Selling first or buying first? The pros and cons of each

Deciding whether to sell your current home before buying a new one, or vice-versa, is a common dilemma for homeowners in British Columbia and across Canada. There's no one-size-fits-all answer, as the best approach depends heavily on your personal financial situation, risk tolerance, and the prevailing real estate market conditions. As your mortgage broker, I'm here to help you understand the implications of each choice so you can make an informed decision.

Understanding Your Options: Selling First vs. Buying First

Both strategies have distinct advantages and disadvantages. Let's break them down.

Selling First: The Certainty Approach

When you sell your current home before purchasing your next one, you gain a significant amount of financial clarity.

Pros of Selling First:

• Financial Certainty: You know exactly how much equity you've unlocked from your sale. This allows you to set a precise budget for your new home, making it easier to secure financing and avoid overextending yourself.
• Stronger Buyer Position: With cash in hand and no home sale contingency, your offer on a new property becomes much more attractive to sellers, especially in competitive markets.
• Avoids Carrying Two Mortgages: This is a major benefit, as you eliminate the financial stress and burden of paying for two properties simultaneously.
• Reduced Pressure on Selling: You can take your time to negotiate the best possible price for your current home without the urgency of needing funds for a new purchase.

Cons of Selling First:

• Temporary Housing: The biggest drawback is the potential need for interim accommodation. This could mean renting, staying with family, or utilizing short-term furnished suites, all of which come with their own costs and inconveniences.
• Market Fluctuations: If there's a significant shift in the market between your sale and your next purchase, you might find yourself buying in a more expensive market than you sold in.
• Rushed Buying Decisions: You might feel pressured to find a new home quickly to minimize the time spent in temporary housing, potentially leading to compromises on your ideal property.

Buying First: The Seamless Transition Approach

Purchasing your new home before selling your current one can offer a smoother transition, but it comes with increased financial risk.

Pros of Buying First:

• Seamless Move: You can move directly from your old home to your new one, avoiding the need for temporary housing and the hassle of multiple moves.
• Less Stressful House Hunting: You can take your time to find the perfect home without the pressure of having already sold your current property.
• No Gap in Homeownership: You maintain continuous homeownership, which can be important for some individuals.

Cons of Buying First:

• Financial Risk (Carrying Two Mortgages): This is the primary concern. If your current home doesn't sell as quickly as anticipated, you could be stuck paying two mortgages, property taxes, and other associated costs, which can add up to hundreds or even thousands of dollars per month.
• Contingent Offers are Less Attractive: If you need to include a "sale of existing home" contingency in your offer on a new property, it can make your offer less appealing to sellers, especially in a seller's market. Sellers often prefer firm offers without such conditions.
• Bridge Financing Costs: If the closing dates don't align, you might need bridge financing, a short-term loan that covers the down payment and closing costs of your new home until your old one sells. While helpful, bridge loans typically have higher interest rates and can include administrative fees.

Navigating the Market Conditions

The real estate market plays a crucial role in determining which strategy is best for you.

• Seller's Market (Low Inventory, High Demand): In a seller's market, homes tend to sell quickly, often with multiple offers. In this scenario, buying first might be less risky, as you're more confident your current home will sell in a reasonable timeframe. However, even then, a contingent offer might put you at a disadvantage.
• Buyer's Market (High Inventory, Low Demand): In a buyer's market, homes take longer to sell, and buyers have more negotiating power. Here, selling first is generally the safer choice. This prevents you from being in a position where you own two homes for an extended period, incurring significant carrying costs.

Strategies to Mitigate Risk

Regardless of whether you choose to buy or sell first, there are strategies to help manage the risks involved:

• Get a Lender approval: Before doing anything, get a mortgage planning. This gives you a clear understanding of how much fits your budget, even if you plan to sell first.
• Conditional Offers: If buying first, you can try to include a "sale of existing home" contingency in your offer. This means your purchase is conditional on your current home selling. While it makes your offer less attractive, it protects you from owning two homes if your current one doesn't sell.
• Bridge Financing: If you buy first and the closing dates don't align, bridge financing can provide a temporary solution. It uses the equity in your current home to cover the down payment and closing costs of your new home until your sale closes.
• Flexible Closing Dates: Try to negotiate flexible closing dates on both your sale and purchase agreements to minimize any overlap or gaps.
• Realistic Pricing: If you're selling, price your home realistically based on current market conditions to encourage a quicker sale.
• Temporary Rental: If you sell first, consider a short-term rental to give yourself ample time to find the right new home without feeling rushed.

British Columbia Specifics

Here in BC, there are a few additional considerations:

• Property Transfer Tax (PTT): When you purchase a property in BC, you'll pay Property Transfer Tax. There are exemptions for first-time homebuyers and newly built homes, but these have specific criteria and property value thresholds. For example, as of April 1, 2024, the First-Time Home Buyers' Program offers a full PTT exemption on qualifying properties with a fair market value of $835,000 or less, with partial exemptions up to $860,000.
• Mortgage Stress Test: As mentioned, the mortgage stress test applies to most new mortgages in Canada, including in BC. This means you'll need to qualify at a higher rate, which can impact your borrowing capacity.
• CMHC Insurance: If your down payment is less than 20% of the purchase price, you'll likely need mortgage default insurance (often referred to as CMHC insurance, though other providers exist). The minimum down payment is 5% for the first $500,000 of the home price and 10% on the portion above $500,000, up to a maximum purchase price of $1.5 million for insured mortgages.

FAQ

Q: What is a contingent offer in real estate? A: A contingent offer is a purchase agreement with specific conditions that must be met before the sale becomes final. These conditions act as a safety net for the buyer, allowing them to back out without penalty if the contingencies aren't satisfied. Common contingencies include financing approval, a satisfactory home inspection, or the sale of the buyer's current home.

**Q: How does the mortgage stress test affect my

Related mortgage resources

• Explore my free intake for me to review to see where you stand with no obligation.
• Explore my home purchase planning to plan a confident purchase.
• Read Using a Home Equity Line of Credit (HELOC) in Burnaby for Smart Financial Planning for a related BC mortgage perspective.