by Catherine Broady on Wednesday, January 31, 2018
Part 4 of a four-part series

Are you currently living in a home you bought five, ten, even fifteen years ago and are finding it WAY too small? Chances are you’re going through a very similar situation to the one described in this story. This is a classic example of a “chicken or the egg” scenario where homeowners face the dilemma of whether to buy or sell first.

The Clients

Dale and Marie bought their first, starter, 3-bedroom bungalow about fifteen years ago when they were newly married. Back then, the house was perfect for their lifestyle and their budget. As an entrepreneur, Dale was able to set up one of the bedrooms as his home office, and they prepared the other spare bedroom as a nursery with the hopes of starting a family. 

Now fast-forward fifteen years. They’ve since had two kids, one in high school, the other in elementary school, and they were feeling like the walls were closing in on them! They no longer had enough room for all the kids’ “stuff”, they were all fighting over 1 bathroom on those busy mornings, and Dale’s home office had been relegated to a dark and dingy corner of their basement. They had felt this need for more space and a bigger house for quite a few years now, but the whole idea of moving out of a house they had been in for so long and raised their kids in was simply overwhelming.

The Challenges

The biggest challenge that all move-up buyers and sellers face is the decision to buy first and then sell, or sell first and then buy?

There’s no clear-cut answer to that question. Many factors come into play. The first thing one would need to do in this situation is to speak to a mortgage specialist to find out if buying without selling is even an option. Most people don’t think it is, but you’d be surprised how many people are able to do this without even realizing it.

The Options

After meeting with their mortgage lender Dale and Marie realized they had built up enough equity in their home over the past fifteen years that they could get mortgage approval to buy a bigger home without having to sell first. This allowed them to explore 3 different options.

OPTION 1: Play it safe. By putting the house up for sale first, they could secure an offer, sell their home, and be sure to give themselves at least three months or more to find a new home before closing on the sale of their old one. This option is good for those with a lower tolerance for financial risk. The downside however, is that in a market with scarce inventory, they may have to settle for whatever new home they can find in the time they have, even if it’s not ideal. 

OPTION 2: Take a gamble. By looking to buy a home first, they give themselves the time they need to find just the right house. They won’t have to settle for whatever they can get under a time-constraint. The down-side here however, is that once they buy that new home, they’ll have to then hope that their old home will sell before they close on the new one, otherwise they could wind up owning two properties and be paying two mortgages! This option is probably better suited for those with higher financial risk-tolerance.

OPTION 3: Leverage your equity. In some cases, homeowners who have lower mortgage balances and higher equity ratios can actually manage to keep their current home as long as they rent it out as an investment property, and still be qualified to buy a new home to move to. The negative side to this is the added risks and responsibilities that go with becoming a landlord. Maintenance costs, problematic tenants, vacancy rates, and tax implications are all things to consider. It’s very important to know what you’re getting into before committing to this option. 

The Results

We discussed the options at length with Dale and Marie, and because their lender determined that they qualified for OPTION 3, they decided to take the plunge and become landlords! This was something they never imagined they would be able to afford. After crunching the numbers, they realized they could increase the mortgage on their existing house and the rent they could charge was high enough that it would cover all their expenses, and they would still have some money left over to use as a down payment on their new home. This certainly made their dream of moving a lot less stressful. 

We immediately started shopping for houses and we found them a suitably sized home in the same neighbourhood that fit their budget. They quickly made an offer, which was accepted. We then listed their house for rent and found a great tenant for exactly the rental price we had forecasted. Not only did they fulfill their dreams of getting a bigger house in the same great neighbourhood, but they’ve also become real estate investors – building up equity with a solid, long-term asset. 

If you find yourself in a similar situation to Dale and Marie, and are facing the same challenges, the same doubts, and the same fears as they did, don’t despair! Just be prepared to do your homework, consult with the right people, and turn those dreams into your reality!