Selling a house and buying another feels scary these days. It’s hard to get the timing right.
The first step — selling — typically takes just a few weeks because there aren’t enough properties for sale to meet demand. But that same shortage means the second step — buying your next home — can be a doozy. It typically takes months to find a home and make a successful offer against competing buyers.
Call the sale-and-purchase maneuver the Homeowner Two-Step. It’s a difficult dance to perform flawlessly. Will you end up paying two mortgages at the same time? That’s a stumble. Will you find yourself staying in an apartment or hotel for more than a night or two? Oops. Will you have trouble paying for repairs and coming up with a down payment? Blame your two left feet.
Some relatively new companies can lead you through the Homeowner Two-Step:
Real estate businesses known as iBuyers can purchase your home fast and strengthen your negotiating position with sellers.
A lender called Knock can advance you the down payment on your next home. It can lend you money to fix up your current home, to be repaid when you sell it.
Each approach has advantages and disadvantages, which are worth exploring before you list your home.
The score behind the Homeowner Two-Step
In 2020, a typical home buyer searched for two or three weeks before working with a real estate agent, then another eight weeks while working with an agent, according to the National Association of Realtors. After the seller accepts the offer, it takes another six to eight weeks to get to closing day. In all, the homebuying process often takes three or four months.
In February 2020, it typically took 36 days to sell a home, according to the NAR. By March 2021, that figure had shrunk to just 18 days. Meanwhile, the inventory of available homes dwindled because the pandemic made homeowners reluctant to list their homes for sale. Yet the demand for homes remained strong. The imbalance between supply and demand led to dramatically shorter selling times.
How iBuyers can help
iBuyers buy homes with little hassle, then sell them after making mostly cosmetic repairs. iBuyers aim to pay market prices for properties and draw much of their income from fees. Prominent iBuyer companies are Opendoor, Offerpad and Zillow Offers.
An iBuyer can lead you through the Homeowner Two-Step by:
Giving you the ability to make an offer without a sale contingency.
Syncing up the closing dates on the sale of your home and the purchase of the next home.
Allowing you to pay cash or make a big down payment.
Make an offer without a sale contingency
Under a sale contingency, you offer to buy a house on the condition that you sell your current home within a specified time. If you can’t find a buyer for your home by the deadline, your purchase offer goes bust.
Requesting a sale contingency puts you at a competitive disadvantage today, when sellers receive multiple offers.
You don’t need to request a sale contingency after you’ve accepted an offer from an iBuyer. That’s helpful because “no one’s taking contingent offers these days,” says Brian Bair, Offerpad’s CEO.
Sync closing dates
Once you accept an iBuyer’s offer to purchase your home, you choose a closing date. The time window varies from company to company. At Zillow Offers, it’s anytime between seven and 90 days, senior director Scott Bond says.
“Most sellers want to go at their own pace, and we try to accommodate that,” Bond says.
Darren Rollinson, a pharmaceutical clinical operations manager who lives in Denton, Texas, needed a fast pace. He and his wife, Yolanda, bought a home from sellers who needed to close within one month.
Rollinson says it would have taken three or four months to prepare his home in Lewisville for a conventional sale. But he had only one month. Zillow Offers bought his house, as-is, in time for him to buy his new house in February 2020.
Offerpad has similar flexibility: a service called Extended Stay, which allows you to remain in your old home free for up to three days after closing. You can remain as a paying tenant in the home for up to 60 days. Opendoor’s Late Checkout program lets you rent the home for up to 14 days after closing.
Make a big down payment or pay cash
When you agree to an offer from an iBuyer, you know how much money you’re going to get for your property. In turn, you can credibly promise a sufficient down payment when you bid on a home. But when selling traditionally, there’s a chance that you won’t get your expected price if a deal falls through or you have to renegotiate.
Opendoor has a program in which clients “can use our cash to make a strong contingency-free offer on the home of their dreams, while they are waiting for their current home to sell,” Kerry Melcher, Opendoor’s head of sales and brokerage, said by email. The service is available for buyers who qualify for a mortgage and have the transaction reviewed by Opendoor Brokerage.
For this reason, a seller might favor a purchase offer from someone who is selling to an iBuyer because it seems more of a sure thing.
Disadvantages of using an iBuyer
You might fetch a higher price and pay less in fees by selling the traditional way. With an iBuyer, you pay for convenience, a flexible closing date and possibly a stronger negotiating posture when buying the next home.
iBuyers typically paid about 1.3% less than market value in 2018 and 2019, according to research from Mike DelPrete, a real estate tech strategist and scholar in residence at the University of Colorado Boulder. iBuyers charge fees of around 7.5%, or about 1.5% higher than a real estate commission, DelPrete wrote — but he added that the extra 1.5% roughly covers the iBuyer’s costs of owning the home while it’s for sale, “making the true cost difference negligible.”
Another approach: buying before you sell
A company called Knock started out as an iBuyer but then moved out of that crowded space and refashioned itself as a mortgage lender. But not a traditional lender. Knock enables you to buy your next house before you sell your current one. You do the Homeowner Two-Step, but backwards: step two, buying, followed by step one, selling.
“We’ll give you the new mortgage before any other lender would,” says Sean Black, Knock’s CEO.
Knock inspects your current home and determines how much it will cost to fix it up and prepare it for sale. It estimates how much your home will sell for. It calculates how much home equity you have. It will advance you the money for a down payment on your next home.
Because Knock intimately knows the details of your home, its value and your finances, it can guarantee that you’ll get the loan, so “we also take away the contingency for the mortgage,” Black says, “so you’re effectively at an all-cash offer with us.”
After you buy a home with a Knock mortgage and move into it, Knock hires and supervises contractors to get your old home in shape to sell (“paint and carpet, usually,” Black says). Meanwhile, the company will make the monthly mortgage payments on your former home. When the home is sold, you repay Knock the down payment advance, renovation costs and any mortgage payments it made on your behalf. The advances are interest-free.
If there’s a disadvantage to Knock, it’s the complexity.
Much ado about convenience
In a seller’s market, it gives you an advantage when you can time the sale of your old home in a way that’s convenient to the seller of your new home. You can do it with meticulous planning in a traditional sale, or with the help of an iBuyer.