You Just Found A New Home, But...
Issue #44 of The Two But Rule
A Homeowner’s Dilemma
I don’t know about you, but for as long as I can remember, the dream of homeownership has seemed more like a nightmare of difficult dilemmas. And one of the biggest Catch-22s for most people is navigating the transition from the house you own (and live in) to the new house you want to buy.
Recently, we spotted a house we were interested in, and sure enough, we started scratching our heads about how to pull off the old homestead switcheroo. I decided to take a look at this gnarly problem from a 2Buts perspective.
Wait! Why is this a problem? Surely you simply buy the new house for cash and then take your time selling your old place…maybe rent the old house for a hefty rate and rake in the Benjamins.
If that’s your solution, then…erm…good for you(?) But if you’re like most middle class homeowners, the money you need to cover a downpayment on the new house is only going to come from selling the house you’re in. But…yeah, you’re still in it.
Unless I missed something in my research and conversations with real estate experts, there aren’t a lot of firm solutions to this conundrum…not a lot of sturdy bridges to get you from Home A to Home B. Most people simply “muddle through,” taking advantage of one of the following strategies and hoping that nothing goes wrong during the risky and expensive maneuver. For example, you could…
Hold Two Mortgages
If you have a good job, an excellent credit score, and have managed over the years to build equity in your current home, you could take out a mortgage on the new home and then retire it when you get the cash from the old place.
But you’ll need the downpayment for the new mortgage and enough cash to cover closing costs…as well as the monthly payments on both mortgages for as long as it takes to sell the old house.
In a world where a majority of high-earners in the US are now living paycheck to paycheck, it’s a good bet that most people just don’t have that kind of cash laying around. And even if they could handle the extra expense for a few months, what happens if the market tanks and they’re forced into selling the old house for less than what they needed, simply because they could no longer cover both mortgages? Still, if you have the cash and the risk tolerance, it’s an option.
BUT if you can’t come up with the downpayment on the new mortgage, then there’s the venerable…
A bridge loan lets you borrow the downpayment and closing costs of the new house for a short time…usually six months to a year. The downside is that you’re now carrying the expense of the old mortgage, the new mortgage and the bridge loan — and the interest on the latter is going to be high. (You could also accomplish roughly the same thing by taking out a home equity loan, a line of credit (HELOC), or another type of loan.)
But you’re still taking on the risk of not selling the old place for the necessary amount before time’s up. The financial quagmire you can land yourself in if the old house fails to sell can be nasty, and in these days of economic uncertainty and rising interest rates, it’s a real concern.
But if taking on more debt isn’t your bag, you could…
Sell first, then rent, then look around for something to buy
Ok, so forget about that house that just came on the market and got you excited to make a change. Now that you’re motivated, just go ahead and sell the old manse, bank the cash from the sale, put everything in storage, and move the family into a rental until another opportunity to buy appears.
But in many municipalities these days, rental homes — or apartments that would handle, say, a family of five (plus the dog…don’t forget the dog) — are really scarce and very expensive. Sure, you’re now hopefully sitting on a relatively large pile of money from the sale of your home, but you need that to buy a new house. Every month you spend pouring that money into a rental that’s not earning you home equity (not to mention the considerable moving and storage costs for all your stuff) could be inching you closer to no longer being able to get into a new house at all.
And don’t forget the emotional strain on the family from living in a temporary place — probably with bad carpeting — as they wonder which storage crate might contain Junior’s beloved stuffy that got mislabeled in the move.
The UK’s House Chain Approach
In an apparent effort to break this Catch-22, real estate in England and Wales involves something called a House Chain. A large percentage of UK homes are “on chain,” meaning that if you want to buy a house, you can put an offer on it, but then you may have to wait for the sellers to close on their new home. If you’ve bought or sold a home in the UK, you’re probably familiar with listings noting whether they are chain-free.
Here’s the best backgrounder on house chains I could find.
I’m still learning about the house chain framework: when it first appeared, why it came to be, and how it evolved. Presumably the impetus was to help people in a country with a relatively large population of working and middle class homeowners who can’t afford to buy a new home before selling the old one. (By the way, thanks to Peter Davey on this thread in LinkedIn for his insights about this.)
But, oh boy…house chaining is a case study in not examining the “chain of buts” that can happen after you launch a half-baked solution to a problem. In this case, the solution created an explosion of new problems, and you can hardly find a story about house chaining that doesn’t mention what an awful experience it is.
With house chaining, you can be all set to get your new dream home when the chain falls apart, because someone upstream or downstream failed to close on their sale or purchase. It can happen because a seller or buyer pulls out, or a survey comes back with something unexpected. Mortgages don’t always pan out, and there can be any number of legal issues that nix a deal, collapsing the chain. That’s a pretty big set of buts. According to a 2022 survey, house chains involving as few as five homes fall apart 75% of the time.
And yet, now that house chains are endemic in the UK, it’s widely considered unavoidable, so the pattern persists. Once a system like this gets into a society, it’s as though it acts like the cordyceps fungus, turning a whole ant colony into zombies that have no choice but to follow the mindless pattern encoded into their brains by the fungus. (If you haven’t seen a video of this phenomenon, be warned…super creepy.)
BUT What If…
In researching this story, I played the 2Buts game with a few people and came up with the following notion that might turn out to be a not-stupid idea. Check it out, and add your voice to the conversation. Lots of buts to explore.
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