Tips for Upsizing or Downsizing in an Inventory Constrained Market

Our real estate markets have recovered nicely from the 2007 economic collapse, a forgettable time when family, friends, and many of us experienced job loss, ruined credit, short sales, and foreclosures.  To put things in perspective, at market bottom in July 2010 when most people were unwilling to risk purchasing a home, Marin County’s inventory of single family homes for sale stood at an astounding 1,144 units, and by the time some of the excess inventory was sold off and prices stabilized home values had fallen by as much as 35% to 40%.  Today property values stand at approximately 25% above the market peak reached in 2007, buyer demand is strong but inventory levels are extremely low. Our high point for homes available for sale in 2016 for example was 370 (June), 68% below the July 2010 inventory peak.  In a balanced market which we hope to see again one day, Marin inventory levels for single family dwellings should reach 600 to 700 during the summer months.

The reason for low inventory levels is not just that buyer demand is strong but that sellers have anxiety about upsizing or downsizing in a market where there just aren’t enough homes for sale, worried that they are going to sell their home and not find a suitable replacement.  Sellers that have cash or can be approved for two mortgages control their own destiny.  But for the rest of us it’s a bit trickier! What I am here to tell you is that with good planning and execution and by employing one or more of the following strategies it can be done!

• Seller in possession after close – Seller rents back from buyer for 60, 90, or even 120 days after close of escrow to allow time to locate a replacement home. Often times we successfully negotiate that all or a portion of the rent back period is at zero cost to the seller.  Seller can now make an all cash offer on their replacement home, an enormous advantage in today’s market.

• Sale subject to seller finding a suitable replacement property – The seller makes it known when the property is listed that they will move forward with the sale of their home on the condition that they locate, enter into contract, and remove contingencies on their replacement home.

• Sell then move into temporary living quarters – Moving twice can be stressful but with this strategy sellers maintain strong leverage with buyers, have time to locate a replacement home, and are in position to make an all cash offer on their replacement home, an enormous advantage in today’s market.

• Seller locates a replacement home and enters into a contract that states that seller will move forward with the purchase of the replacement home after close of escrow. The success rate will be lower if the seller’s home is not on the market when this offer is made or if there is a lot of interest (multiple offers) on the targeted replacement home. This strategy is more likely to work when the targeted replacement home has been on the market for an extended period of time and that seller is running out of time and options.

• Bridge Loans – Bridge loans are temporary loans that bridge the gap between the sales price of a new home and a home buyer’s new mortgage in the event the seller’s home has not yet sold. The bridge loan is secured by the buyer’s existing home.  Underwriting is based on “make sense” underwriting approach rather that FICO or debt to income approach.  Some lenders who make conforming loans (needed to close the transaction on the target home) exclude the bridge loan payment for qualifying purposes.

• Security backed line of credit (margin loan) – This arrangement with your brokerage firm allows you to borrow from 50 to 95 percent of the value of the assets in your investment account depending on the value of your overall holdings and types of assets in the account. A margin loan may also allow you to avoid potential capital gain taxes because you don’t have to liquidate securities for access to funds.  Plus you might also be able to continue to receive benefits of your holdings, like dividends, interest and appreciation.

• Borrow against your 401k account – There are two types of 401 K accounts. Under an employer sponsored plan you may be able to borrow funds from your 401k account for a 5 year period at a moderate interest rate (your monthly payments are automatically deducted from your checking account and are credited back to your account). With a self-directed 401k account you can withdraw and use funds for up to 60 days and not be charged with a fund distribution or incur taxes and penalties for early the withdrawal of retirement funds as long as the money is redeposited into your account within the 60 day period.

• Home Equity Line of Credit – Useful for down payments on your target replacement home. Works best if you already have a HELOC set up before you list your home for sale since most banks will not approve a HELOC if your home is on the market.

Please contact me if you are considering selling your home and have questions about the strategies outlined above.  I am happy meet with you to discuss these options in more detail and work with you to create a plan to help you meet your goals and objectives!