and you still haven’t found your dream home? Where do you go in the interim? What will it cost? Will you have to make two moves? Will the family stress out by this disruption? How much stress and added cost will this approach produce?
Home for Sell Contingency Risks
For the seller: The risk is that the buyer may not be able to make it happen, so the Transaction Falls Through (TFT), and the house goes back on the market. But when buyers see the TFT in the MLS listing, what do they think? They think something is wrong with the property and therein price resistance! At no time is the listing realtor needed to be more competent. He or she and seller must do a walkthrough of the home to be sold to help determine it’s Fair Market Value versus what the buyer intends to list the property. The realtor has to be very careful to do a very reliable assessment of the likely buyer, sale price and Days On Market before the seller agrees to the home to sell contingency. Even then, anything can happen.
For the buyer: A home contingency is subject to the seller’s terms, which stipulates the number of days in which the home must be in contract and close escrow. If these dates are not met, the seller will issue a Notice To Perform to the buyer which specifies the number of days the buyer has to comply, and if the buyer is unable to do that, the seller is free to cancel the contract. Imagine getting the family all fired up about their new dream home only to have them see it fade away.
The Bridge Loan Solution
Assuming you’re can be approved for a bridge loan, considering the value of both homes and the mortgage balance on your existing home, you will be able to make an offer with no home to sell contingency – but – you will still have an appraisal contingency, several days, because lenders mandate it; the value cannot be assumed; it must be set by a licensed appraiser. The key to risk management here is having a realtor and lender who know how to reliably estimate Fair Market Value so there is no appraisal disappointment.
IMPORTANT: All these scenarios assume the seller has provided you with home, roof, and pest inspection reports, and you are willing to accept the responsibility for the content of those reports. This will enable you to make a very attractive offer with only a 10 day appraisal contingency, which is quite doable, and a 14 day close of escrow.
By day 18 post ratified contract, your family can be in the new house; you can then make repairs, prep, stage and list. You will have interest accumulating but that expense will be offset by the value you added and there will be no family stress in being in the house as these events unfold. What is that worth? And if you have a knowledgeable, skilled realtor, there should only be nice surprises with respect to purchase price and Days On Market!
Buyer can immediately put home on the market and buy without restrictions.
Bridge loans might not require monthly payments for a few months.
Buyer can remove the home to sell contingency and move forward with the purchase if buyer made a home to sell contingent offer and seller issued a Notice to Perform.
Bridge loans cost more than home equity loans.
Buyers must be qualified by the lender to own two homes and many might not meet this stringent requirement.
Making two mortgage payments plus accruing interest on a bridge loan could cause financial stress.