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Timing the purchase of your new home

Ideally when buying real estate, consumers want to close the deal on selling their existing home the same day they close the deal on their new house.

But the world isn't perfect, and it is not always possible to time the closing of your sale with the closing of your purchase. That could leave you with a gap or overlap, during which you don't have a place to live or you carry two properties and need additional financing.

Consumers can take heart, though -- such gaps are rare. And there are solutions, such as interim financing, to get over some of the monetary hurdles.

"It tends to be the exception, not the rule. I don't see it that often," says Chris Wisniewski, group product manager for mortgages and home equity at TD Canada Trust in Toronto. "Believe it or not, the purchase and sale are timed quite well."

First-time home buyers, she notes, are "usually quite flexible in terms of a closing date." They're usually renting and can adjust their closing schedules. At worst, they can break their lease and only be on the hook for some rent.

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It can be more challenging for existing homeowners, who can get caught in two types of poor timing. First, they could face a gap in ownership, where they sell and close their deal a few weeks or months before they buy and close the deal on their new property. In this scenario, they must find a place to live for the short term, such as with a friend or relative, or they may need to rent a hotel room or an apartment.

The second scenario is an overlap. That's when consumers close a deal on a new property and either haven't sold their existing home or are closing the deal but not on the same day. So, they wind up paying for two mortgages during the overlapping period.

An ownership gap can leave you looking for short-term housing
A gap in ownership, while inconvenient, is usually easier to deal with than an overlap. It arises often with new home construction, where deadlines are fluid and contractors often exercise their right to extend a closing.

If you find yourself between homes, Don Lawby, president of Century 21 Real Estate in Vancouver, says one factor working in your favour is the current hot housing market.

"Because the market is so good, vacancy rates have gone up fairly significantly across Canada," he says. "In most areas, if you need to, there's probably some opportunity to find temporary accommodation."

Of course you can always try to rent your existing property back from the new owner until your new home is ready. That is the cheapest and most convenient way to deal with the ownership gap because you avoid having to move your belongings twice.

Experts say sellers need to anticipate the ownership gap problem and should consider accepting an offer from a buyer who is flexible about the closing date, even if the offer is slightly lower than others. That's because it might save money in the long run if you don't have to move twice or find temporary accommodations.

In addition to the logistical nightmare the ownership gap presents, it can also erode the profit you make from the sale of your home.

Obtaining bridge financing can be difficult
On the other hand, overlapping is more financially complex. That's because you have to qualify for two mortgages, even if only for a brief period.

To avoid the stress of an overlap, Lawby suggests "people always go visit their friendly banker or mortgage broker and arrange for standby or interim financing if for some reason closing on your property doesn't happen in an orderly fashion."

Wisniewski says interim financing can help in an overlap situation. "It's a fairly simple process to get interim financing," she says, which covers the situation in which you've sold your old home and bought a new one, but the closings are staggered.

However, if you've bought a new home and are closing that deal but haven't yet sold your existing home, you need a bridge loan to get you through till you sell your home. At that point, you are effectively on the hook for two mortgages and getting financing is "a little bit more complex," she says.

You need to have the cash flow to carry both properties or enough equity built up in the properties to persuade the bank to make the loan, while you look for a buyer for your existing home. As well, it can be more expensive, with bridge loans usually two percentage points above prime.

Wisniewski says it helps to have a line of credit in such a situation.

Jim Middlemiss is a freelance writer and lawyer based in Toronto. He's a frequent contributor to National Post, Investment Executive and Wall Street & Technology.

-- Posted: Sept. 20, 2004
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