The new rules for selling your home and buying another at the same time

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In the current market, it’s exceedingly easy to sell your home. But since you’ll still likely need somewhere else to live, once you close, you’ll quickly find yourself in a scrum of buyers competing over a limited number of houses for sale that suit your new requirements.

It’s a dilemma millions of people are facing in these times of super-low inventory and super-high home prices. There are a few things you can do to keep a roof over your head while navigating concurrent real estate transactions, but they all come at a cost and have some drawbacks.

Key takeaway
You don’t have to be out on the street if you’re between home transactions. There are a number of ways to bridge the gap between your past place and your next one including various rental options.

These complications can be even more pronounced for homeowners looking to downsize at the moment, because rising prices are making lower-cost transactions more competitive than ever. Not only will you be competing with the growing ranks of first-time homebuyers, there’s a raft of private and public companies that are snapping up homes to flip or rent them.

Here’s what to know about the sell/buy dilemma in this intense seller’s market.

Consider a short-term apartment rental

Sellers these days will often opt for a month-to-month lease in a fully-furnished apartment until they can close on their new home. Even this option isn’t sure-fire because in some especially competitive markets finding a place to rent can be challenging.

“You don’t want to be pressured to buy your next home just so you’re not homeless,” said Kevin Kieffer, a broker associate with Compass’ EastBayPro Team in the San Francisco Bay Area. “You want to make sure that’s the right home for you, so having rental as a backup is key, and that’s another issue because finding short-term rentals is tough.”

In places like the Bay Area where housing supply is especially tight, short-term rentals can be especially expensive, so it’s important to factor the added costs into your budget, including storing your stuff while you’re between permanent homes.

“There’s some high-end condos nearby where folks are going in there, they’re furnished, running probably 40 percent higher than the market because they are month-to-month,” Kieffer said.

Shelly-Ann Eweka, senior director of financial planning strategy at TIAA, added that simultaneous sellers and buyers need to be prepared for things to go a little off-course.

“What I tell people is ‘be flexible,’” she said. “What you plan may not turn out to be exactly what happens.”

Ask for a rent-back option

To some extent, sellers are in the driver’s seat and are in a great position to dictate terms of the sale. They can require the buyers to rent their property back to them while they finalize the purchase of their next home. A rent-back clause in the contract means sellers will pay the buyer’s mortgage and possibly some rental fees to continue living in the house for a set period.

Kieffer noted that rent-back clauses are easier when the sale is an all-cash transaction. If a lender is involved, the rent-back is limited to 60 days from closing, because most banks consider the house a rental or investment property if it’s not owner-occupied after 60 days, which can affect the financing.

But 60 days isn’t always enough to close a purchase in the current market.

“I’ve got some folks coming up on that now,” Kieffer said. “At 60 days you’re now seeking a rental property.”

So, for many, it may be more streamlined to skip the rent-back and go right into a separate rental unit.

Selling to iBuyers

Some have suggested that the current real estate climate is the perfect use-case for iBuyers, those online outfits that typically make sight-unseen offers on homes. The theory is that using an iBuyer means a prospective seller could go through the whole process of buying their new home first, and then quickly sell the place where they currently live when they’re ready to close on the next one.

However, both Kieffer and Eweka cautioned that this strategy can be risky and expensive.

“You have to be careful of the cost,” Eweka said. “With all real estate transactions you need to be aware of all the fees, depending on who you’re working with and what process you’re going through.”

Kieffer added that iBuyers make less sense in high-cost markets because their fees are usually a percentage of the total transaction, which winds up being a more significant loss in more expensive transactions.

“I’ve had a lot of people get offers from iBuyer companies, but it doesn’t make sense for them because they have to take so much off the top,” he said. At 3 or 4 percent commissions, in dollar terms, it winds up being too high a premium for most sellers-cum-buyers in million dollar-plus housing markets.  Of course that fee must be compared with real estate commissions if you were to sell the home in the usual way.

Other (not-so-good) options

In some cases, Kieffer said his clients will stay with relatives or friends between real estate transactions, and while that is a financially sound strategy, it can be emotionally taxing.

For other folks, a bridge loan may be the way to go, but that can be expensive because lenders tend to charge high fees for those products.

“People are only in bridge loans if they’re going to make money on it,” Kieffer said.

Eweka said as companies expand remote work possibilities, now is a great time for people to consider moving to less-competitive markets.

“If you are in a fortunate enough position to be able to work from home and you’re going through this process, especially if you’re in between homes, you may be able to use that time to explore some other cities,” she said.

Why downsizing is more difficult

Market conditions make it especially tough for homeowners looking to downsize.

“Moving down is even more challenging because down puts you in an even more competitive market,” Kieffer said. “If you’re selling a 1.2 [million-dollar] house and want to get into an 800, the number of offers on an 800 is way more than it would be if you’re moving up to a 1.6.”

The one benefit downsizers have, he noted, is that they can usually pay all-cash for a new place.

Eweka said downsizers also need to be careful to do their homework and make sure they understand what their current property is really worth.

“All the leverage you have as a seller, you won’t have as a buyer,” she said. “You have to be realistic about how much your home is worth and how much you’ll be getting after the sale.”

Bottom line

If you’re looking to sell your home and immediately buy another, it’s a good idea to do your research, and stock up on patience. It’s quite likely that your current home will sell quickly, but your purchase could be a slog, so make sure you understand what your current property is worth and start shopping for the next one early.

Above all, Eweka said, don’t be afraid to speak up if you don’t understand any part of the process.

“Ask too many questions. Be that person. This is a huge decision,” she said. “I don’t care if you ask the question 25 times, make sure you understand it.”

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Written by
Zach Wichter
Mortgage reporter
Zach Wichter is a mortgage reporter at Bankrate. He previously worked on the Business desk at The New York Times where he won a Loeb Award for breaking news, and covered aviation for The Points Guy.
Edited by
Senior mortgage editor