Chapter 5
Timing Is Everything
IN THIS CHAPTER
Knowing how to time the sale of your house
Figuring out when to purchase your new home
Closing both transactions simultaneously
Thomas Edison, one of our country’s foremost inventors, was often called a genius. He modestly said genius was 1 percent inspiration and 99 percent perspiration. He should know. It took him years of hard work to invent the phonograph. Edison tested more than 4,000 different filaments before discovering the one he ultimately used in the first practical electric light bulb. Insight helps, but there’s no substitute for hard work and planning.
You don’t have to be a genius to get top dollar for your house when you sell it. Nor do you have to be lucky, although a little luck here and there never hurts. To paraphrase Edison, lucky sales are 1 percent good fortune and 99 percent planning and perspiration.
If you follow the right steps before you put your house on the market, good fortune may come your way throughout the transaction. You can control the selling process instead of reacting to it on a crisis-by-crisis basis. You can create your own luck. This chapter shows you how to make time your best pal.
Timing the Sale of Your House
Time is your most precious gift. When it’s gone, you can never get it back. Some people spend their time wisely; others foolishly fritter it away. Depending on how well or how poorly you use it, time can either be an ally or a ruthless enemy during the sale.
In most communities, choosing the date you put your house on the market is an important decision. Certain periods of each year are predictably advantageous for sellers. Others are just as predictably less than stellar.
Real estate marketing activity isn’t flat throughout the year. No matter where you live in the United States, the real estate marketing calendar generally has two distinct peaks and valleys created by ebbs and flows of activity in your local real estate market (see Figure 5-1).
Source: © John Wiley & Sons, Inc.
FIGURE 5-1: A real estate marketing calendar usually has predictable peaks and valleys in housing sales activity.
The sales peaks are higher and longer in good years, and the valleys are deeper and longer in bad years, but the marketing calendar’s relentless rhythm never changes. These seasonal cycles are heartless. They don’t care about birth, death, divorce, job loss, or any other life changes that force you to sell. You can’t alter the rise and fall of market cycles any more than you can stop the tides. You can, however, use the predictability of these cycles to your advantage. This section helps you identify when the best times are to put your house on the market and which are the worst.
First peak season: Spring flowers and For Sale signs bloom
Calendar years begin January 1, but real estate years don’t. Depending where you live, the longer and stronger of two annual peak seasons begins somewhere between late January and early March. If you live in a temperate area, such as Florida or California, the market kicks into gear sooner. If you’re still digging out from under ten feet of snow on March 1, your market may take longer to heat up.
Weather aside, most folks don’t bound out of bed on New Year’s Day to buy a house. They need several weeks to adjust to the daily grind after that happy whirl of holiday parties and vacations. The buy-now, pay-later monster also rears its ugly head; people need time to recover from the trauma of paying all their holiday bills. As a result, many January buyers are extremely price conscious.
February through May normally is the most active selling time for residential real estate. Families with children want to get their purchase or sale out of the way by late spring so moving (which typically occurs 30 to 60 days after the ink dries on the contract of sale) won’t disrupt the kids’ schooling for the next academic year. Other people buy or sell early in the year for tax purposes or to avoid interference with their summer vacations. The annual outpouring of new listings pulls buyers out of the woodwork. Sellers are drawn into the market by all the buying activity.
The first peak season is usually the best time to put your house on the market. High sale prices result from spirited buyer competition. Because more buyers are in the market now than at any other time of the year, your best chance of getting a fast, top-dollar sale is during the first season. If you intend to buy another home after yours is sold, this time period offers the best selection of homes to purchase.
First valley: Summer doldrums
Memorial Day generally marks the beginning of the first valley. Sales activity usually slows during June, July, and August. People who bought or sold in the spring move in the summer. Buyers, sellers, and agents often take summer vacations, which reduces market activity. Many folks spend their weekends having fun in the sun instead of looking at houses. Who wants to be cooped up inside on a sumptuous summer day?
Houses ordinarily take somewhat longer to sell in the summer because of a lower level of buyer activity. Unless you have to sell now (or if property values are declining), wait until the fall to put your house on the market. You’re likely to get a higher price after people return from vacation.
If you’re selling your house to buy another one, keep in mind that summer is your first opportunity to go bargain shopping. Summer is a good time to find motivated sellers who bought a new home and must sell their old one fast before the ownership expenses of two properties put them in the poorhouse. Less property is available to choose from in the summer than in the spring, but plenty is still on the market.
Second peak season: Autumn leaves and houses of every color
Labor Day usually starts the second peak season. This peak normally rolls through September and October, and into November. Don’t let the beautiful autumn leaves fool you, however. Just as fall brings a chill to the air, an icy edge of desperation develops in the second season for some sellers.
People who sell during late autumn tend to be strongly motivated. Some bought new homes in the spring before selling their old ones. Now they’re slashing their asking prices — finally getting realistic after wasting months marketing overpriced properties.
Others are calendar-year taxpayers who sold houses earlier in the year and want to buy their new home before December 31. Why? So they can pay tax-deductible expenses (such as the loan origination fee, mortgage interest, and property taxes) prior to the end of the year to reduce the impact of federal and state income tax. Either way, calendar-year taxpayers are under pressure to buy.
If you’re a bit of a gambler, the second peak season may be the most rewarding time to sell. Given that you correctly apply the pricing techniques we describe in Chapters 10 and 11, your house should sell quickly and profitably. Unless prices are rapidly increasing in your area, wait until activity slows in mid-November and then buy your next home at a discount price. You get the best of both worlds — “sell high and buy low.”
Deciding to sell during the second peak season can be a risky gambit. If you inadvertently overprice your house, it won’t sell. If you need to sell, carefully monitor buyer response to your property. Be prepared to drop your asking price as soon as you identify the danger signs (noted in Chapter 11). Don’t wait until Thanksgiving to reduce your price. You may end up attempting to sell your house during the dreaded dead season (see the next section).
Another problem with waiting until the second valley in the real estate marketing calendar to sell your house and buy your next home is that you’ll probably have a very small selection of houses to choose from. What good is a fantastically low price on a house you hate?
Death Valley: Real estate activity hibernates until spring
The second peak season usually drops dead a week or two before Thanksgiving. With the exception of a few, mostly desperate, sellers and bargain-hunting or relocating buyers who stay in the market until the bitter end of December, residential real estate sales activity ordinarily slows significantly by mid-November. Folks stop buying property and start buying gifts. Would-be sellers take their houses off the market while their kids are out of school and their guests are visiting for the holidays. Ski slopes and sunny beaches beckon.
This real estate Death Valley is generally the worst time of year to sell a house. Even the brilliant pricing techniques in this book may not be able to save you from getting your financial bones picked clean by bargain-hunting vultures if you’re forced to sell at this time of the year. The weather is miserable, and very few buyers are in the market. Time will show you no mercy if you wait until this point to get realistic about pricing your house to sell. Don’t put your house on the market during Death Valley days unless you have absolutely no other alternative.
The Seller’s Quandary: Timing the Purchase of Your Home
So which comes first, selling your house before buying a new one, or buying first and then selling? Neither course of action is risk free. The adverse consequences of buying a new home before selling your present house, however, can be far more dire. At worst, buying your dream house before selling your present house may put you in the poorhouse.
If you read the sad tale of Carlos and Jody in the “Never try to catch a falling safe” sidebar, you may think that selling first is the only correct answer. Believe it or not, you can make a compelling case for either course of action:
- Selling before you buy eliminates financial risk. When you sell first, you know precisely how much money you have from your sale to put toward your next home. No sleepless nights worrying about how you’ll come up with the cash you need for a down payment on your new home or how much longer you’ll have to make mortgage, property tax, and insurance payments on two houses. Your fiscal future is clear.
- Selling first, however, introduces uncertainties and problems. If you sell first, you may be forced out of your old house before you have somewhere else to go. Where will you live? Where will your kids go to school? Where will you store your grand piano and your bowling ball collection if you’re forced to rent an apartment while looking for another home? Do you really want to move twice? What if you can’t find a home you like as much as the one you just sold? Putting your life on hold indefinitely while searching for a new home is emotionally draining and insomnia producing.
Given a choice between either selling your present house first or buying your next home first, we strongly recommend that you sell your present house before purchasing a new home. Even in good real estate markets, sales frequently drag on much longer than you expect. Selling in a weak market usually compounds the problem. Homeowners tend to overestimate their house’s resale value and underestimate the length of the selling process — a fiscally deadly one-two punch.
Consolidating Your Sale and Purchase
Suppose you don’t want to sell your house first and then buy a new one. Nor do you want to buy a new home before selling the old one. What then? You can use a third option to sell your old house and buy your dream home without terror, chaos, pain, or privation. Your best alternative is to consolidate the sale and purchase into a seamless whole. The following sections describe how.
Determine your house’s current value
The ultimate success or failure of your transaction depends on accurately determining your house’s present fair market value. Don’t kid yourself. This isn’t a place for wishful thinking. Overpricing is bad in any real estate market — in a weak market, overpricing is a sure prescription for disaster. You must be realistic when pricing your house, or the sale of your present property and the purchase of your new home may flounder.
In a nutshell, you can either pay to have your house appraised or get a written opinion of its fair market value (called a comparable market analysis) from several real estate agents who fervently want to represent you during your sale. Chapter 10 covers everything you need to know about establishing your house’s value.
Check your buying power
Buying power is a function of the amount of cash you put down on your new home and the size of the mortgage you get. Both numbers are easy to figure out. Here’s how:
- Calculate your cash position by subtracting the probable expenses of sale from your house’s estimated resale value. Chapter 3 goes into probable expenses of sale, such as mortgage payoffs, corrective work credits, real estate agent’s commissions, and property tax prorations. We also cover relocation traps, such as higher housing costs associated with buying a more expensive home than the one you own now. You see how to figure your proceeds of sale before putting your house on the market.
Have a lender evaluate your creditworthiness. Find out the size of the mortgage you can get based on current interest rates, your income, and the probable down payment you can make on a new home if your present house sells at its estimated resale value. If you’re nearly ready to sell your current house and buy another, now is a perfect time to get prequalified or, better yet, preapproved for a loan. Read Chapter 14 to see why preapproval can give you a negotiating advantage.
Lenders can’t tell you how much money you can afford to borrow — just how much money they’re willing to loan you based on their assessment of your ability to repay the mortgage. Lenders don’t know or care about your other financial goals and objectives, such as providing for your retirement or socking away money to help your kids through college.We, however, care a great deal about your financial well-being. That’s why we devote Chapter 2 to helping you determine how the next home you buy fits into your overall financial picture.
Familiarize yourself with the market
Harry S. Truman, our country’s 33rd president, was a renowned skeptic. He was fond of saying, “I’m from Missouri. You’ll have to show me.” Folks from the “show me” state don’t value silver-tongued talkers. They live by the doctrine that seeing is believing.
When buying or selling houses, everyone needs to adopt Missouri’s principle. Reading Chapter 10 to explore the theory of pricing property is all fine and good. However, merely reading about valuing houses can’t turn you into an educated buyer or seller.
To properly educate yourself about property values, you must tour comparable houses. No amount of book smarts beats good old shoe leather and eyeballing.
You have to wear two different hats during your property tours:
Seller’s hat: A good comparable market analysis (CMA) prepared by a real estate agent to determine your house’s current value contains two lists. One documents houses comparable to yours in condition, size, age, and location (called comps) that have sold within the past six months. The other shows comps that are currently on the market. You probably won’t be able to get into properties that have already sold, but you should make a point of touring each comp currently on the market to verify your house’s resale value.
If you’re working with an agent, have him or her tag along when you tour properties. As you walk through a house, ask the agent to point out similarities and differences between it and recently sold properties that you haven’t seen. This “show and tell” greatly speeds up your discovery process. After visiting a few comps, you start to see which houses are priced to sell and which houses are overpriced.Buyer’s hat: The house you intend to sell and the home you want to buy may be different — different neighborhoods, styles, sizes, ages, conditions, and prices. Your new home may not even be in the same city or state. You won’t, however, have to reinvent the wheel as a buyer because most principles of valuing property apply whether you’re a buyer or a seller. Smart buyers also use CMAs. Seeing is still believing, and nothing beats touring property currently on the market so you know what’s available when the time is right.
We also wrote a book to help buyers find their way through the purchasing maze. It’s called — surprise, surprise — Home Buying Kit For Dummies (Wiley).
Take action
Now you’re ready to start the action phase — selling your old house and buying a new one. Timing is critical. If you structure your transactions properly from inception, you’ll be in firm control of the process instead of the process controlling you.
Putting your house on the market
First things first. Let the world know that your house is for sale. You must, however, continue looking at any new comps that come on the market after yours as well as other new homes being offered for sale. The market constantly changes. New property becomes available. Houses currently on the market sell. A good real estate agent can keep you posted regarding important changes that may affect your situation.
Push your hands deeply into your pockets whenever you tour prospective dream homes. Untimely dreams have a way of turning into nightmares. As long as your hands are safely out of harm’s way, you can’t sign any purchase offers.
Don’t make an offer to purchase your next home yet, for the following reasons:
- Your asking price may be too high. Even though you try your best to price your property to sell, you may inadvertently overprice it. You know that you’ve overpriced your property if purchase offers fail to appear. Because the amount you can afford to spend for your next home probably depends on the amount you net from the sale of your current house, knowing how much money you’ll have available may be critical. If your budget provides little wiggle room and you’re forced to reduce your asking price, you can simply make a commensurate adjustment in the amount you eventually pay for your new home.
- You aren’t a real buyer until you have a solid contract on the house you’re selling. Read Chapter 14 to understand why this statement is true. For now, trust us; any offer you make on a new home that depends on first selling your present house (if your house isn’t in contract yet) won’t be taken seriously. Real sellers refuse to tie up their property indefinitely while you attempt to sell your house.
Structuring your terms of sale
Chapter 14 gets into information you must know when offers for your house begin pouring in from potential buyers. For now, concentrate on one extremely important aspect of the deal you make — structuring your terms of sale to provide enough time to purchase your new home. You shouldn’t need a ton of time because you’re already familiar with prospective new homes currently on the market, and you’re probably either preapproved or, at least, prequalified for a mortgage.
Here’s how you can give yourself the time you need to make a well-planned and executed purchase:
Schedule close of escrow on your old house to occur 30 days after the buyers remove all their conditions of purchase and increase their deposit. Buyers may take three or four weeks to remove the two most common conditions of nearly all house purchases — mortgage approval and property inspections. Getting loan approval usually takes somewhat longer than completing the various property inspections. Thirty days is your magic number, because lenders normally won’t hold their loan commitment more than 30 days after they approve a mortgage.
Some lenders may be willing to hold mortgage commitments more than 30 days. One quick call to the buyers’ loan officer is necessary to determine the lender’s policy on this issue. If, for example, the buyers’ lender guarantees a loan commitment 45 days after the loan is approved, schedule your close of escrow accordingly. The more time you give yourself to close your other transaction, the better.
You can get even more time by putting a “rent-back” clause in your counteroffer to the buyers’ purchase offer. This clause lets you rent your house back from the buyers after escrow closes. It can buy you an extra month or two (or more) if the buyers agree to a rent-back. Sellers usually pay rent equal to their buyers’ actual cost for principle, interest, taxes, and insurance. For example, if the buyers pay $1,500 a month for mortgage payments plus their prorated property tax and insurance payments, that amount is your rent. Although the rent may be more than you currently pay to live in your house, the amount is probably less than it would cost you to move into a motel for a month or two and much more convenient. As we note in Chapter 14, sellers are wise to prepare a formal lease agreement that covers the rent-back.
No standard rent-back clause exists. Check with your real estate agent or a lawyer to determine how rent-backs are best handled where you live.
Timing the offer to buy your new home
You may be tempted to rush out and make an offer on your dream home while the ink is still drying on the contract you just signed to sell your present house. Don’t. Give yourself time to shake out deal-killing glitches in your sale before you make any offers on a new home.
Don’t present an offer to buy your next home until the contract on your present house resembles the Rock of Gibraltar. If you want the sellers of your new home to treat your offer with respect, delay making an offer until your buyers remove all their conditions of purchase and increase their deposit on the house you’re selling. Until you know the buyers’ mortgage is approved and you resolve questions related to handling corrective work discovered during the property inspections, your contract is as solid as a bowl of pudding.
You may think that we’re overly cautious when we urge you to wait until the contract for the sale of your house is rock solid before making an offer to buy your new home. We’ve seen seemingly solid deals blown apart out of the blue. The real estate gods can be cruel and fickle.
- Make the offer to purchase your new home subject to the sale of your present house. This step protects you from being forced to buy a second home. Your offer should specify that if the escrow for the sale of your house doesn’t close within the time specified in your contract of sale, you have the right to cancel the contract to purchase the new property. If for some utterly unforeseen reason the sale of your house falls apart, at least you can get out of the contract to buy the new home.
Combining a 30-day close of escrow with a two-month rent-back clause gives you a three-month comfort zone in which to close the purchase of your new home. Ideally, you can simultaneously close the sale of your present house and the purchase of your new home. If you can’t, however, then sell before you buy. You’ll sleep better.