So you've built up loads of equity and would like to use it, in order to buy a new home. Exciting! Maybe the kids have grown and are moved out, so what once seemed like barely enough room now feels like too much house. Perhaps it's time to upgrade from your starter home, which has gained a ton of value in recent years. Everywhere you turn, though, people are saying how tough this market is for buyers and how short the supply of homes is. What do you do? It's a conundrum...but there are answers!
The Post-Closing Occupancy Agreement (A.K.A. "rent-back")
When listing your home for sale with the goal of putting the net proceeds toward a new home purchase, one of the first tools we have at our disposal to help bridge the gap between closing on your current home and taking posession of the new one is the rent-back. When listing your property, your Realtor can include (preferably in the broker's notes, which is not visible to the public) your need for a rent-back, because you are currently looking for a replacement property. Since most lenders give buyers a grace period before requiring the first mortgage payment, there is a window of time after the closing where the buyer could potentially offer a free rent-back to the seller (which is, incidentally, a very good way to sweeten an offer, without going above asking price). This will vary in duration, depending on the lender. Once that period is up, typically a buyer will ask for a daily occupancy rate, or "rent," until they have taken posession of the property and the seller has moved out. This rent-back period will have a clearly-stated ending and once that date is reached, the daily rate will typically skyrocket...creating a strong incentive for the seller to meet their stated move-out date, or risk eviction. This rent-back period can be as long as 60 days, although waiting two months to take posession will be a tough pill for most buyers to swallow...so it's rare.
In a rent-back, the seller will be required to carry a renter's and liability insurance policy to cover the property during the rent-back period, in the event of damages incurred during their continued occupancy. As soon as title changes hands, the condition of the property becomes the buyer's responsibility...and the burden of paying deductibles and repair costs will be, too. Having the seller buy walls-in coverage for the duration of the rent-back protects the buyer from bearing any of the costs of repairs and also acts as a strong incentive for the seller to ensure the property remains in reasonably similar condition to how it looked when the transaction closed.
How to manage a buyer contingency
For the seller who is seeking to buy a replacement property, the other component in coordinating the two transactions is having the listing active, or ready to go live, before making an offer on a replacement property. Most listing agents would be very hesitant to allow their sellers to go under contract with an offer that is contingent on the sale of another property, without ample evidence that the buyer's property is ready to be sold. Showing them the listing that is ready to go "at the push of a button" can help immensely, but having the listing active and available to be checked is even better. Of course, the lender will need to have an underwriter sign-off on a pre-approval, with the projected net proceeds of the sale being applied toward the purchase of the new home. It can be very helpful to have the same Realtor list your current home and help with the purchase of the replacement property, as they will be intimately familiar with both timelines and can advise you on the best course of action for each transaction.
Having a buyer contingency like this can hurt an offer's chances somewhat, in a competing offer situation...a seller may opt to go with the more straightforward option. This may require your Realtor to sweeten the offer in other ways (and they don't necessarily need to be strictly financial). It's far from impossible, but you will want a strong Realtor who can handle both sides of the transaction smoothly for you. A major part of this is pricing the property correctly. Too high and the home will languish on the market and eventually require price reductions, taking you below the net return that your lender pre-approved you with. Too low and you could be leaving a lot of money on the table. It's crucial that your Realtor find the "sweet spot" between price and time on market. You want it to sell fast, but for the right price. At the time of this writing, if you are selling a home under $500,000 it's reasonable to expect your home to be under contract within two weeks. The higher price points will take a little longer.
If this sounds like your predicament, and you could use a hand with coordinating the two transactions and making it happen as smoothly as possible, I can help! Give me a call or an e-mail...let's talk about your goals and how best to achieve them!