Making a wise real estate decision

How can I make a financially prudent home purchase or sale?
By: Dian Hymer: Inman News
This could be a particularly good time to make a move if you are a homeowner whose current home no longer suits your needs. Although interest rates are rising, they still remain at multi-decade lows. And the appreciation rate in recent years has been particularly high. But, even though conditions are good, you need to have realistic expectations in order to make it all work.

Many trade-up sellers have a difficult time understanding that their current home isn't necessarily worth what they need in order to make the move. A seller's financial needs don't dictate the sale price of their home. Market value is constrained by what buyers are willing to pay.

A complicating factor is that if you're buying in a fast-paced market, you may be forced to compete in order to buy the new home. This could mean paying a higher price than you'd anticipated. You can end up in trouble if you buy first, pay a high price and your home turns out to be worth less than you thought.

HOUSE HUNTING TIP: To guard against coming up short on the sale of your home, it's best to be conservative in the estimation of the approximate selling price of your home. There's no way to know for sure how much your home will sell for until it sells and the buyers complete their inspections. Sometimes the sale price is renegotiated during the course of the transaction if the buyers discover defects during their inspections. By estimating low on the sale price of the home you're selling, you're less likely to end up in a financial bind if your home doesn't sell as high as you'd like.

Repeat home buyers who are trying to trade up in a high demand, low inventory market are faced with an intriguing dilemma. If they sell first, they know exactly how much equity they have to work with. They are in a great bargaining position, since they don't have to sell a property. They have converted their equity to cash.

However, when inventories are low, there's a risk that it might take awhile to find and buy the new home. It's not uncommon to make several offers in competition before meeting with success. Moving to an interim rental is almost a certainty for some buyers, depending on the local market conditions.

Low inventory market conditions often lead to unusually high selling prices as buyers compete with one another to be the winning bidder. In a market like this, your home could sell for significantly more than you anticipated which could improve your purchasing power in a positive way. This could give you the edge you need in a multiple offer competition.

Selling first and renting your home back from the buyers for a time is one way to try to avoid an interim move. But, this is usually only a short-term option. It can be costly if you have to pay rent equal to the buyer's per diem cost of owning your home (principal, interest, taxes and insurance). If you've owned your home for a long time, your mortgage amount could be quite low compared to the buyer's mortgage, and your property taxes and insurance premium could also be lower.

Rather than pay a high cost to rent back your home from the buyers, you may be better off moving to an interim rental. The cost to rent will probably be less, particularly if you're living in an area where the rental market is soft.

THE CLOSING: The additional benefit of moving to an interim rental is that you won't feel pressured to buy a home that doesn't suit your long-term needs.

Dian Hymer is author of "House Hunting, The Take-Along Workbook for Home Buyers" and "Starting Out, The Complete Home Buyer's Guide," Chronicle Books.