Bought elsewhere, must sell

Be wary of real estate’s most dangerous trap

Some people have a natural attraction to that special situation we call ‘a rock and a hard place’. Others are nimble real estate market navigators who avoid steering themselves into difficult conditions. Mostly the latter are savvier because they’ve taken the time to be informed, sought good advice from trustworthy sources and mapped out their course for the best result. Be a good navigator.

People who buy before they have sold turn themselves into a ‘must sell frustrated vendor’ by choice; anyone forced to rapidly sell their home is at the mercy of the market. In about 85 percent of cases, the result is acceptable enough for the seller.

The other 15 percent are tales of woe oft repeated by real estate agents. Here’s a cautionary story worth remembering.

Warren had found the house of his dreams. To fund the purchase Warren would sell his highly desirable and unique long-term residence. Little did anyone know he would be selling in a falling market.

Warren’s home had a fundamental value but once he decided to purchase prior to selling, only the price a buyer would pay in the current market mattered. Shortly after Warren bought his new home, the European financial crisis deepened at the same time the Australian dollar hit new heights. The impact on the prestige end of the property market was immediate — it went into shutdown.

The conservative value of Warren’s home before the crisis was close to $3 million. But he was under pressure: exorbitant bridging finance of 8 percent on the millions of dollars he had spent on his dream home meant he felt he had to accept the first offer.

The home eventually sold to a buyer who put forward an opportunistic offer — the only genuine buyer in three months on the market. If Warren had been in a position to wait, by the end of the year, his home would have sold for several hundred thousand dollars more. The confronting consequences of having to sell ASAP often only dawn on the unprepared homeowner once they have committed themselves to buy elsewhere. With historical auction clearance rates around 50 percent, setting a deadline for the sale may not be the magic bullet sellers hope it will be.

Telling yourself that you will ‘just rent it out if you don’t get your price’ seems practical at first. That’s until you work out that you are paying a mortgage rate of 5 to 7 percent on a property that returns 2 to 4 percent in net rental income. It’s a better result than a fire sale of your biggest asset but it is a situation better to skip altogether.

In order to avoid being caught short once you are committed elsewhere, good navigators know all the options upfront.

Should I buy first or sell first?

Most homeowners who buy before they sell, do so for two reasons: they have excess confidence that their home will sell quickly and well, and they fear they will be unable to find another suitable replacement home.

The answers to these questions will help you here:

• Would you rather rent because you sold your home for a high price?

• Or would you prefer to sell your home for a bargain price just because you bought elsewhere and were forced into a quick sale?

The unpredictable market

Like all markets, the property market is prone to gyrate. Rapid swings up or down of 5 percent are not uncommon. Changing market forces are hard for experts to predict let alone people who infrequently dabble in the property market. Just when you think the Reserve Bank of Australia (RBA) will leave interest rates on hold, they raise them. Then when economists and other market soothsayers shout from the hills that an interest rate rise is imminent, the RBA keeps rates on hold or lowers them.

In an unpredictable market, a research brief suggesting that Sydney or Melbourne home prices will rise by 20 percent over the next two or three years is published at the same time The Economist magazine announces the Australian real estate market is a house of cards with property prices 40 percent overvalued. Many decisions to buy before selling are made because sellers have never witnessed the fickleness of the market up close. It’s all theory until your house and your future are on the line.

In a rising market, you may be more inclined to buy first and own two properties, whereas in a falling market you would be well advised to sell first. Being without a property for a short time in a flat market should not be a major concern to you. Short-term rentals generally abound in flat markets.

Generally it is much easier and safer to find a home to buy quickly than it is to find a buyer at your desired price. One solution to assist you in this situation is the long settlement.

Give yourself some breathing space

Avoid being crunched by that rock or hard place. Whether you buy or sell first, negotiate a long settlement in your contract. This allows you the time to comfortably find a suitable buyer or suitable home. If you buy first you need a settlement of at least twelve weeks. Sixteen weeks or more is better — this allows you eight to ten weeks to find a buyer for your home and a further six to eight weeks to settle the sale after contracts have been signed and exchanged. Most people aim to exchange contracts on the same day when buying and selling. The realistic objective should be to have both settlements occur on the same day to avoid bridging finance. The best way to buy and sell the family home is in the same market.

 

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