As homeowners watch housing prices rise and see their equity grow, some may be thinking that now is the time to take advantage of record-low interest rates and trade up to a larger home.
Of course, trade-up buyers face certain challenges in this market, including how to secure a new home and how to time the purchase to coincide with the sale of their current home.
While there are many considerations, here are just a few of the items to think about when trading up.
Analyze the market
As a trade-up buyer, you may have some advantages over those who are purchasing for the first time. One of those is the likelihood that you’ll face less competition.
For example, April data from the Utah Association of Realtors show the inventory of homes priced $500,000 and below fell 70% in the past year. Compare that to the market over $750,000 where inventory was down less significantly, falling 45%.
Along with having more choices, you’ll probably face less competition for a higher-priced home. For homes priced above $750,000, there’s 2.2 months of supply.
That’s compared to an ultra-competitive market with only half a month of supply for homes $200,001 to $300,000. It’s not much better in the $300,001 to $500,000 category where there’s only 0.6 months of supply.
In other words, Utah real estate is currently very competitive in all price categories, but it is a little less competitive in the above $750,000 category.
Make sure to talk to your Realtor for a market assessment of the current conditions in your area and price range.
Consider a leaseback
Because it’s a strong seller’s market, you’ll likely have a decent amount of negotiating power when you sell your current home. But you may face challenges when it comes time to buy your new one. And because most people have cash tied up in their existing home, they need to sell before they buy.
One option that may make the coordination process easier is to lease your house back from the buyers after you sell it. This is referred to as a short-term leaseback.
While you’re leasing the house back from the buyers you can work on securing your new home. With cash on hand from the sale, this will help you make a stronger offer when searching for a new house. It will also help you avoid moving multiple times.
Look into lending programs
Some companies like Knock.com (not in Utah at this time) offer to help you buy a home before you sell. The company will give you a mortgage on the new home, cover your existing mortgage until you sell and provide a bridge-like loan on your current equity.
Talk to lenders about what financing options they provide. As you look into any lending program, however, make sure you fully understand the terms of the loan and how it could affect your real estate transactions — especially if the appraisal on your new home comes in low or you aren’t able to sell your home for as much as you anticipated.
Look at your budget and taxes
As you consider how much it will cost to move, don’t forget that a bigger home will come with more expenses like higher property taxes, utilities and maintenance. Make sure to budget accordingly.
Also, if you have lived in your current home for less than two years, you might have to pay capital gains on the profit.
The general tax rule is if you’ve lived in the home as your primary residence for at least two years out of the past five years, you can have up to $250,000 in gains tax-free for single filers and up to $500,000 for those married filing jointly.
To learn more about trade-up buying strategies, contact your local Realtor. Find a directory of Utah Realtors at UtahRealtors.com.