The Home of Choice Scenario
Up-sizing and Downsizing
The process of selling your home while purchasing another may seem like a daunting challenge, but it is done all of the time. Some home sellers want to sell their home and either move up in size or move to a better neighborhood where they may find better schools, perhaps they have found a new job and need to move out of town or out of state. Then there are those who need to downsize for any number of reasons, the house has become too big, or economic conditions have made it difficult to keep up the payments and those sellers are looking for something more manageable to purchase.
Whatever the reason for your need to sell your home and purchase a replacement, the process can be accomplished in a number of ways which I will explain to you.
Sell Your Home First, Then Buy
This first plan to sell your home first and then buy would be a situation where the seller is the safest, but it does require multiple moves. It would require the seller to sell the home, and then move most of their belongings into storage and then find a temporary short term rental. They may choose to move in with relatives or friends…uncomfortable…, or even perhaps enter into a rent-back deal with your home’s new owner, all while you look for and go through the process of purchasing a replacement home. You may be thinking that this is a crazy method but it does have its advantages. The main advantage is that you will know exactly how much you will be able to spend on that new home. That’s because you will know your final sale price of the home you sold, and now you can see the net proceeds from that sale in your bank account right? Another advantage is you won’t have to worry about temporary financing. Another good result in going this route, is that if you have found the home of your dreams while your home is still available on the market, you may be tempted to reduce the price of your current home in order for it to sell it more quickly. Obviously, biggest problem with this particular method of selling first, is that it is just too darn disruptive for most people. They just don’t want to move two times. Not only that, but the displacement may end up being longer than you have planned, especially if your home shopping process drags on.
Buy a Replacement Home, Then Sell
This plan works best if you have already paid off your current home, or if you have lots of money to play around with. If you are going be taking on the burden of paying two mortgages, perhaps for longer than you have planned, you are going to have to need to look as good as gold to some lender to be able to pull this method off but it does get accomplished. The major benefit to going this method is that there is less hassle. You can move leisurely into your new home at your own pace because you won’t have some anxious home buyer chomping at the bit to get you and all of your belongings out of the home you just sold. You may be able then take time to make improvements to the home you are selling and get it ready for sale. This makes it much easier to accomplish with all of your items moved out. It also creates a clean slate which many home buyers like because without all of your items in the home, they are more easily able to see how they would like to lay out their furniture and personal decorating preferences. The major drawback here with this method is obvious, depending on how quickly you sell your old home, you may be paying those two mortgages as I was saying earlier in addition to being responsible for the maintenance and the security of the old home until it does sell. So all of a sudden, this less disruptive way becomes more difficult and hair-raising. Again, this sell first method works best if you own the home free and clear.
The seller may also decide that they will rent out the old home for a year let’s say, but tax incentives lost, and the possible need to keep up the property with renters in place, the needs for repairs and the possible damage that renters may cause must be taken into consideration.
Sell Your Home and Buy Another Simultaneously
This method requires skill and strategy, but it is accomplished every day in your fair city. It really can be done, believe me. This strategy definitely is where a Realtor’s metal is tested and I am going to spend the remainder of this podcast talking about how this particular method is accomplished, and perhaps take out some of the fear associated with it. Remember, my wife and I have helped many buyers and sellers through this process many, many times. So here we go.
It’s Time to Put Your Home On the Market
Now it’s time to huddle with your Realtor and list your home. And if you live in the San Fernando Valley or Simi Valley, Moorpark, Thousand Oaks, or Westlake Village, you need to call me so I can show you how I can market your home and sell it for the most money, in the shortest time with the least hassles. Often times this is when you learn if your plans of moving up have a chance of coming to fruition. Your agent will give you a good idea of what you might expect for the sale of your house excluding all of the costs associated with selling in his Net Sheet. By the way, you should download my episode on home seller’s closing costs if you haven’t already and see what it costs to sell a home in Southern California. A Net Sheet is a breakdown of costs a home seller will incur during the sale process and give an estimate as to what the seller will get to keep or will Net from the sale of the home. So now the seller knows what he or she can use towards the purchase of the replacement home.
So let’s say that you find out that you will have the money you need to make that move once you sell your home. Now the Listing Agent will fill out the listing agreement with you take pictures, make sure you are ready to greet the whole Real Estate Buying World into your home, and you are off and running. Congratulations, your home is on the market. Make sure you do your dishes every morning and vacuum and dust and pick-up after yourselves. You are going to hopefully have visitors; prospective home buyers are going to be walking through your humble abode.
The listing agent will note in the private remarks to Realtors in the description of your home in the MLS, the Multiple Listing Service where your home is advertised to the whole world as being for sale, that you the seller, are going to need to find a home of choice before escrow can open on your home for sale here. This is big red flag to the selling agent, also known as the buyer’s agent. If the buyer’s Realtor is a good agent who is showing property to a buyer who is in any particular hurry to move, the agent is going to warn that prospective buyer to skip over the properties where the sale of the home depends upon the seller finding a home that they like.
When the listing agent’s remarks refer to a Home of Choice, that would mean that if the buyer liked the home and wanted to buy it, they would have to wait for the seller to find their home of choice before they could get moving towards that countdown to close both the purchase of a replacement home for the seller, and the purchase of the sellers current home by the interested buyer. So again, Real Estate Agents who actually read agent remarks written in the MLS, are bringing home buyers to look at your home who already know that you as the seller indeed have to find your replacement Home of Choice before you can sell your home to them.
The SPRP, Seller’s Purchase of Replacement Property Form
When an offer is received by your listing agent, included in the counter offer back to anybody who submits an offer will be the SPRP, the Seller’s Purchase of Replacement Property , form. This is an amendment to the California Residential Purchase Agreement which is specifically designed and written to help keep home sellers from becoming suddenly homeless. It puts a stipulation on the sale of the house to this prospective buyer, that you as the seller need to find a home of choice before the sale of your home can be finalized. It gives the seller a number of options.
Section 1A gives you, the seller, 17 days to find a replacement property, and open an escrow. Now, there is a box that you as the seller, can ask your agent to check, and then write in any number of days, after acceptance you need to have to find a home. So it doesn’t have to be the 17 day default period, the seller can ask your agent to shorten it or lengthen it . Now let’s say that you choose to not check the box and go with the default time of 17 days. If you, the seller still haven’t found your replacement property by the 17 days and therefore haven’t lifted your Home of Choice Contingency, the buyer now has the opportunity to cancel the agreement and go on their merry way and find another home. If the buyer really loves the house and is willing to wait longer, the you as the seller can ask for more time to locate another home and if that is agreed to by both parties, an amendment will be made and signed by both parties, the buyers and the sellers for the extended period of time agreed to. At any rate, when the buyer is ready to move on, let’s say that they have waited long enough and maybe they see another home they like better while they are waiting for you to finally find some place, they will need to give the seller a Notice for Seller to Perform giving the seller notice in writing that the agreement is going to be canceled.
There is another choice, in Paragraph 1B, The agreement is contingent upon the concurrent close of escrows of both the seller’s replacement property, and the purchase of the sellers’ property by the buyer.
If the box is marked in paragraph 1B of the SPRP for a “concurrent close,” then the seller’s contingency remains in place until the seller has actually closed escrow on the replacement property. As a buyer, paragraph 1B creates a situation which puts the buyer of the property being sold in a very bad position because the seller can actually cancel the sale of his own property by using this contingency, any time throughout the escrow period. If the seller is unable to close escrow let’s say, on a replacement property, then the seller would be able to just cancel the sale of their property at any time during the length of the escrow period — leaving the buyer without a home and with all the expenses/costs associated with the purchase of the home — inspections, appraisals, and other fees. One option for a buyer is to try to negotiate with the seller to have these expenses reimbursed if the seller cannot find a replacement property and subsequently cancels the transaction.
Another option for a buyer to avoid incurring expenses is to negotiate when the time periods in the purchase agreement would begin for inspections, contingencies and other obligations. The SPRP form paragraph 2A gives the buyer and seller options for the time periods to begin as written in the purchase agreement. The first box in paragraph 2A (if marked) specifies that the time periods would begin “as specified in the agreement” — when the contract is accepted. The second box (if marked) specifies that the time periods in the purchase agreement will begin “the day after the seller removes the contingency of the purchase of a replacement property.” So once the seller has found their replacement property and has an accepted offer and opens escrow on that property, then, the buyer can get on with their inspections, appraisal and so on. Then at that time, the escrow clock will begin ticking for the buyer. The times for the length of the escrow, the different contingencies like inspection, insurability, lender contingencies will start for the buyer.
What I have found is in order to be sure that there is no confusion or misunderstanding between buyers and sellers, I mark the last box in 2A which says Other, and has a line for the agent to fill in specific wording that protects the buyer and the seller. Why would I as the listing agent be concerned with protecting the buyer? Remember, as the listing agent or the representative of the home seller, I want to make sure that there are no misunderstandings between the two parties. Misunderstandings can sometimes turn into legal issues, so I would check the box in 2A, OTHER, and I would write in “All time periods to start when the seller opens escrow on their home of choice and removes the SPRP contingency. Both escrows are to run and close concurrently.
So what about the buyer and buyer’s agent in this case? Do they have any control as to the wording of the SPRP? If you have a buyer of a property that has a seller who needs to find a new home to buy before they sell their home to you, the buyer’s agent needs to be clear in the purchase contract itself. So just as it is written in 2A where it says; Time periods in the Agreement for inspections, contingencies, covenants and other obligations shall begin: as specified in the Agreement.
So the key to protecting the buyer from having to perform costly inspections and a costly appraisal by their lender, before the seller finds their home of choice, a cost of sometimes as much as $550 for that appraisal and often another $500 or more for a home inspection, is to have the proper language written in their offer. Written into the Residential Purchase agreement, that can be referred to as in 2 A of the SPRP.
It should be clear in the purchase agreement that the buyer will hold off on any inspections, appraisals and the like, until after the seller finds a home of choice and removes the Seller’s Purchase of Replacement Property Contingency. That would read like this and can be written in on page 4 of the Residential Purchase Agreement… Escrow contingencies and timeframes to begin the day the seller opens escrow on their home of choice and removes their SPRP contingency. Escrows to run and close concurrently.
If the buyer’s agent does not have this wording written into the purchase agreement, and the buyer gets a counter with the SPRP from the seller who needs to find a home of choice, the buyer’s agent must include in a counter offer to the seller a counter containing the language I just mentioned…… Escrow contingencies and timeframes to begin the day the seller opens escrow on their home of choice and removes their SPRP contingency. Escrows to run and close concurrently.
Now to wrap this form up, there is, in addition to these other items on the SPRP, a separate paragraph which provides that the seller may extend the close of escrow date for the sale of seller’s property for an agreed upon time by providing buyer with a written notice at the time the seller removes the contingency pursuant to paragraph 1A.
So let’s say that the seller needs more time than 30 days to move, they will give notice in Addendum Form, that they need extra time. The worst part or section of the SPRP form, as far as the buyer is concerned, is in paragraph 3 where it says in effect, the seller can cancel the agreement any time, and once the buyer receives The Seller’s written removal of the contingency, the buyer may not cancel.
These problems can be solved as I said, by the listing agent checking the box on the SPRP and writing in the wording I mentioned before…..”all time periods to start when the seller opens escrow on their home of choice and removes the SPRP contingency. Both escrows are to run and close concurrently.
Or, by the buyer’s agent writing in the proper wording into the Purchase Agreement, or in a counter offer to the seller as I mentioned before.
All of this sounds kind of complicated, and it is, but transactions such as these are done every day, so please don’t let that stop you from going forward and doing it. The main thing here is communication between all parties involved. There should be open communication and no secrets should be kept away from buyers and sellers.
Below is the wording from the SPRP, The Seller’s Purchase of Replacement Property Form.
SELLER’S PURCHASE OF REPLACEMENT PROPERTY:
- A. The Agreement is contingent on Seller entering a contract to acquire replacement property. Seller shall, within 17 (or ___) Days After Acceptance, remove this contingency or cancel the Agreement. If Seller does not remove this contingency in writing within that time, Buyer, after first giving Seller a Notice to Seller to Perform (C.A.R. Form NSP), may cancel the Agreement in writing.
OR B. CONCURRENT CLOSE:
This Agreement is contingent upon Seller closing escrow on replacement property. 2. A. Time periods in the Agreement for inspections, contingencies, covenants and other obligations shall begin: as specified in the Agreement; the Day After Seller delivers to Buyer a written notice removing this contingency; or Other ___________ ________________________________________________.
- Buyer and Seller agree that Seller may extend the Close Of Escrow date for the sale of Seller’s property for a maximum of ___ additional Days or until __________________ (date) , by providing Buyer written notice at the time Seller removes the contingency specified in 1A, if applicable. 3. Even after the expiration of the time specified in paragraph 1, Seller retains, until Buyer cancels pursuant to paragraph 2, the right to remove in writing this contingency or cancel the Agreement. Once Buyer receives Seller’s written removal of this contingency, Buyer may not cancel pursuant to paragraph 2.
The COP, Contingency for Sale Or Purchase Of Another Property Form
When you as the seller are now the buyer of your replacement home, your agent will fill out and send along with the offer, a form called the COP or the Contingency for Sale or Purchase Of Other Property.
Basically this piece of paper is letting the seller of the home you are buying know that this purchase hinges on the sale of your home. You are now in the same shoes as the buyer of your home is in. They are depending upon the concurrent close of escrows to pull off this sale and purchase of multiple homes. The COP will show the seller of the home you want to purchase what is happening with your home. It tells the seller that your home is listed on the MLS, whether or not the property is in escrow yet or not, and if the property is not in escrow at the time you make the offer, it states the amount of time you need as the buyer to open escrow with your home of choice. I have a copy of the form in my blog, so look for it and see what it has to say.
Now, let me confuse this scenario even more. Let’s say that the seller for example, found a home of choice where the seller of that home also countered back with a SPRP? What if they too need to find a home of choice? Think about that. Let’s say that you as the seller have used up most of your 17 days to find that home of choice, only to find that those sellers of the property you want to purchase, also will need 17 days to find their home of choice. That may be fine with you Mr. Seller, but what about the original buyers? Now those buyers are being asked to give the seller’s seller, 17 more days! 17 days and another 17 days…that’s over a month and lots of things can happen in a month. Interest rates could change; another home can come on the market that looks more interesting to that buyer. Life can happen too like job a loss or worse. And on top of that, you are depending on one more domino to fall in order to close escrow on three or more properties. It can get that complicated and more but, it happens. One escrow closes after then next, all traveling along side by side, concurrently to a successful close, one property funding the other funding the other. It really, really does happen. But do you really want it to happen? You may as the seller now the buyer, want to try to avoid having to depend on all of those dominoes, let’s just call them transactions, on all of those transactions to close without any problems. Remember, if one of those transactions falls through, the entire chain can fall apart. So it may be that you as the seller and now the buyer, may want to avoid looking at homes where the seller also needs to buy another home. Just saying.
So to wrap things up, there are three ways to sell a house and buy another. If you choose to sell your house and buy another simultaneously, remember that it is done regularly. Just keep in mind that the important terms of the SPRP need to be negotiated to satisfy both buyers and sellers, and that is accomplished with a well written offer, and a clear SPRP as well as a clear counter offer from the buyer in case the buyer is not happy with the boxes checked by the listing agent for the seller on that Sellers Purchase of Replacement Property form.
And when you do make the decision to go forward with listing your home and buying another, make sure you have a skilled agent who can navigate through the transaction and get the job done for you. And remember that if you live in the San Fernando Valley, Simi Valley, Moorpark, Thousand Oaks or Westlake Village or the surrounding areas, call me and my wife Debra to help you sell your home and find you a new home.
Well, that is all for this episode of the Southern California Real Estate Answer Man Show. For more tutorials on buying and selling Real Estate, download my other episodes from the iTunes store. Subscribe to my podcast and if you liked what you heard, please leave a good review at iTunes for me. Make sure you take some time to watch some of my YouTube Videos, search properties on my website or request a market analysis on your home to see what the value of your house actually is. I am a real Real Estate agent, and along with my wife Debra, who is also a top producer at Troop Real Estate, we are looking forward to helping you with all of your Real Estate Needs. With the Kessler Team you get two agents for the price of one, and not only that, but you get experience and compassion, knowledge and understanding from your Realtors. We are here to serve you and can be reached by phone at 818-426-6415 or email us at realestateanswerman @gmail.com. Remember to visit our blog and our website, and thanks for listening. See you in your next home! Goodbye everyone!