August 31, 2017 | sellers
Remember when you bought your first place? You were terrified. Maybe a little clueless about the process. But generally, speaking for most people, it was easy. Why? Because you didn’t have to sell a house before or after you bought your first property. When you’re buying your first home, many Torontonians are often renting. And renting and arranging your closing date is often fairly straight forward. You often have some flexibility in terms of exiting your rental contact. Provided you have been renting for over a year, you can give the minimum 60 days notice to your landlady/lord as soon as possible if you have quick close. On the other hand, you can give your minimum 60 days notice a little later, if you have a longer close or require some renovations on your purchased home before you move in. The point is, the closing date has some flexibility.
It’s not the same if you want/need to sell one home to buy another one. When you go to buy your second home, and require selling your first, you will come to realize there is much more involved with timing the two sales. Everyone will do their best to align the closing date of their sold home to be very close to the buying date of their next home to suit their needs.
I can tell you from experience, though, that this does not always happen. And here are some reasons why:
- You have sold your property, but have trouble finding the next home you would like to buy.
- You bought a new home, but underestimated the time it would take to prepare your current home for sale.
- You bought a home, and you have trouble selling your first home.
- While negotiating with the buyer or seller, you had to compromise on the closing date for a better price or because you were in competition and felt it was smarter to appeal to the seller’s closing date.
- Something unexpected came up and the closing needed to be extended by the lawyer.
Now, there is a very rare case where you can almost perfectly synch up a closing day of your first home with the closing day of the next one to fit your needs, but it is rare. Here is what I can tell you that happens almost every time:
You will own zero homes or two homes at some point. In other words, you will sell your house first, then own no homes until you buy the next one. Alternatively, you buy one before you sell your current home.Therefore, you own two homes for a short time and pay mortgages on both.
And this leads to the question: Should you sell first or buy first? So, let’s explore what may be the best strategy for you.
OWNING NO HOMES or SELL FIRST AND BUY SECOND
- You won’t have to pay mortgages on two homes. While you’re searching for the second home, you won’t be under any pressure to buy because of the weight of paying two mortgages.
- If prices are falling, you can take your time to buy the next one at a good price.
- By selling your home first, you will know exactly how much money you have to purchase the next one.
- If you own no homes, then you do not have a place to live. So, you will have to either find a short term rental, which includes the costs of moving from your current home to a rental, and then the cost of moving to your next purchased home. Some people move back in with their parents, even with their kids. That can have its perks. Often, though, it means living in the basement under strained circumstances no matter how lovable your family can be.
- If you wait too long to buy the second home, the prices could increase, and you may be priced out of finding the second home you want. Generally, people want a bigger, nicer, or better located property the second time around, but in a market where prices are rising fast, you may find what you could buy at the beginning of the year may become more expensive by the end of the year.
- When you buy a second home, you may have the option to port your old mortgage toward the new house. If you own no homes, you can’t port your mortgage. And don’t forget, if you are exiting your mortgage earlier than the term expires, you may have to pay a penalty.
OWNING TWO HOMES or BUY FIRST AND SELL SECOND
- If you have bought your second home before selling your first one, you have better control when you can move into the second home. You could live in the second home while the first one is for sale. This way, you don’t have to live in all the chaos of people constantly going through your home while you keep it clean and presentable at all times while it is on the market.
- If prices are rising, you won’t have to worry about the rising prices of properties rushing ahead of what you can afford in your second home. If it’s a seller’s market, there’s a good chance, you will be able to sell your house quickly with the right strategy and price point.
- You can really take your time buying your second home because you don’t have to sell your first home until the second one is bought.
- You will be paying two mortgages. Often a bank will give you a bridge loan to carry two mortgages for a short period of time at a higher interest rate. There is often a time limit on this bridge. So, you will be under pressure to sell.
- If it’s a buyer’s market, and you are trying to sell your current home and carry another mortgage, you will be under more pressure to sell. This could lead you to drop your price lower than you would like in order to sell the first property to pay for the second.
- If you buy your second home first, you won’t have a clear idea of what you can afford. What you sell your house for may be more or less than anticipated.
Now, I don’t think there is one solution that is better than the other. Buying first may suit some people better. Selling may suit others.
If you’re not sure, you should do your best to see how the market is behaving in your neighbourhood. That is the key. In a seller’s market, it is often wiser, to buy first because selling is easier. Buying can take some time, especially if you have something very specific in mind. In a buyer’s market, it is often wiser to sell first. If selling becomes difficult and takes longer, you don’t want to be under pressure to sell.
Just remember, if you do sell for less than expected, you will likely buy for less too. Alternatively, if you pay more for your second house, then you may sell for more as well if the market stays consistent. So, if you buy and sell around the same time, you may suffer on one side, but benefit from the other.