Kristy Burchell has been working from home in the Dallas-Fort Worth area for 15 years, as well as homeschooling her two children. She and her husband Stan put their home up for sale in 2013 but quickly found the experience didn’t work with their lifestyle. Since then, they’ve been looking for a different way of selling their home.
“We knew that trying to sell-traditional wasn’t going to work for us,” she noted. “We couldn’t live through showings, it was extremely disruptive to both our work and our school schedules.”
Selling while buying a home is notoriously challenging.
Most homeowners rely on the sale of a home to make a down payment on a new purchase, but making an offer contingent on selling puts you at a disadvantage in today’s hot market. Carrying two mortgages at once is also difficult, if not impossible, for most. Plus, as Burchell found, showing a home while still living in it is uncomfortable at best — especially in a pandemic.
Fortunately, a number of new companies have started experimenting with solutions to these problems.
Burchell looked at several different options including iBuyers, home equity lines of credit, and bridge loans, before eventually running across a property technology company called Knock that offered her a different solution. She decided that it was most cost effective to go with Knock.
“They essentially offered the opportunity to secure financing for the new home, make a non-contingent offer, which in the market right now is also extremely important,” said Burchell, who is living in her new home and preparing to list the old one. “And, their fee was quite reasonable.”
Knock is one of a handful of startups trying to streamline the home buying and selling process. They use a mix of creative financing and technology to enable a homeowner to first purchase a new home and then sell their old home. Other companies offering similar services include HomeLight and Orchard.
Startup companies offer a new approach
The exact products offered by the different companies in this market differ slightly, but they follow a basic model.
First, each company will evaluate your home’s condition and comparable properties in the area to determine market value. The evaluation can generally be done completely online by submitting information about and pictures of your home, or in person by an affiliated appraiser.
The companies then make what they sometimes call a “guaranteed purchase offer” that will range between 85% to 95% of market value. This is the amount the company will pay you if your home does not sell in an agreed upon timeframe, typically about 60 days.
On the buying side, these companies serve as your mortgage lender, using the equity you have in your current home to underwrite a mortgage to buy your new home. This allows the homeowner to make a non-contingent offer on a new home, without actually having sold their old home yet.
Once you have purchased your new home, these companies will prepare your old home and market it. After the home sells, you get the proceeds from the sale minus the company’s service fees and expenses. If your home doesn’t sell within a predetermined period of time, the company will buy it for the guaranteed offer.
In Knock’s case, the New York-based company provides an interest free bridge loan to cover a down payment on your new home if needed. They call it a “down payment advance.”
If repairs are required in the old home, the company will provide and manage the contractors and take care of the repairs. You can then list the home on the open market.
Knock will pay your old mortgage for up to six months so you don’t have to pay two mortgages at the same time. All these costs, however, are deducted from the proceeds of the home sale, along with a flat service fee of 1.25% of the purchase price of your new home with the balance going to you if your home sells within 180 days. If your home takes longer to sell, you can opt to accept the back-up offer.
“All you have to worry about is what you will do once you sell your old home, but you don’t have to deal with all the uncertainty, the inconvenience of repairs and showings,” said Knock co-founder and CEO Sean Black.
With its Trade-In program, HomeLight will make a guaranteed purchase offer for up to 90% of your home’s market value. You can then make a non-contingent offer on a new home. When you are ready to close, HomeLight will purchase your home upfront for the agreed upon price. If your home eventually sells for more than the guaranteed offer, you’ll receive the extra proceeds from the sale.
Once you have bought a new home, HomeLight will deep clean, stage and list your old home with a local realtor.
As a result, you receive the proceeds from the sale of your home minus HomeLight’s fees, in time to buy your new home. HomeLight’s average fee is around 1.5% of the purchase price of the new home and includes appraisals and loan originations, which are done by HomeLight. However, the fee can increase by 0.5% every month the home is on the market after the first 60 days.
With Orchard, you can also qualify to receive up to 90% of your home value in instant equity to use to purchase a new home. The company also has a program called Offer Boost, which allows you to make an all cash offer on a new home.
With Offer Boost Orchard will “reserve” your new home by purchasing it for you. Once your old home sells, you can buy the new one back from Orchard interest free. Orchard charges a flat fee of 6% on the sale of your home, which is on a par with typical realtor fees.
What could go wrong?
While there’s plenty of upside to the services these companies provide, there are also potential downsides. If your home needs extensive repairs, the cost of repairs can cut into the profits you receive when the home sells.
The mortgage rate offered on the purchase loan is competitive, but that doesn’t mean you won’t find a lower rate with a different lender. Your best option is always to shop around. Keep in mind that not all companies will allow you to work with another lender.
Another potential downfall is what happens if your home takes longer to sell than usual. In the case of HomeLight, the average fees are based on a home selling in about 60 days or less. If your home takes longer to sell, those fees could increase. You would also have the option of accepting the company’s back up offer, selling your home at a discounted price.
Other options for buying while selling
Two-thirds of buyers who currently own their homes need to sell that house in order to be able to buy a new one, according to Vanessa Falumener, vice president of Cash Close at HomeLight. In a normal housing market, you might be able to make a contingent offer to purchase a new home and have the seller consider that offer.
According to Glenn Brunker, president of Ally Home, presenting a purchase offer with a sales contingency in an ultra competitive market means “there’s a high likelihood that (you’re) not going to get that purchase offer accepted.”
Other alternatives include using bridge loans and home equity loans or lines of credit to help finance your down payment while your home sells. However, bridge loans tend to be difficult to qualify for and charge higher interest rates than standard mortgage loans.
A home equity loan or HELOC, while charging a lower interest rate than a bridge loan, will increase your ratio of debt-to-income, which could undermine your chances of qualifying for a new mortgage. In both instances, you’ll also be responsible for paying two mortgages until your old home sells.
You may also be able to negotiate a longer closing period with the person buying your current home or the seller of your new home. Typically, a closing will take up to 45 days. Extending that period to 60 days (or slightly longer) may be an option if the other party also isn’t in a hurry, and will give you time to sell your home.
Another alternative is a lease-back, where you sell your home but then rent it back from the buyer for a set period of time. Again, this option requires that the buyer not be in a hurry to move into the home.
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