Thinking About Jumping into the "Buy-Before-You-Sell" Rodeo?

5 days ago

5 min read

Updated: 4 days ago

Read This First, Pardner.

Buy-before-you-sell loans offer to solve a common homeowner problem: How to buy your next place without selling your old one first.

While that convenience can open up big opportunities it also carries risk. Learn how to navigate this particular wild west, in my latest blog.

A normal home sale starts like this:

A seller hires a listing agent to carefully evaluate their home's value and plan the future sale.

The seller invites their listing agent in. The agent tours the property and takes notes. After an on-site review, the agent brings all that information back to their office to analyze active competition, inventory levels, and absorptions rates.

Next, the agent writes up a comparative market analysis (CMA), explain market conditions, and describe seasonality waves the seller is about to dive into … before they ever dip a toe in the water. Kinda neat, huh?

Working together, seller and listing agent determine a list price, prepare the home, syndicate the listing through the internet, and begin showings. Public response is monitored and price adjustments are considered based on how the market responds.

Sometime later, the home sells, and the seller moves forward with the proceeds …

Slowly and safely.

"So, what’s that cart doing half-a-mile up the road,

and why do you keep asking me about a horse?"

Buy-before-you-sell programs put that important cart weeks and months before the horse, before a borrower has ever identified the agent they want to help them with their future sale or even hired them to do the job.

In fact, at the time of loan introduction and application, a borrower is working with an exclusive buyer's agent — not a listing agent at all.

And while that may sound like some minor technicality, it’s not. It’s a big deal.

Here’s why.

Buyer vs. Seller Agency:

Two Different Relationships, Two Different Properties, Two Different Periods in Time

The agent who has been hired to help a buyer buy home their new home is actively working under an “Exclusive Right to Buy Agency Agreement”. Under that agreement, that buyer’s agent has agreed to perform a list of uniform duties, representing the buyer for a finite period of time. Within a Buyer’s Agency relationship, the agent additionally agrees to:

“Promote the interests of Buyer with the utmost good faith, loyalty and fidelity, seeking a price and terms that are acceptable to Buyer, and counseling Buyer as to any material benefits or risks of purchasing the property that are actually known by Broker.”

But here's the thing: All of those duties are specific to the home that the buyer wants to purchase. None of those duties relate to the borrower's existing home, that will need to be sold sometime down the road.

What's more, at this point a buyer’s agent would have never had a reason or an opportunity to step foot inside the borrower’s existing home, the foggiest idea of what their property might be worth today, much less any inkling about what it might sell for months later.

Obviously, this mash-up ruffles my feathers a bit. 🐓

IMO, firms that offer and approve these loans need to do a much better job recognizing that pointing this direction immediately creates two separate — and potentially conflicting — real estate needs for their borrowers who now need guidance on two different properties, under two kinds of agency relationships, at two totally separate points in time.

A Professional Assessment of the Departure Home's Market Value

Concerningly, none of these loan programs require a professional estimate of the borrower's existing home value before approval.

The ones I have worked with so far (and that's been several), have based the the borrower's loan amount upon their"preferred list price" alone. While that amount will be tested internally (and cushioned considerably) by administrators managing the buy-before-you-sell program, those tests still rely on automated value models (AVMs) that use crude algorithms.

But AVMs aren't appraisals, they’re not even CMAs. It's not uncommon for AVMs to estimate the same property's value with a variance of tens — or even hundreds — of thousands of dollars.

The danger becomes this:

If a lender relies on an inflated AVM to approve a home loan, it could pave a very bumpy road ahead when the borrower goes to sell their existing home later.

"I get it. This road has risks. It also gives me the flexibility I need. How can I protect myself?

Great question. Glad you asked. Here ya go ...

First, ask yourself:

Who is the buyer’s agent I’m working with on the home I want to purchase?
Who is the listing agent I want to help me sell my existing home, later?
If I want the same agent for both jobs, does that broker know that I am hiring them for two separate roles? Do we have agreements in place for both relationships (buyer agency and seller agency), right now?
Has my listing agent had the opportunity to tour my existing home to provide a CMA or a Broker’s Price Opinion on it? Have I compared my listing agent’s opinion of value and market forecast against my approved loan amount, and program performance timelines?

Then, ask your lending professional:

What happens if my home doesn't sell at the approved price within the program's timelines?
Are there penalties, rate changes, or any forced actions that I need to be aware of up front? If so, where are they detailed in my loan documents? Point them out to me and explain them in plain language.
How many borrowers have you helped use this program before me? Have any run into trouble? What's your best advice for me, should I decide to go in this direction?

Most importantly, hold onto the reins, and just slow down.

Borrowers are the ones who are in control here.

Take whatever time you need to understand what you're signing up for in advance. Afterwards, bring aboard all the pros you want to support them through both legs of a long journey, even if that means pressing the pause button on a home you really want.

The Bottom Line.

Given all my words of caution you might be surprised to hear that I’m proud to be batting 1.000 helping a very long list of buy-sell clients successfully navigate these hills. And, every single one of them are totally in love with the new home that their old home made possible to buy.

But it’s through exactly that experience that I learned these programs are not inexpensive, create unexpected blind spots, can become stressful, and always carry risk — especially if a borrower hasn’t mapped out both roads carefully, in what can become a fairly wild frontier.

'Til the next roundup! Buyer (a/k/a soon-to-be seller) beware …

and happy trails to you! 🎵🐴🎶

SCHWING at West + Main 💙💛 2010 Youngsfield, Lakewood 80214

(303) 638-8711, schwing@westandmain.com

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