"How do we do this?" she asked looking at her Silicon Valley home and with a distant fondness. When they'd bought it, it was the right place for their needs at the time: economical, in a good school district, and cozy enough to be relatively low-maintenance. Theirs was, after all, a budding family.
A few years had gone by and some promotions later, in their case both his and hers, the cozy enough feeling gradually drifted into wishing there were more room for her son to have a proper desk in his room for his homework and having a separate office in case either of them wanted to work from home.
It was time for an upgrade, and for them, it was worth tackling the challenges involved. Moving is never easy, physically and psychologically. And then there are the logistics of selling the home you live in and purchasing a new one, often simultaneously. Auto retailers have this one solved, but there are more variables involved when trading-up your home. Here are some tips I recommend to my clients for moving into a larger, more expensive home.
Preparation for Moving Up
"I love it," she said. Everything about their current home was serviceable, but from the granite island with inset burners in the kitchen to the Juliet balcony overlooking the main entryway, just walking through this Silicon Valley house made them feel more alive. We'd already done the calculations, gotten pre-qualified, and knew where the down payment was going to come from so the only thing left to consider was the offer itself. We headed back to the car and they glanced at each other, then glanced back at me and said, "Shouldn't this be harder?"
It certainly could be, but we'd been preparing since the day they said, "How do we do this?" and now it was time to cash in the rewards from our preparation.
1) Pre-Approval and Budgeting for the Costs of the New Home
Calculating how much they could afford on a new mortgage payment was the easy part. They could afford the new mortgage payment straight-up, and without any gymnastics like a no-ratio loan, so getting pre-approval wasn't an issue. In this case, we knew it was the hidden costs that surprise you. No, I knew this loan officer and she wouldn't try to sneak anything though --- larger homes simply cost more to maintain and furnish.
After all, it wasn't just the new desk for their son and the accoutrements for the new office: they were moving up everywhere from the new dining room to the expanded living room, and adding a patio and a backyard. What they saved on the HOA, we figured they'd end up spending on landscaping and electricity. They're small costs compared to the home, but a lot of little financial details end up being a lot of your money at the end of the month.
2) Arranging Funds for the Down Payment
The check they wrote from their home equity line-of-credit (HELOC) would cover what my client's family needed for the down payment. They'd need to close the HELOC upon the sale of the house, but the funds they'd receive would cover the loan and they weren't at risk of a penalty because they'd had the HELOC open for a few years.
People sometimes get bridge loans which are short term loans based more on the collateral used for the loan than the credit of the people taking the loan. The rates are generally more expensive than HELOCs but this may be a viable option for people who are planning on paying off the loan quickly. Some people open a new HELOC for the same purpose but are surprised when they're penalized for closing the loan too quickly (by selling the house). Paying extra points for a short period of a couple months may be less expensive than a penalty.
3) Reserving Funds for Your Transition
The goal was, obviously, to perfectly time selling their existing home and moving into their new home back-to-back. We'd try to incorporate contingency language into the contracts where they wouldn't have to carry two mortgage payments for their transition period, and, in the opposite case, we'd try to incorporate rent-back language so that they wouldn't have to find temporary housing until their new home is purchased or available.
But knowing where the money would come from if those events were to occur is part of sleeping well at night. Plus, movers cost real money and many aren't shy about asking for a tip at the end of the day.
4) Knowing the Housing Inventory Available and Market for Your Home
Looking before you leap. This step illustrates the old adage when moving into a bigger house. You have the mental picture in your mind of the neighborhood where you want to live and the type of home you want to live in. Wouldn't you like to know how many of those types of home are available so that you can guesstimate how long it will take you to find the home you're looking for? This is why I do (and publish) so much research on the Silicon Valley housing market.
And on the flip side, you've heard stories in both directions: the horror stories about homes taking months over price reductions to sell tempered by the multiple-offer, no contingency scenarios the hottest properties are going for. Where is the reality and where does your home fit in? It's your house: you deserve to be proud, but if you scare people off with your initial pricing, others may not even give your home the look it rightfully deserves. There's a misconception that you can "always negotiate" --- but you can only negotiate if people talk to you in the first place.
I have plenty of stories about the pitfalls of overpriced homes. When it comes to something this important --- in this case, you have two homes riding on the pricing of the house you're trying to sell --- I will always give you an unbiased, straightforward opinion. Your home might be one people will line up to bid on.
5) Getting Your Current Home Sale Ready
Imagine being at the Olympics getting ready to run the 100m dash and not being at the starting block when the gun fires. Being able to avoid starting off flatfooted when moving into a larger home is essential to ensuring you can quickly take advantage of any opportunities that arise. Once you know you want to move up, you can begin the process simply by ensuring that your current home is, at the very least, presentable and clean --- in every room. It won't be optimal at first, but you'll still be able to show your home as quickly as possible if needed.
Even before you put your home up for sale, as you become more comfortable with the idea of trading up, you might start to remove some of your valuables and put them in an established location, like a safe deposit box, so that you can leave your home unattended --- again, if needed. Eventually you can begin to pack away the more personal effects that keep people from envisioning your home as their own. And, ultimately, you can empty out, stage, or get livable staging so that your home is easier to sell.
Making Your Transition Easier Using Contracts
It really depends on the market. Sometimes they come in droves, other times you have to offer freshly-baked cookies. Sometimes you can't drive a block without seeing what you want, other times you have to fish for pocket listings.
You may not be able to plan precisely when you'll sell your home or when you'll find the perfect place for you, but with preparation and knowledge of the tools at your disposal, you will be in a better position to negotiate: after all, one of the goals when managing a transaction for moving up to a larger home is to have as little overlap as possible, saving you money in the process.
If You Find a New Home for Yourself Before Selling Your Old One...
1) Longer Closing Period. Price and all other terms being equal, offers with longer closing periods are usually less desirable for sellers than ones with short closes. But as an agent, I believe it's important not to assume. Sometimes sellers like longer closing periods because they're doing a 1031 Exchange or they're looking to upgrade too! Understanding the needs of the seller is just as important as understanding your needs as a buyer.
2) Sale Contingency. It's possible to make the purchase of a bigger home contingent of the sale of your existing home. This puts the burden of risk onto the seller. The likelihood of the seller accepting an offer with this contingency obviously depends on the risk the seller is willing to take, the compensation being offered in return (if any), and how likely the seller believes they are to receive more attractive offers.
If You Find a Buyer for Your Home Before Finding a New One for Yourself...
1) Longer Closing Period. Many buyers are flexible about the actual day they actually get the keys to the house up to a certain point, usually around 30 to 45 days, sometimes more, sometimes less. This period can be used to close on the upgrade home so that there's a relatively seamless transition.
2) Rent-Back. Of course, buyers ponying up hundreds of thousands if not millions of dollars for a Silicon Valley home are going to want to live in it sooner rather than later. A rent-back clause allows you to lease the home from the buyer for whatever time period and compensation you both agree to. This is a relatively clean way of buying more time to find and close on the perfect upgrade.
3) Purchase Contingency Period. There's nothing like a signed contract to put the picture of finality into people's heads. And it's that finality that contributes to seller's remorse, which exhibits itself in the question sellers repeat to themselves, "What did I just do?" A purchase contingency period specifies a period of time, usually days, when you as the seller can back out of the contract without penalty. This period of time is used to identify a home or whether the type of home you want will be available to purchase.
4) Closing Contingency. This clause puts the burden of risk onto the buyer. By including a closing contingency, you're telling the buyer that you agree to the sale, but only if you decide to purchase another house within a specified period. If that period elapses without the contingency being lifted, no sale occurs.