Buy First or Sell First: Which is Better?
It seems the natural order of things. You see a house you love. You buy first, sell your existing home and move direct from one to the other.
Only buying before you sell can be a risky gamble.
One customer, Sarah from Melbourne, tells us, “Never again. We bought while the market was at an all time high, but before we could sell our existing home the affects of the GFC began to hit and you could literally feel the instability creep into the air. The market seemed to drop overnight and we ended up selling $150k lower than our reserve – we still have the mortgage to show for it.”
It’s a common and costly mistake. When you buy first, there’s the pressure of selling your existing home within a limited time frame. If you don’t get the sales price you hoped for, you face losing a chunk of your hard-earned equity.
So what about selling first? This way, you get to gauge the market, wait until you’re offered the sales price you want then free up your equity for buying again. The problem with selling first is that the race is then on to find your next home. This can take longer than expected and house prices could rise in the meantime.
So, which option is better?
It all comes down to whether it’s a buyer’s or a seller’s market.
In a buyer’s market…
It’s probably better to sell first. Hopefully, you’ll get a good price and you can negotiate a longer settlement to give you time to find another home. Or, if you can stomach the hassle of moving twice, you may choose to stay with family for a while, or rent and take the time to find a property you love. Be careful of leaving it too long in a rising market.
Selling first eliminates the need for bridging finance and enables you to know exactly what you have to spend. If you sell for a higher price than expected, it could open up a wider choice of properties that you thought were out of your price range.
Some sellers choose to invest the equity they receive from their sale and build up a larger deposit for the next time they buy.
If you’re not a risk taker, selling first is probably the best option for you.
In a seller’s market…
The risks of buying first still exist, but they are reduced. This is the most convenient option because it allows you to move directly from one property to the other, eliminating the need for furniture storage and the costs associated with moving twice.
But this option should only be taken when you have a good understanding of the market and where it’s headed. It’s also a wise idea to pre-gauge the interest in your existing home. If it’s the type of property that’s highly sought after, you should be able to sell quickly and arrange a settlement date that allows direct transition between homes.
The problem is, people often dive into buying first because they see a house they want. As in Sarah’s case, they’re generally unprepared and naïve about where the market’s headed.
Buying first involves research and planning. Realistically, what can you get for your existing home? Will your bank lend you the bridging finance to cover the gap between settlement dates? How long can you afford to cover for two loans?
Bridging loans cover the gap between the purchase of your new home and the sale of your existing one. Although the options vary between lenders, they are generally set up as interest-only and can involve higher rates because they are considered short-term loans. Interest is normally compounded monthly and added to the ongoing balance when you sell your house.
To sum it up…
The business of buying and selling is a juggling act that needs to be managed carefully. The decision to sell first or buy first largely depends on timing and your own personal situation. Do you like to take risks and how well do you understand the housing market?
Remember that markets fluctuate between locations, house types and price ranges. When doing your research, keep it local and relevant to your current style of home.
Be thorough. The wrong choice can quickly diminish precious equity that’s taken years to build.
What’s your opinion – buy first or sell first?