Where's My Trust Fund?

In an ideal home buying world, every move-up buyer (or even down-sizer) would sell their current home and have it close on the same day that they move into their dream home.  Unfortunately, things rarely work that way.  Not only is the housing market extremely illiquid which means it can take months to sell your home, but it can take awhile to find the new home you want to buy.

The Old Math

Many many moons ago, say back in 2003 or 2004, housing prices only went up.  In this world it almost always made sense to try to sell your home before buying your next home so you could take all your equity and earnings and apply it toward your new down payment.  It went something like this:

Buy starter home: $100,000

Put 20% down: $20,000

Sell house a few years later for appreciated price (remember home prices only go up): $120,000

Net money out of house = $20,000 down payment + $20,000 profit ($120,000-20,000) + increase in equity from years of payments, let’s call it $5,000 = $45,000

Assuming you can afford the payments you can now use this $45,000 to put 20% down on a $225,000 house.  (20% of 225,000 = 45,000)

If your goal was to someday have a big house, you could sell and buy every few years, slowly arriving at your ‘dream’ house.

The New Reality

Unfortunately, we are all now well aware that housing prices can go down.  It is harder to be a move up buyer as equity has been wiped out and many homeowners even have negative equity.  Using the same example as before:

Buy starter home: $100,000

Put 20% down: $20,000

Sell house a few years later for depreciated! price: $80,000 if you are lucky!

Net money out of house = 0

Down payment money available for new house = 0 + whatever additional savings you have on hand

Now it’s a few years later and if you are lucky you can sell your house for 80% of what you paid for it.  Worst case scenario is that you are underwater on your mortgage.  This is when your house is worth less than your mortgage amount and you actually have to pay the bank to get out.  If you want to buy a new house, you need to have 100% of the down payment saved on the side since you won’t be getting any equity out of your starter house.

Selling Before Buying

Unfortunately, our current scenario looks like “the new reality” example.  Luckily, we put 20% down on our current place and we’ve now lived here long enough to build up a fair amount of additional equity.  However, I’m still not sure we’ll be able to get any money out of our current house when we sell, it all depends on the final sale price.  Right now we’re just hoping we do not have to pay anything.

Ever since we’ve started looking at new houses, I’ve been assuming we’ll get no money out of our current house.  Therefore, we’ve been saving for a 20% down payment for our new house.  Since we have no equity in our current house to use towards our future house, we’ve been more focused on finding a house in our price range we’re excited about than on selling our current house.

I bought our current house when I was single so we can afford it on one of our incomes and we’re being conservative an also buying a house we can afford on one income.   So I have figured we could buy a new house, then put our current place on the market, and potentially have two mortgages for a few months why we wait for our first house to sell.  Are you still with me?

This is all a very long winded way of explaining where I’ve been for the past few weeks.  We decided we did not want to have to worry about two mortgage payments unless we really have to and have put our place on the market.  Hopefully we will be able to sell our current house before buying another one.  It’s not easy trying to keep a place clean with two little ones so we moved out for a couple of weeks, staying with family during the initial onslaught of open houses and showings.  So I’ve been spending my time cleaning and move and cleaning some more.  Hopefully I will be back to a more regular writing schedule soon.

Which leaves me wondering, how does anyone ever time this perfectly?  My only hope is that once we move into our next house, we do not need to move again for a long long time.  Thank you for your patience and wish us luck!