With Terry Story, 28-year veteran Real Estate Agent with Coldwell Banker in Boca Raton, FL
What options does a current home owner have if they decide they really want to buy a new home but are unable to come up with the money before selling the home they’re living in? Terry talks with Steve about the ins and outs of what is called a “sale contingency,” in which a prospective buyer enters into a contract with a home seller that gives them the option to buy the new home if they sell their existing home by a certain date. Terry admits that these deals are often difficult to negotiate because they can delay the sale and add another layer of complexity from the seller’s perspective. Moreover, they always come at a cost to the buyer, who, of course, wants to minimize those costs.
A home sale contingency helps cash-poor buyers who have equity in their current homes get access to the liquidity (cash) they need—usually by selling their own home—to close a sale on a new home. The contingency essentially gives the buyer a little more time to sell his own home. To pull this off, the buyer must price his home more aggressively, accepting somewhat less than he wants to and somewhat less than the comps. The buyer’s realtor must persuade the seller and his realtor that the buyer is serious about selling his own home within a short time frame and that the buyer’s offer is not only competitive but a better deal than he’ll get elsewhere. The seller is also likely to want a kick-out clause added to the contingency, which allows him to nullify the contingency contract in order to accept an offer from another prospective buyer.
One way that a buyer trying to sign a contingency contract can influence the seller is by offering a “rent back” option. This allows the home seller to stay in his own home for a month or two after closing the sale, at a very reasonable rent. For many sellers, this is an attractive add-on to a contingency contract, though for buyers it represents another cost on top of the skin already sacrificed to aggressively sell the current home low and buy the new one high.
Another option for contingency buyers is to take out a home equity line of credit (HELOC)—a kind of second mortgage—in order to raise the cash necessary to buy the new home. This approach is not without its risks and expenses either because a HELOC affects the buyer’s debt-to-income ratio, and, therefore, the bank underwriting the new mortgage may back out. Buyers need to discuss the particulars of their situation with their mortgage underwriter before making an offer on the new home, whether a contingency sale or conventional one, to make sure they will still qualify for the new home loan. If all the key numbers are acceptable to the lender—income, credit, equity in the house—this may be a workable option.
Steve and Terry wind down their conversation this week by talking about a new trend in home building: using shipping containers to build homes. These containers are cheap to purchase as is (between $1000 and $4500) and are repurposed by being painted, decorated, or otherwise treated to supposedly look like “real homes.” These might be multiple modular “cans” or solo ones, and the process of turning them into homes is called “upcycling.” Some have been spotted on the market north of $200,000. This trend also has some commercial applications like the hip new restaurants in the arts district of Miami. Neither Steve nor Terry have seen one of these container homes or restaurants in person, and they’re somewhat surprised that such a small space—typically around 1000 square feet per container—could have very broad appeal but remark that it fits in with the consumer interest in “tiny homes” of late.
Disclosure: The opinions expressed are those of the interviewee and not necessarily United Capital. Interviewee is not a representative of United Capital. Investing involves risk and investors should carefully consider their own investment objectives and never rely on any single chart, graph or marketing piece to make decisions. Content provided is intended for informational purposes only, is not a recommendation to buy or sell any securities, and should not be considered tax, legal, investment advice. Please contact your tax, legal, financial professional with questions about your specific needs and circumstances. The information contained herein was obtained from sources believed to be reliable, however their accuracy and completeness cannot be guaranteed. All data are driven from publicly available information and has not been independently verified by United Capital.
Steve Pomeranz: It’s time for Real Estate Roundup. This is the time every single week we get together with noted real estate agent Terry Story. Terry is a 28-year veteran with Coldwell Banker, located in sunny Boca Raton, Florida. Hey, Terry, welcome back to the show.
Terry Story: Thanks for having me, Steve.
Steve Pomeranz: Terry, you do this every single day. I know that people list their properties, or they go to buy up properties, and they haven’t sold their original property, you know, the home that they live in. What are some of the things that you can do? How do you buy a home when you already own a home?
Terry Story: You know, this is not an easy task to tackle. First of all, if you try to buy a home without the sale of your home, you have to create a contingency, which isn’t very attractive to the seller. It’s not impossible; it’s all in the art of persuasion. You need a good agent who can try to persuade the seller that this is a reasonable and good deal.
There’s a couple ways you can do it. First step I would do is show the seller that the home is being priced properly. For example, you’ll show them the comps. The buyer has to realize, in order to try to buy somebody else’s home, they’re going to have to be aggressive on their sale price. They can’t have it both ways.
Steve Pomeranz: Yeah.
Terry Story: They can’t try to steal the house they’re trying to buy, with that kind of contingency. So, in order to do that, they’re going to have to offer a strong price on the house that they’re trying to buy, and really, possibly, accept less on the sale of their house, so that they can sell it quickly.
Steve Pomeranz: Hold on a second, let me interrupt. So, the idea here is if you need the proceeds from the sale, you better price it right because liquidity is now your primary concern, the idea of getting enough cash to buy the next home. So, you’re probably going to have to give up a little bit, especially if sales are slow, on your existing home.
Terry Story: That’s right. You’re going to have to give up there, and then you’re going to have to entice that seller with more money, for him to be willing to take that contingency.
Steve Pomeranz: So, there’s going to be a cost.
Terry Story: So, there is absolutely a cost involved.
Steve Pomeranz: Yeah, there’s a cost for you getting yourself into this situation.
Terry Story: Correct. I don’t like doing this. I was successful doing it a few times last year. If you have a good relationship with the other realtors, that’s very helpful in just really trying to convince the seller that this is worth doing. The other thing they’re going to probably have to do is add a kick-out clause, where the seller has the option that if they get another offer during this time, that they reserve the rights to kick-out this particular contract and consider another offer.
Steve Pomeranz: Wow.
Terry Story: So, it’s an uphill battle for a buyer trying to purchase a home this way. The other thing you can do is possibly offer the seller a rent-back situation. Many sellers would love the idea of you purchasing their home, yet they get to stay there for one or two months. You can negotiate something very favorable to them, but again, that’s still going to cost you. It’s always going to cost you when you try to put yourself in this situation.
Your third option, if you have a lot of liquidity, equity in your house that you currently own, you can tap into possibly getting a HELOC on your house to purchase the new house.
Steve Pomeranz: A HELOC is a home equity line of credit.
Terry Story: Correct. Now when you do that, you also have to be very, very careful because that’s going to throw off your debt-to-income ratios, so you have to make sure that you’re still going to now qualify to purchase the home. So, there’s a couple things you need to take into consideration.
Steve Pomeranz: Hang on. So, if I’m going for a mortgage, and then I decide to pull money out of my existing home, that could really mess things up because you’re not really supposed to do any serious financial transactions …
Terry Story: Correct.
Steve Pomeranz: … When you’re going for a mortgage. They want to see something stable, and they don’t want to see you messing around. So, if you’re going to do any of this, you better do it before.
Terry Story: Absolutely do it before and make sure you discuss this with the mortgage person before you start doing this, as to what your goal is, to make sure it makes sense to do it. But you can do this if you have the right income, credit, equity in the house; it is an option.
Steve Pomeranz: So, the idea is you pull this money out, and then you finally sell the home, and then you pay the HELOC back, obviously, on the sale of the home.
Terry Story: Correct.
Steve Pomeranz: All right. You know, before we go, I want to talk about this new hot area of real estate building and investment, and it’s the fact that they’re building new homes with what were formerly shipping containers, which took stuff from China to the ports and held your electronics. Now they’re making them so you can put two or three together and build a house. Tell us about that.
Terry Story: That’s right. Well, the interesting thing is these homes run 80 to $120 a square foot to build. They’re doing this and they claim, I haven’t seen one actually, but they claim that they look like houses. They put stucco on them, they paint them, I mean, I can’t imagine a shipping container looking like a house, but they claim that it does. And then, in this particular article that we were discussing, one of them had been put up for sale for $230,000.
Steve Pomeranz: Yeah.
Terry Story: And then, they’re taking these shipping containers and they’re making restaurants down in the Wynwood area …
Steve Pomeranz: In Miami.
Terry Story: … Down in Miami. So, I actually almost feel like I’ve got to go down there to check it out.
Steve Pomeranz: They’re calling it upcycle. They’re taking a container, repurposing it, and bringing new life to it. So, it’s not recycled, it’s upcycled.
Terry Story: Upcycled, yup.
Steve Pomeranz: Love marketers. They’ve got to spin it.
Terry Story: Can you imagine the city letting us do this, Steve?
Steve Pomeranz: No, not where we live.
Terry Story: Maybe we should open up a neighborhood called, I don’t know, what would we name it?
Steve Pomeranz: The container store, I’m not sure. This is kind of interesting, but what difference … Is this then a, basically, a mobile home? I mean, those are, in a sense, steel containers …
Terry Story: I guess.
Steve Pomeranz: … That are prettied up, and some of them you can’t tell aren’t regular homes. So, this is a shipping container, maybe it’s stronger, I really don’t know. I think the thing that gets me the most is that they’re very small. They’re like a thousand square feet, they’re 1,200 square feet, which isn’t really an awful lot. But it does fit in with this idea about these tiny homes, which we see on TV now.
Terry Story: Yeah, exactly. And you can buy these shipping containers for anywhere from a thousand to 4,500, I guess depending on what kind of condition they’re in.
Steve Pomeranz: That’s a good business.
Terry Story: I know.
Steve Pomeranz: You spend $5,000. You buy four of them, that’s $20,000. You fix it up, I don’t know what would add to it, and you sell it for 120 to $150,000.
Terry Story: They’re 40 feet long, 9 feet wide, I mean, you know …
Steve Pomeranz: Yeah.
Terry Story: You can do all kinds of fun things with this space.
Steve Pomeranz: I guess so. My guest, as always, is Terry Story. Terry is a 28-year veteran with Coldwell Banker, located in sunny Boca Raton, Florida, and you can find her at terrystory.com. Thanks, Terry.
Terry Story: Thanks for having me, Steve.