An energetic young entrepreneur made lots of money in real estate during the late 1970’s by buying older homes in need of renovation and renovating them. His strategy was to buy a tired-looking property and move in to it for a couple of years while he completed the transformation. When the work was done, he’d sell for a significant profit, find his next project and repeat the process again and again. This plan was quite successful for a number of years until the recession of 1980.
Mortgage interest rates shot up to 18 percent and home sales slowed to a virtual standstill. Not daunted by the prospect of a slower market, this entrepreneur bought a project house in 1981 before selling the home he’d just finished renovating. After months of marketing his masterpiece, with no nibbles, he found himself in a financial bind. He was supporting two home mortgages and incurring renovation costs at the same time.
Ultimately, he was forced to put the home he’d just purchased on the market. Unfortunately, this house sold before the one he really wanted to sell. Not only did he fail to achieve his goal, he was set back financially. Perhaps you’re thinking this would never happen to you. If you’re prudent and cautious, it won’t. However, this situation is not all that uncommon, particularly in a transitional market like the one we’re experiencing now.
It’s risky to buy a new home before selling the old one in a softening real estate market. If prices drop between the time you buy and the time your home is ready to go on the market, you might have to dip into savings to make up the shortfall. Or you might have to sell other assets, or sell the home you just purchased, as in the examples above.
A market slowdown could mean that it will take far longer to sell your home that you’d planned. If you’re paying for two mortgages, or interim, loan, this could become quite costly. An option for some who buy before selling is to rent out the old home if it doesn’t sell within a reasonable time. If your mortgage on that property is low enough, you might even generate a cash flow.
Another concern is that tenant-occupied property can be difficult to sell unless the tenants are cooperative. In our experience most tenants would agree to allow you to take potential property buyers through several times per week in exchange for a period of ‘reduced rent’. Depending on your financial position, this may be a worthwhile arrangement. You might however still have to incur further renovation expenses before you re-market a tenanted property.