When homeowners start considering a voluntary move from one residence to another, two problems immediately arise: One of these is to determine how much they’ll be able to net from the sale of their current house, and how much they’ll be able to buy their next house for. The second is how to sell their current home, and yet be able to stay in it until they are able to move into their next home. Being able to solve these common problems is the key to being able to buy and sell real estate with very little “holding time” and the tieing up of a lot of money.
There are a number of ways to handle this. First is for the seller to obtain a bridge loan and use it to buy the replacement house. The downside is that he’ll wind up with two mortgage payments for as long as it takes to sell his current house. That’s a pretty scary proposition for most homeowners. Second, he could sell his current house, put the money into the bank, store the furniture and move into a rental until he is able to find a suitable replacement, then buy it and move in.
The downside here is the double move that is hard on both the seller and the furniture. Added to this is the difficulty in being able to get a short term lease on a suitable rental, so it could be a year or so before the move is completed. In the interim, prices of replacement houses could be rising with the result that the seller would wind up with a lot less than he started with.
In the negotiation process, whether in buying the original house, selling the replacement house, or acting as a Broker, it pays to point out these two less-than-satisfactory choices; then to suggest a trade in deal. Here’s how that might work:
Let’s say that you had a free and clear that $300,000 house you wanted to sell that would be acceptable to someone with a $225,000 house on which there was a $150,000 loan that he needed to sell in order to complete a purchase. You might offer to take his house at a discounted value of $200,000 less the $150,000 existing loan plus $250,000 in trade for your $300,000 house.
Without regard to settlement costs, he’ll raise the $250,000 with a new loan on the new house, $150,000 of which you’ll use to pay off his old loan, leaving you with a free and clear $225,000 house plus $100,000 in cash. You’ll have sold your hard-to-sell house and at the same time will have picked up $25,000 in additional profit. He will avoid sales commissions and solve his occupancy problem.
The house you took in might be much more suited to the rental market than the house you sold if you intended to hold it for investment, or it might be easier to sell than your old house. There also might have been some mortgage debt on the $300,000 house that could have been paid off out of the buyer’s loan proceeds, or by refinancing the $225,000 house. All of these variations can be worked out as a mathematical exercise fairly easily if you use the simple “T-Bar” work sheet format that follows:
| Party 1 gives: | $225,000 house | Party 2 gets: | $225,000 |
| Less: | 150,000 loan | Less: | 150,000 loan |
| Net Equity: | 75,000 | Net Equity: | 75,000 |
| Plus: | $250,000 cash | Plus: | 250,000 cash |
| Total given: | 325,000 | Total Received: | 325,000 |
| Party 1 gets: | $300,000 house | Party 2 gives: | $300,000 house |
| Less: | 250,000 new loan | Less: | – 0 – loan |
| Less: | 25,000 discount | ||
| Net Equity: | 50,000 | Net Equity | 300,000 |
