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Homeowners who are planning to move up often wrestle with the dilemma: "Should we sell first or buy first?" You'll find plenty of agents advising you to buy before you sell, but that's rarely in your best interest. It's in the agent's best interest because if you buy, you will need to sell, and the agent will be guaranteed two sales, regardless of how much it cost you to do it this way.

 

If you decide to sell first and then buy but, say, your home doesn't sell or it attracts very low offers that you do not want to accept, the agent will get nothing. Think about it.

 

Of course, which comes first, the chicken or the egg, depends on the market -- is it a buyer's or a seller's market -- and your personal motivation. However, for most sellers and buyers, the smart thing to do is to sell before you buy.

Reasons to Sell First and Then Buy

  • Ability to Negotiate.

    By selling first, you have the luxury of time. You don't have to take the first offer that comes along because you already have a place to live. It's called your home.

  • Higher Sales Price.

    Sellers who aren't under pressure to sell often obtain higher sales prices because buyers realize the sellers are not desperate. Nothing yells "discount your offer" like a listing that reads: "seller motivated, bought another."

  • Contingent on Concurrent Closing.

    By making the sale of your home contingent on closing concurrently with your new purchase, you have basically said to the buyer, "If I can't find the home I want to buy, I'm under no obligation to sell to you." You don't have to name the property address. You can simply state: "This sale contingent on closing concurrently with the purchase of seller's replacement home."

    In fairness, a smart buyer's agent won't let a buyer sign a contract with a contingency clause like that; however, I get away with inserting that clause because few agents understand its implication.

  • Contingency Period.

    OK, let's say the buyer's agent is smart enough to strike a concurrent closing clause from the contract. The next best thing to ask for is a time period during which you are free to look for a replacement home. A contingency period will give you the right to cancel the contract during that time period if you so choose, which can range, on average, from 7 to 21 days.

  • Renting After Closing.

    Some sellers who want to take their time to find the perfect home, that one-in-a-million, will often opt to rent after closing. If the buyer doesn't require immediate occupancy, the seller might rent back their own home for the amount of the buyer's new mortgage payment. Or the seller might move out, put their belongings into storage and rent a furnished, short-term apartment.

Reasons to Buy First and Then Sell

  • It's a Seller's Market.

    When the number of buyers are many and inventory is reduced, homes generally sell within days of hitting the market. In this instance, there is little risk in buying first and selling second. However, few sellers will accept a contingent offer. Since these sellers will not accept a sale-contingent offer, you could be stuck owning two residences until your home sells. On top of that, you will pay top dollar for your new home, especially if you end up bidding in a multiple offer situation.

  • Deal is Too Good to Wait.

    Sometimes, regardless of the marketplace, a home will come on the market at a price that is too good to pass up. Perhaps the sellers are getting divorced, need to pay medical bills or one of them has a gambling addiction with debts to pay; the point is the sellers are extremely motivated to sell. Before word spreads across town, you might want to be the first offer on the table.

    In this instance, it makes sense to buy before you sell because the money you make walking into the deal is worth making double payments until your home sells. When the deal is that good, pull out all your negotiating tricks.

  • It's Your Dream Home.

    This is an emotional decision. As much as many buyers might want to be logical and analytical, people who let their hearts rule are not. Real estate is an emotional business anyway, so those who fixate on owning a certain type of home may as well buy it when they first spot it. For some, money is no object. Fortunately, these types of buyers rarely look back, but keep their sights set on the horizon, on moving forward, and they don't regret making emotional decisions. They want what they want, and they get what they want.

Whatever you decide, please contact me first!  I can help you decide what is best for your situation!

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Could Canada could slip into the same traps that hurt the U.S. economy in 2008-09? Some are sounding the alarm bells – at least on the housing front.

 

Clearly, Ottawa is worried about the debt levels being carried by the average household. Witness Finance Minister Jim Flaherty’s recent announcement that he was changing the maximum amortization on a government-backed mortgage to 25 years from 30 years.

 

The announcement was greeted with mixed reviews, including loud criticism from those who worry younger generations will have a significantly harder time being able to afford first homes.

 

But reducing the limit for mortgage amortization is not only good public policy – cooling the speculative real-estate sector without killing the home-construction industry – it is good for homeowners in general. Here’s why.

 

U.S. banks and lending institutions took part in two inappropriate activities in the U.S. housing and mortgage market prior to 2008, both passively allowed by the government in the hope of assisting low-income Americans to own their own homes.

 

First, banks were offering mortgages with low introductory interest rates that would later (one to three years later) rise to higher ultimate rates. Second, banks were offering mortgages at very high ratios to the value of the house (even up to 100 per cent). This was all fine – for both banks and home owners – so long as incomes and house values rose.

 

It all came to a thunderous halt in 2008.

 

As homeowners’ mortgages with low introductory rates came up for renewal, many could not afford the new higher payments that went along with the higher ultimate rates. Americans had to walk away from their loans, and therefore, from their homes – in droves.

 

At the same time, for those who had leveraged a very high percentage of their home value in their mortgage, the falling house prices meant that they now had a mortgage with an outstanding value that was larger than the value of the house. So, they too, simply walked away, handing the keys to their homes to the lending institutions.

 

This all snowballed into the exponential fall in American home values in 2008-09, and the accompanying loss in value of the mortgage assets held by the lending institutions – a very important piece of the global financial crisis.

 

In Canada, we are fortunate that our successive governments have always forced higher down payments for homes here than those required in the U.S. With the new limits on the amortization period, our government wants to dodge the American crisis. This is prudent, and safeguards the economy in general. But the new limits are also good for the individual home owner.

 

Let’s do some arithmetic. Consider a $100,000 mortgage. (Most mortgages are much larger, but you can get to the answer to your personal situation easily by multiplying by the size of your mortgage.) I will assume today’s five-year mortgage rate of 5.24 per cent.

 

If you take out a mortgage to be paid off over 30 years, your monthly payment will be $548.10. Over 30 years, you will pay a total of $197,316, including $97,316 in interest. If, however, you choose the 25-year mortgage, your monthly payment is $595.34 ($47.24 more a month). Over 25 years, you will pay a total of $178,602 – $78,602 in interest, just 80 per cent of the interest you would pay on the 30-year mortgage. Further, you will own the house debt-free five years sooner.

 

If interest rates rise, the arithmetic becomes more dramatic.

 

Consider a $500,000 mortgage at 6 per cent. If you choose the 30-year mortgage, you pay $2,974.12 a month for 30 years, a total of $1,070,683, including $570,683 in interest. Using a 25-year mortgage requires monthly payments of $3,199.03 ($224.91 more a month) for a total payment of $959,709, including $459,709 in interest.

In other words, for an extra $7.39 a day, you can own your house five years sooner and pay a whopping $110, 974 less in interest.

 

If a home buyer cannot afford an extra $7.39 a day in mortgage payments, should they be in the market? Aren’t we all really better off with the shorter amortization period?

 

The bottom line: The impact of this new legislation is less pain than pragmatism. For once, we should be thankful to our big brother in Ottawa.

 

Source: http://www.theglobeandmail.com/commentary/good-for-homeowners-and-the-economy/article4415948/?cmpid=rss1

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