Three months ago, my boyfriend and I were ready to make the move to downtown Toronto. Our neighbourhood was taking off, our home renovation was complete, we had addressed the the five questions to ask before selling your house and financially, we were in good shape.
Our plan was to buy a semi- or detached downtown home with a rental apartment in the $500,00 to $650,000 price range, and renovate over the next two years. Once we found the right place, we would sell our existing home and make the move. Easy as pie.
Unfortunately the real estate market had other plans. As house prices continued their super-charged ascent - in perfect symmetry with the number of times we had been outbid - the answer to number four on the list: 'Can I really afford what I want/need?' quickly turned from "yes" to "no."
Now every house hunter has a horror story and we don't profess that ours is particularly unique, but it was persuasive enough to turn our "buy now, sell later" strategy on its head. It started when a red brick, two-storey home with a garage (albeit a slanting, sinking one) popped up on MLS one afternoon. Its $539,000 sticker price - a relative steal for the neighbourhood - was enticing.
After a few showings and an open house, it became apparent that whoever was mad enough to cough up the cash for this place would be ripping it down to its studs. So naturally we figured that it was worth the value of the land. Translation: we actually stood a chance at getting this house.
We calculated the costs of a full renovation and an addition at the rear - roughly $150,000 to $200,000 - and factored in a basement tenant suite generating a rental of $1,000 a month. Although it would be expensive and laborious, it was our ticket into a good neighbourhood and, as semi-experienced renovators, we deemed ourselves worthy of round two.
But after a lot of 'best-' and 'worst-case' number-crunching, numerous tense conversations and even a few sleepless nights, something changed. As the offer date drew closer and the reality of living in reno-purgatory for the next three years grew increasingly likely, we bowed out. We didn't even throw in a lowball offer. It was over. The house in question ended up selling for more than $200,000 over the asking price, which reinforced our sense that we had made the right decision.
As we reflected on the grey hair-inducing experience, it dawned on us that without money from the sale of our existing home, we simply weren't comfortable buying another. And in such an erratic market, we didn't feel comfortable opening ourselves to potentially massive amounts of debt and uncertainty. In other words, basing life-changing financial decisions on hypothetical or 'hopeful' scenarios was too stressful.
Kevin Somers, a broker and area manager for Royal LePage Real Estate Services in Toronto, says selling first and buying second is a viable option for people who want to know exactly how much they have to spend on their next place, especially if they are looking to move up in the housing market. "Ideally, those choosing this route would have to be comfortable with the prospects of potentially moving twice in a relatively short period of time and be confident that cost-effective arrangements could be made for accommodation during their gap period."
Mr. Somers has this advice for people who would rather wait and sell their home before they buy a new one:
- Understand the rules around the portability of your mortgage. This option lets you transfer the interest rate and all the existing terms of your current mortgage to your new home, subject to a credit review and property appraisal when you make the new home purchase.
- As the seller, you can dictate the close date and buy yourself time with respect to avoiding mortgage-breaking penalties and figuring out your next move.
- Do your homework and surround yourself with people who understand your objectives and can provide you with good advice.
- Acknowledge the fact that you may not find the perfect place right away. Figure out your interim housing plan and have the financial means in place to terminate your mortgage.
- As a buyer with cash reserves, the deck is stacked in your favour. Knowing your exact financial position also gives you discretion relative to the properties you live in and allows you to go in with a strong offer.
- Ask yourself what you think is affordable. Despite the frenetic nature of the market, the key is to set personal parameters firmly in your mind and stick to them.
Stressful as it was, this experience taught us a valuable lesson about our own financial risk tolerance threshold. And while selling a house before buying another comes with its own share of uncertainty, it's comforting to know that we won't be getting in over our heads.