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

Sep 24

6 min read

Updated: Sep 26

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 unique risk. Learn how to navigate this wild west in my latest blog.

A normal home sale starts like this ...

Step 1: A seller contacts a listing agent, invites them into their home for a complete evaluation, and asks them to provide a professional assessment of market value.

The agent tours the property and takes notes. After an on-site review, the agent brings all of the information back to their office to analyze active competition, inventory levels, and looks at absorptions rates.

Then the broker writes up a comparative market analysis (CMA), makes recommendations for repairs and marketability, explains market conditions to the seller, and describes seasonality waves the owner is about to dive into before they ever dip a toe in the water.

Kinda neat, huh?

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

Sometime after, the home sells, and the seller moves forward with their proceeds … slowly and safely.

"So what’s that cart doing half-a-mile up the road, and why are you asking me about a horse?"

But "buy-before-you-sell" programs put that critical step weeks and months after the fact, most often before a borrower has even identified the agent they want to help them with their future sale.

In fact, at the time this kind of loan is both introduced and applied for, the borrower is actively working with an exclusive buyer's agent, helping them buy a home they want.

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

Buyer vs. Seller Agency Relationships:

Two Different Roles.

Two Different Properties.

Two Different Periods in Time.

Two Different Agency Relationships.

Under an “Exclusive Right to Buy Agency Agreement,” a real estate agent has agreed 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 all of those duties are specific to the home the buyer wants to purchase.

None of them relate to selling the borrower's existing home, weeks and months later.

And 99% of the time, when a borrower first learns about this kind of program, no one has advised them to ask a real estate agent or appraiser to evaluate their current home to obtain a professional opinion of value before they consider this option in the first place.

🐓 Why all of this ruffles my feathers a bit ...

Somehow, between a lender recommending a program to a borrower, approving them up to a loan amount based on what the bank's database thinks is in the ballpark, and a real estate agent being in the picture helping the client buy a home they want, Step 1 gets assumed or forgotten altogether, putting the borrower at unnecessary risk.

That’s a big problem.

Here's why:

An exclusive buyer's agent is hired to navigate and negotiate the purchase process, period.

They are neither qualified nor authorized to evaluate a borrower’s financial capacity, or assess the financial soundness of their purchase plan.

That responsibility belongs with the buyer — and their financial advisors — alone.

With this being the case, loan officers who initially offer these programs must recognize that they immediately create two separate and potentially conflicting real estate representation needs for their borrowers:

Guidance on buying one property now — and selling another property later.

Lumping the transactions together, as these programs mechanically do today, often leaves borrowers without necessary guidance about the market value of the home they already own, much less the conditions they may face when they become contractually obligated to sell it later, while also failing to account for the distinctly different representation each transaction requires.

The Missing Piece

What's more, every buy-before-you-sell program I’ve worked with so far has initiated the process using the borrowers “preferred list price" to start the loan application.

Yes, you read that right.

Not an appraisal. Not a Broker's Price Opinion. Not even a basic CMA. Lenders simply plug in the soon-to-be seller's "preferred listing price," with no requirement for professional analysis or market-based vetting whatsoever.

While that number will be tested internally and cushioned considerably by the home's existing equity, the suggested list price itself is typically based on nothing more than the homeowner's own estimate of what the property could sell for.

Next, that figure is compared to the bank's automated valuation model (AVM) which provide crude estimates, not independent valuations. And it's no secret to anyone that various AVMs often place the value of the exact same property tens, or even hundreds, of thousands of dollars apart!

With this being the case, the danger to the borrower becomes this:

If a lender relies on an inflated AVM to approve a buy-before-you-sell home loan, that may pave a very bumpy road ahead when the borrower go to sell their existing home, later.

"I understand this road has risks, but it gives me flexibility I need to move forward. How can I protect myself?

1) ASK YOUR LENDER:

How many borrowers have you helped use this program before me?
Have any of your clients run into problems or unexpected complications using it? If so, what happened?
What happens if my home doesn’t sell at the approved price within the program’s timeline? Are there penalties, rate changes, extensions, or forced actions I need to know about up front?
Where are those consequences spelled out in my loan documents?

2) ASK YOURSELF:

Who is the buyer’s agent I’m working with on the home I want to purchase now?
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 my broker understand that I’m hiring them for two separate and distinct roles? If so, do we have agreements in place allowing them to advise and represent me in each transaction?
Have I asked my listing agent or an appraiser to tour my existing home, and have they delivered a CMA, Broker’s Price Opinion, or appraisal on it yet?
Have I compared that professional and independent opinion of value and market forecast against my approved loan amount and repayment timelines?

3) MOST IMPORTANTLY:

Hold onto the reins and slow down.

Ultimately, the borrower is the one who is in control here.

If you choose to go this route, go into it with your eyes open.

You are not just buying a new home.

Even under the best circumstances you are committing yourself to a long and complicated process, involving two separate properties, through two lengthy real estate transactions, and entering a series of financial and market variables that may not move in your favor.

Successfully navigating all of it will require sustained engagement, careful decision-making, hard work, and, frankly, a little good fortune along the way.

What this Rodeo Has Taught Me

Given all these words of caution, you might be surprised to hear that I’m currently batting 1.000 helping my buy/sell clients successfully navigate these types of programs — and, every one of them is now happily in the new home their old home sale made possible!

But all that experience has also taught me that these programs are expensive, can become stressful, and carry risk.

I’ve seen firsthand the vulnerability of borrowers who are essentially asked to “pin the tail on the donkey” with their preferred list price. I’ve personally experienced the unspoken but real conflict this loan type creates for a buyer’s agent, who is faithfully doing the job they have been hired to do, while their client unwittingly assumes the agent can somehow perform two separate and potentially conflicting roles at once.

But they’re not, and they can’t.

Because no matter how good or dedicated a real estate broker may be, serving in two separate agency positions requires two contractually established relationships — along with the time and opportunity to perform the individual duties of each role.

That’s just how exclusive agency relationships work. 🤷🏼‍♀️

The Bottom Line

Going this direction, rest assured that lenders will require an appraisal for the home their borrower is purchasing, without even suggesting one for the departure home being offered up as an asset to secure the financing in the first place. In my mind, that asymmetry needs to change, as a matter of consumer protection.

But until it does, borrowers can and should protect themselves by obtaining an independent market evaluation of their departure home's value and anticipated market conditions before ever even thinking about singing up for a buy-before-you-sell program.

A licensed appraiser or experienced real estate listing agent can help. 💁🏼‍♀️

’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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