To buy or to sell first? That is the question. At least it’s one of the questions we get asked most often when we meet with prospective Buyers and Sellers. Unfortunately, there isn’t an easy answer, and there isn’t a one-size-fits-all answer. Here’s a look at the pros and cons of each strategy.
Reasons to Buy Before Selling
- Property Selection In a market with tight supply, hot properties sell quickly. In a hot Sellers’ market, many properties are on and off the market in a matter of hours or days, and often before they hit realtor.ca. If you decide to sell first and have a short closing period, there’s no guarantee that your dream home will be available during the time period in which you have to buy.
- Comfort with Interest Rates Mortgage pre-approvals (and guaranteed interest rates) are only good for a period of time, typically 90 days. If it takes you longer to sell, buy and close on a new place, the interest rates you’d counted on at the beginning of this process may be a thing of the past.
- Time for Renovations Maybe your dream home is a project – an old Toronto Victorian that needs a new kitchen, a new roof, a new everything. Buying before selling will give you the chance to complete those renovations while living in the comfort of your old home.
Reasons to Sell Before Buying
- Know Exactly How Much $$ you Have to Spend. Forget what you, your REALTOR, your neighbour and your cousin ’s uncle think your house is worth – a firm sale will be a guarantee of what the market decided your house was worth. You’ll know exactly how much you have to spend on the new place.
- Avoid the Stress and Costs of Your House Not Selling This is a worst-case scenario, but it happens. Most lenders approve financing for your purchase based on at least having an Agreement of Purchase and Sale in place for the sale of your current home. If your home doesn’t sell before you get possession of the new one, you might not be able to get the mortgage you need to close on the property. And then really bad things happen. And if you can get a mortgage, well, carrying two mortgages and all the carrying costs isn’t very much fun.
- Avoid Bridge Financing Costs Often, Sellers aren’t able to match the closing dates of the old and new house – meaning, for example, that they may get their new house on April 15, but don’t close on the sale of their current home until May 8. Bridge financing (where you’re essentially borrowing the equity in your current home until it closes) can be expensive, as you carry the costs of two mortgages temporarily.
Here are some important questions to ask yourself when deciding whether to buy or sell first:
1. Where will you live if you sell first?
Where will you lay your head if you sell your house or condo first and can’t find your new dream home? Get a short-term rental? Move back in with mom and dad? Stay in a hotel?
2. What will you do with your stuff if you don’t close on your sale and your new purchase on the same day?
There are lots of storage options out there, but they cost time and money. Make sure to factor it into your budget.
3. Where will you put your money?
If you close on the sale of your house or condo before the purchase of your new home, where will you park all the equity from your existing home while you search for a new one? Don’t make the mistake of gambling it for a quick buck – a nice, safe place where you’re guaranteed NOT to lose money is much better than buying trendy high-risk stocks.
4. Will you encounter any mortgage penalties?
Check the current terms of your mortgage–most mortgages can be ported, meaning that the outstanding balance can be brought with you to your new property and any additional mortgage funds needed can be added to it at the current interest rate. But be aware of any time limits to port your mortgage. Many mortgages are only portable for 90 days, so if you don’t close on your new property within 90 days of selling your old home, you may encounter some stiff penalties.
5. What is your worst-case scenario?
If you buy a home first and your current house or condo doesn’t sell, what will happen? Can you afford to carry both properties? To lose the deposit on your new place and possibly get sued if you can’t close? How much flexibility do you have with the price of your current property (everything sells for the right price)? Will your lender let you rent out your current home and still close on the new one if you really can’t sell it? Worst-case scenarios are never any fun to deal with, but it’s better to be prepared than not.
6. How much uncertainty can you emotionally handle?
Long before I started working in real estate, I bought before selling. I would have traded the stress and uncertainty of those 30 days for just about anything.
7. What is happening in the markets you are buying and selling in?
There are different real estate micro-markets happening in Toronto: the condo market is acting differently than the house market which is acting differently than the new construction market, and the hotness factor varies greatly depending on the neighbourhood. Of course, real estate markets change over time and it’s impossible to predict what will happen. In an ideal world, we’d all sell in a hot market and buy in a lower market, but rarely does it ever play out that way. You can see the full Toronto Real Estate Board Market Reports here.
So, should you buy or sell first?
- If you’re moving from a less hot market to a hotter real estate market, you probably want to sell first.
- If you’re moving from a red-hot market to a more stagnant market, then buying first might make more sense.
- If you’re more concerned with buying the right new home than selling your current home for maximum $ in a short time period, buy first.
- If maximizing the sale of your current home is your #1 priority, sell first.
So what’s the right thing to do? Should buy or sell first? It really depends on your individual situation and tolerance for risk. If you’re thinking of buying and selling, we’d be happy to talk through your options and help you decide if you should buy or sell first! Contact us at firstname.lastname@example.org.