With a lack of available homes to choose from, most people are hesitant to make a move. They are afraid to list their home because they know it will sell lightning fast, which could leave them homeless if they’re unable to secure a new home in time. They are also faced with extreme competition amongst buyers on the purchase of their next home, which has created yet another stipulation: buyers are being forced to guarantee large sums of cash up front, in addition to their down payment, oftentimes without being able to rely on the proceeds from the sale of their home. This guide will describe some of the strategies we are employing to help our clients overcome these obstacles and enjoy success in this market.
In order to determine which strategy best fits your needs, you first need to define your goals. A few questions to ask yourself:
Let’s talk about what it’s like to sell your house in 2022, regardless of whether you’ll be buying or not. Simply put, it’s wild! Most sellers are receiving multiple offers within hours of listing their home. If this is the case, chances are the offers are well above list price and contain language for appraisal gap coverage, inspection leniency, and post-closing possession. In other words, a dream come true for the seller! But in order to have this kind of success, it is important to note that there are many working parts and pieces to the listing puzzle that you and your Realtor must accomplish up front. Pricing, staging, repairs, photos, listing data entry, showing timeline, offer deadline, multiple offer management system, and communication with all parties are just a few of the criteria that must be met with expert precision. If all is completed timely and skillfully, sellers can expect a high return with very little hassle.
For those who will be buying a home this year, you are on the opposite end of the scenario I described above. Unfortunately, a seller’s market is not kind to buyers. You should be prepared to pay above list price, to cover the appraisal gap, to request little to no inspection repairs, and to not get possession at closing…all the while, competing with dozens of other buyers who are equally prepared to do the same. So how do you win?
Again, there are many pieces to the buying puzzle that you and your team of experts must analyze. You will work together to develop a strategy that matches your buying power and takes advantage of the aces you hold. There are roughly twenty-five negotiable terms on a purchase agreement. It’s a game of give and take. Which, in a seller’s market, mostly means the buyer gives and the seller takes. The more the buyer gives, the better chance they have to win the house. You should be prepared to give as much as you can, while still taking precautions to protect yourself. Your team of experts should be able to advise you through each of these terms, based on your circumstances and level of motivation. In many situations, buyers are highly motivated and want to do whatever it takes to win but are inhibited from doing so because they simply don’t have the cash. The market compels them to shop for a new home before selling their current home, so equity proceeds are not yet available. So this is where we get creative!
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Something that is becoming increasingly common is taking money out of a 401K for down payment. Different account holders have various rules when it comes to how much and when you can take money out of your 401K. Before choosing this option, it is best to contact the company that holds your 401K funds to see how much they allow you to pull out. Keep in mind, if you are taking a loan vs. a lump sum withdrawal against your 401K you will have an additional monthly expense to consider as you pay back that loan. If you currently own your home, and you need quick cash for a down payment, there are occasionally options to avoid penalties if you replace the money back into these accounts within a certain amount of time. For example, if you sold your current home and were able to put the money back into your 401K within a certain time frame, you may be able to avoid any penalties.
If you own the current home you live in, setting up a home equity line of credit can be a great way for you to borrow the equity out of your current home to use it as a down payment on a new home. If you aren’t familiar with what this is, think of it as a credit card where you can borrow money out of your current house. Let’s say you have $100,000 in equity that you can borrow. If you use $50,000 for a down payment on a new home, you could sell your current home and then immediately pay off that $50,000 line of credit. Whatever money is left over would then be yours to keep, pay off additional debt, etc.
It is best to talk to your mortgage loan officer about getting a gift PRIOR to receiving gift funds. There is a very specific way that funds need to be transferred in order for the mortgage company to use these funds for a down payment, closing costs, or appraisal gap. Different loan types have different rules when it comes to gift funds. Some loan types require that the donor be a family member. Donors can gift funds from their checking, savings, retirement accounts, or even can pull funds from a home equity line of credit.
If you have the option, someone you know could purchase a home for you with cash. Depending on how the original purchase contract reads, you would then have the option to either purchase the home from them afterward or do a cash-out refi, taking that person off the loan/remove their ownership. If you are considering this option, it is very important to speak with a mortgage loan officer prior to your family or friend buying the home. Talking to a lender first will avoid unnecessary headaches in the future.
If you are not monthly payment conscious, and you care more about bringing less money to closing, this is a good option. Let’s say you have the exact amount of money to bring for your down payment and closing costs, but you don’t have money for an appraisal gap. You could choose to take a higher interest rate, and in return, receive a credit towards your closing cost. The money you were going to spend on your closing costs now becomes money that you can use towards an appraisal gap. This is also a really great option for someone who has the money but will only be in the home for a few years.
Of course, if you’ve already set aside enough cash on your own, none of these options may be necessary. You can simply purchase the home of your dreams and then sell your current home or maybe even keep it as an investment property.
Whichever route you decide to take, you may be able to offset certain movements by setting an extended closing date on the purchase of your new home. This could allow you enough time to list and sell your current home prior to closing on the new one. With sellers having the ability to retain possession after closing for up to several weeks, you could close on both homes and move into your new home before your buyer gets possession of your old home.
We rank this one at the top because it is a sure thing. Most people would prefer not to move twice, and some are simply offended by the idea of living with the in-laws. But if you have the opportunity to stay with family/friends or can establish a short-term lease somewhere, then this is a great option. You can sell your current home, put all that money in the bank and then shop for your new home. Confident and carefree, you can now write non-contingent offers that are much more likely to be accepted than if you tried to do simultaneous, contingent transactions.
This option would require you to list your home for sale, with the hope of finding a buyer who is agreeable to renting it back to you after closing. This would allow you to pocket the proceeds and stay in your existing home until you find and close on a new home. While not uncommon, this option does offer up several risks for both buyer and seller. There is much to consider and several additional terms/contracts that must be negotiated. An experienced Realtor should be able to help you navigate these waters successfully.
Given the current state of our market, this option ranks, in my opinion, as the dreamiest. Using accessible resources, and of course, a well-connected Realtor, you may be lucky enough to find a seller who is in a similar situation as yourself. They may be trying to figure out their next move and therefore, need a flexible buyer/timeline. This could buy you the time you need to sell your home before purchasing theirs. Together, you can put together a contract that offers protections for and concessions from both parties, to achieve a win-win.
Equally as dreamy, this concept is simply a match made in heaven. Although not likely, it does happen. Perhaps the off-market seller you found is looking for a home exactly like the one you are trying to sell! If so, you’re in luck! They will wait for you to sell your home and likely be super accommodating, as you are allowing them to forego the competitive madness they would otherwise be facing out there in the market.
Everyone wants the house that everyone wants. You know, the one that looks like Joanna Gaines lives there? It will undoubtedly have seventy-five showings and fifteen offers within hours of going live. If you are holding a contingent pre-approval, this is not the home for you. One way to bypass the competition is to be willing to consider the less desirable homes. It may be outdated. It may need work. It may be cluttered. It may have simply been poorly marketed with terrible photos. Or overpriced. Whatever the case, there are nice homes with good bones in great neighborhoods that get passed up all the time. Watch for the ones that have been on the market for a few weeks or longer. Go in with an open mind and a vision. If it checks most of the boxes, give it serious consideration. Those sellers are more likely to accept your contingent pre-approval. And believe it or not, they are probably also willing to negotiate terms. With a little imagination and elbow grease, you could turn that drab home into your dream home!
With demand for existing homes at an all-time high and inventory at an all-time low, we recommend considering the wonderful world of new home construction as an alternative. If you aren’t restricted by a brief timeline, this is a fantastic option that allows for a much less frenzied and less competitive home buying experience. Not to mention, you get to customize the home to your specific needs and likes. But as construction costs rise, so do prices. And most builders will still, however, expect non-contingent pre-approvals prior to breaking ground. Each builder has its own specifications and policies, so it is important to have an experienced agent by your side to help you make the best selection and guide you through the process.
Every situation and client is different. Not everyone fits neatly into one of the above categories. Or maybe you do, but you like to take advantage of strategic or money-saving opportunities when offered. Fortunately, we have such opportunities and solutions for you! When you choose to work with a Keller Williams agent, you gain access to a variety of programs and options, exclusive only to KW clients. From money-saving financing to off-market cash offers to home improvement loans; we’ve got you covered!