Buy First or Sell First?

If you already own a home, both strategies have their pluses and minuses.

Financially, move-up home buyers generally have a much easier time than first-timers, who are trying to scrape up enough cash to cover their down payment and closing costs. But trade-up buyers face a whole new complication: Buy first or sell first?

Buy first:

This strategy makes the most sense if you're in a hot market where you're likely to encounter a bidding war over prime real estate.  Or if you happen to locate the "perfect" opportunity.

The main risk here is that you could get stuck making payments on two houses if your old home doesn't sell fast enough. Plus, you will have to come up with the cash for a down payment.

Many people use their home-equity line of credit as a "bridge" or "swing" loan to supply the new down payment. But you need a robust income to qualify for payments on three mortgages: the old mortgage, the bridge loan and the new home mortgage.

The lender will probably turn you down for the new mortgage if the payments on all three (plus any other outstanding debt) total more than 36% of your gross income. The burden of three mortgages could force you to jump at a low-ball offer -- and you can expect such offers once buyers tour your empty house and realize you're under the gun to sell.

Renting out the old home is another option, and maybe a better financial move if the rent checks more than cover the mortgage and the expense of upkeep. Tax deductions could even put you ahead of the game.  This option requires careful consideration.  It may make the home harder to show and in some cases less attractive to buyers invisioning it as their future home.

If you end up renting out your old house, most lenders will consider up to 75% of rent payments as income, as long as you have a signed lease.

Keep the rental temporary, though, and keep trying to sell the house if the sale will produce a profit. If you've lived in the house for two or more years, you'll need to sell within three years of the time you move out in order to claim that profit tax-free.  There are limitations to this tax-free profit and the amounts vary depending on whether you are married or not.  Consult your tax advisor for a deeper explaination.

Sell first:

Why not just make your offer to buy a new home contingent on selling your old one? This can work, but in a strong market, sellers may not consider such a deal. It ties them up with an offer that is by no means a sure thing.

Sellers may prefer that you have accepted an offer on your current home before they give your offer serious consideration. There's more risk that an offer encumbered by a home-sale contingency will fall through and will have detered another buyer who didn't wish to compete with another offer already placed on the home.

Trouble is, if you've already agreed to vacate your home in 60 days, you could feel tremendous pressure to settle for a house that falls short of your ideal. And if the sellers of the house you want know you need to find a home quickly, it can be all that much harder to negotiate a good price.

If you sell first, you can take some of the heat off by negotiating better terms for your home sale.