It’s nice to know where you’ll be living next before you let go of the home you’ve been comfortable living in for years. However, not only is this not possible for most repeat homebuyers, it may not be the most financially prudent approach.
Lender tightening in recent years has made it difficult for most buyers to buy a new home before selling the old one. This may not be the case for homeowners who have plenty of cash for a down payment on a new home and plan to keep the current home as a rental property.
If the rental property will generate a cash flow and the owners have good employment histories and excellent credit, this is a workable strategy. It enables the homeowners to stay put until they find a home they want to buy.
In low-inventory markets, offers made contingent on the sale of a buyer’s property have little chance of success, especially if there are multiple offers from buyers who don’t need to make a contingent sale offer.
In this situation, buyers need to sell first before they can make themselves competitive in order to buy in a neighborhood where they want to live. This usually means making a double move: first to an interim rental, then to their next home. This is inconvenient but necessary in the current home sale market where in many places there are fewer listings of homes for sale than there are buyers eager to buy.
HOUSE HUNTING TIP: There are benefits to selling your home first other than being able to compete. One is that you know exactly how much money you have to put into the next house. You may find that you can afford to pay more or less than you think you can. There’s no way to know for sure until your home has sold and closed.
Becoming a renter while you look for a new home allows you to wait until the right home comes on the market. You don’t feel pressured to buy a less-than-ideal home because you’re under the pressure of a time frame.
One option when you sell first is to ask the buyers of your home to allow you to rent your home back for a period of time. The hope is that you will find a suitable home to buy in that time frame and won’t have to move to an interim rental.
It’s a good idea to reserve the right to rent back for a while after closing. But, unless you think you can find a home to buy quickly, it may be less expensive to move to a rental and take time finding the right long-term home to buy.
Usually, sellers who rent back need to pay buyers an amount equal to the buyers’ principal, interest, taxes and insurance prorated on a per diem basis: the buyers’ cost of owning your home. This may be quite a bit more than you currently pay to own your home.
Buyers who successfully negotiate a contingent sale offer usually have to pay a premium price for that privilege. You’re in a better position to negotiate a competitive price if your offer is contingent on the close, rather than contingent on the sale, of your current home, particularly if all contingencies have been removed from that contract.
In this case, if you have to pay for a few days or a week to rent your home from the buyers, a high per diem should be seen as a convenience fee. Make sure the purchase contract on your home allows you to notify your buyers when you’ll vacate the premises and have the rent prorated accordingly.
THE CLOSING: Be aware that many lenders won’t allow a rent-back for more than 30 days following the closing.
