Our buy-before-sell niche has turned into a huge boon for our business – primarily because we offer so many options.
I mention this from time to time because it surprised me so much; I did not anticipate this much demand.
One of the things borrowers are more concerned about as of late though is this – what happens if their old home does not sell?
As a quick review, buyers often want to buy a new home before selling their current home – so they do not risk ending up homeless and forced to put everything in storage and/or so they don’t have to make much less appealing offers that are contingent on the sale of their current home.
Buy-before-sell options (there are dozens) include: (1) Bridge Loans; and (2) EasyPath (or our “Guaranteed Backup Offer” options).
Bridge Loans
Bridge Loans are temporary financing that often involves paying off the existing loan against the current home, taking some cash out for the purchase of the new home, as well as taking a loan against the new home.
In other words, bridge loans are one big shiny loan, secured by both properties (old and new), and last for 12 – 18 months depending on their terms.
Bridge loans are a wonderful tool on occasion, but they are expensive, as the interest rates tend to be much higher than the rates for traditional financing.
Hence, if the former home does not sell, it (1) gets very expensive for buyers as their loan balance continues to grow and, worst case, (2) buyers can face short sale or foreclosure against both homes if their loan term expires or their balance grows beyond what they can pay down and refinance after selling their former home.
Buyers therefore need to be more than reasonable when it comes to listing their former home and do so quickly, especially if valuation is tight.
Guaranteed Backup Offers
Guaranteed Backup Offers involve an investor simply “agreeing” to buy someone’s former home if it does not sell (this allows us to ignore the housing payment on the former residence when qualifying the buyers for their purchase).
With one of the options, borrowers can actually get a bit of cash to help with their purchase, but it is expensive, as the investor demands up to 2.4% of the sale price of the former residence when it sells.
With our most popular option, the investor simply agrees to buy the former home – IF and only IF the former home does not sell in 6 months – for a fixed fee that is as low as $2,500.
What Happens if the Former Home Does Not Sell?
With all guaranteed backup offers, buyers must sell their previous homes within a set period of time (anywhere from 120 to 180 days).
If the previous home does not sell, the investor (providing the backup offer) will step in and buy the home at a previously agreed to price – which is low, e.g. 75% of the market value.
The investor then resells the property and shares the profits from the sale of the previous home with the former homeowner (“profits” = actual sales price – price paid for previous home by the investor – costs).
For our most popular option, the homeowner receives 90% of the net profits – so it is still not that bad of a deal.
But more importantly, in all the years we have offered this, we have yet to see an investor actually have to buy a property.
We have facilitated many dozens of these guaranteed backup offer transactions, and everyone has been able to sell their former home within the specified contract period.
