Ok, there is something incorrect about each answer so far.
Yes, if you can, go & buy the other house first.
1. As far as being "well established in the next home", that's not necessary. In fact, in California you don't want to get yourself toooo established in the next home, because you'll still want to claim & show that you DID in FACT own & occupy, what's now the short sale home for 2 of the previous 5yrs.
2. It is not a requirement for you to start missing payments on the old house in order to get the short sale approved. Depending on what's most important to you it's not mandatory for you to totally ruin your credit by missing payments.
(((However you may feel that since you're in the new house, missing a payment isn't going to put you at risk for not being able to qualify for other things, since you already have the house.))) Just something you need to consider.
3. Regarding the equity line. This depends on which lien holder gave you the equity line, whether it was a cash out refinance of the 1st lien or Straight equity loan from the 2nd.
If it was an equity loan from the 2nd, they will want a 30% payoff in order to release you of any & all future liability. The 1st lien holder will agree to 10%, a buyer will have to donate something ( 10-20%) with you donating a portion as well.
4. The 1st lien holder: It can be negotiated for you to be released of any future liability, but I would like to discuss this with you in more detail.
Feel Free to email me or call me directly. I can help homeowners in the entire state of California & in Nevada with Short Sales & this type of situation.
Realtor Since 1996
Short Sale Expert