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Home Buyer, Home Buyer in San Ramon, CA

What is the best strategy for move-up buyers?

Asked by Home Buyer, San Ramon, CA Thu Dec 6, 2012

In this type of market, what should move-up buyers do - list and sell the current home first and then look for the next home? This seems a bit risky given such low inventory. I would imagine it would be difficult to buy a new home contingent on selling the current home....

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Steve Ornellas’ answer
Home Buyer,

We all know that Supply is quite limited across many Bay Area neighborhoods; however, what I have not seen addressed is the influence of the "Fiscal Cliff", which I believe you should get ahead of due the out-of-the-ordinary disruption that may take place. The battle of “Tax Increases vs. Entitlement Reductions" will be UGLY!

Case in point:
Tim Geithner: Obama 'Absolutely' Prepared To Go Over Fiscal Cliff http://www.huffingtonpost.com/2012/12/05/timothy-geithner-fi…



Here are a few key housing market influencers to keep your eye on as you ponder how to best move forward:

1) The Mortgage Debt Relief Act of 2007 (and CA's companion Act) is set to expire at the end of 2012. Obviously, these Acts reduce the amount of Federal and State tax income, and no matter our personal opinion about whether this Act helps or hurts the Housing Market, the fact is it reduces Federal/State tax income; therefore, it’s a target easily taken away by non-action.

2) The Mortgage Interest Tax Deduction is also on the table. Currently, as you well know, mortgage interest is a tax deductible item. This isn't the first go-round where elimination/reduction has been discussed. Sure, NAR is lobbying to keep this deduction around as a main incentive for home ownership. Would an erosion (i.e. setting a lower maximum allowable deduction on primary and second homes) or outright removal of the deductibility slow the housing recovery? Probably so.

3) Section 121 of the Internal Revenue Code is also probably attracting attention.
Generally, under Section 121 of the Internal Revenue Code, a Homeowner(s) can exclude up to $250K for those filing a single return and $500K for those married filing a joint returns if they:
-Owned the home for at least 2 years during the 5-year period ending on the date of the sale (ownership test),
-Used the home as his or her principal residence for at least 2 years during the 5-year period ending on the date of the sale (use test); and
-Did not exclude gain from the sale of another home during the 2-year period ending on the date of the sale.

Might this also be a target?

4) Federal Capital Gains Taxes are increasing from 15% to 20% on January 1, 2013. Even if we assume Section 121 of the Internal Revenue Code is left unscathed, saving $5K for every $100K over the $250K per person exclusion is something I might want to protect.


I'm more conservative when it comes to financial decisions especially when I know higher taxes are coming down the road. I would list my home ASAP and try to close escrow before the end of the year so you can retain the old Capital Gains Tax rates (and gladly reapply the savings to rent while looking for my next home) as well as avoid all of the future "disruption" hitting the fan.

By the way, you will put yourself in a better competitive purchase position if you have cash from the sale of your home as well.

-Steve
0 votes Thank Flag Link Thu Dec 6, 2012
One of my favorite blogs is by Steve Harney. He explains in graphs and in simple terms that people can appreciate and understand.

Here's one: Cost vs Price http://www.kcmblog.com/2012/11/07/cost-vs-price-explained/

He said ". As a buyer, you must be concerned not about price but instead about the ‘long term cost’ of the home."

Maybe this will help.
0 votes Thank Flag Link Thu Dec 6, 2012
Your instincts are correct...few would consider a contingency offer right now....I like the suggestion from others about utilizing rent backs, or if that's not possible, find a temporary place to stay if the timing does not work out...it's a hassle, but it is a tough market for buying.
0 votes Thank Flag Link Thu Dec 6, 2012
Hi,

Selling in this market is ideal, since inventory is so limited and homes are going pending within days of the listing. I am an optomist and never say never, so I would suggest you sell your home, look for a replacement and have a contigency plan in place in case you don't find a new home immediately.

Yes, you can write in that your sale is contingent on you finding a new home, but that could scare buyers. You can always rent back your place for 30 days to give you extra time to pack, move and make plans or find a replacement home.

I am usually busiest during the holidays which indicates that lots of transactions continue to occur during this season. There are always reasons why people need to move, so forced upon them, some by choice.

This is an ideal time to move up, due to the historically low interest rates in place. We never know how long they will continue. It is partically responsible for the glut of buyers competing for purchases.

If you want to discuss your options, find out what your home is worth and what you can afford to buy, then please contact one of us and use our resources and market knowlege to acheive your goals.

Regards,
Suzanne Looker
0 votes Thank Flag Link Thu Dec 6, 2012
Move-up buyers are having a very difficult time in the current market. There is no way, under normal circumstances, that a seller will accept a contingent offer from a buyer trying to sell an existing home.

There are a few things you can do:

1. Write into the contract that any offer on your existing home is contingent on you finding a replacement home within 21 days. A seller is more willing to consider a contingent offer IF they know your existing home is already in contract. The problem with this approach is that you (i) lose all negotiating power on both the sale of your existing home and the replacement home AND you (ii) typically end up paying absolute top dollar and securing lousy terms for the replacement home because the seller knows they have you over a barrel. Secondly, if the sale on your existing home gets delayed or is cancelled, this can cost you on the purchase of the replacement home.

2. Sell your existing home and secure a short-term, month-to-month rental. This is what most move-up buyers are doing currently – it removes the stress of having to buy just “any” house because you need somewhere to go. It also means you can negotiate more effectively – ESPECIALLY in a multiple offer situation. Put most of your belongings in escrow and do whatever you can to live “lean and mean” until you find a new home.

3. Have your realtor look for a seller that is willing to sell their home without going on the open market. These types of sellers are frequently much more willing to entertain a contingent offer because they are typically not in a rush to sell and move. If you like the home your realtor finds, it’s a win-win for all parties. The seller wins because they can negotiate a great price and terms and NOT go on the market – this is VERY appealing to some sellers who might not like the idea of people tramping through their house at all hours. It’s a win for you because the pressure is off. Even if your current deal falls through, there is no pressure – you can go to a backup, negotiate effectively and then close and move up to the new home. We’ve done this a few times and it’s worked out very well for everyone.
0 votes Thank Flag Link Thu Dec 6, 2012
To dovetail off of Marc's answer:it is a great idea to consult with you lender prior to any move. The lender can get your loan approved with or without a contingency (selling your own home). This may include securing a an equity line potential on your current home or an interum 'swing' loan so that you can close while your current home is pending.
Is this too agressive/risky for you? Then consider the rent back or the 'reverse' contingency where you accept the offer on your home subject to getting into contract on a new home of your choice.
Bottom line: move up buyers discuss, in detail, with your mortgage planner.
0 votes Thank Flag Link Thu Dec 6, 2012
My suggestion is certainly to sell first unless you have access to funds sufficient for a down payment on the home you want and the ability to qualify for the new loan combined with any existing one. Obviously only a minority can do this.

A good way to minimize stress is to build in a rent-back provision for 30 days when selling and also go for a 45 day (or even longer) escrow period. This gives you more time to find a suitable home after agreeing a sale on your existing one.

Inventory will most likely improve as we enter the new year. Certainly I am currently talking to quite a few San Ramon home owners who plan to list in January or February. Then it will depend on how specific your needs are in a new home. Provided that your expectations are in line with current home values and you don't have any unusually specific needs, you should be OK.

As Ron says, you do need to be prepared to rent as a last resort.

Bernard Gibbons

+++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Bernard Gibbons, J. Rockcliff Realtors
DRE License # 01331583
Phone (925) 997-1585 - bernard@bernardgibbons.com

http://www.DanvilleSanRamonHomes.com
0 votes Thank Flag Link Thu Dec 6, 2012
Due to the low inventory in the East Bay, move up buyers are in the best position to buy the next house if they employ 2 tactics: use the strong demand to negotiate a rent-back on the property you are selling. That way you can write the offer on the next home non-contingent and may have a longer window of time to find & buy the next house. Second tactic is to work closely with a reliable lender who can underwrite your financial package as much as possible, allowing you to write an offer on the move-up house with a 21 day close. That will help differentiate your offer in a fiercely competative marketplace
0 votes Thank Flag Link Thu Dec 6, 2012
Back in the "dark ages", it was a lot easier to do this; Lenders would help you with Loans that had a CONTINGENCY FOR SALE, or "Bridge Loans", which bridged the gap between the sales.

In this new Market, the best you can hope for is good timing:
But the odds of that happening are remote, at best, and could be disasterous for you.
My recommendation would be to resign yourself to the situation, get a Storage Unit for most of your belongings, and plan on renting for a few months.
You will have to move twice, but the benefits and stress will far outweigh the consequences.

Good luck and may God bless
0 votes Thank Flag Link Thu Dec 6, 2012
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