4 Smart Ways to Buy a New House Before You Sell

Spring is a popular time to consider moving – the weather is nice, there’s more movement in the market, and plenty of time to settle in before the next school year. 

But buying a new primary residence always comes with its own complications. If you already own a home, you’ll have to find a way to fund your purchase without first cashing out on your existing property. How will you fund your new home without selling into a down market or triggering massive taxes?  

Financial planning for buying a house requires some mental gymnastics to come up with the right solution for your wallet. Raising capital is a complex issue but not impossible. Here are four top tips to be a savvy home shopper. 

The Problem with Buying Before You Sell

If this isn’t your first home purchase, you’re in a position that leaves you strapped for cash. All of your equity is tied up in your current property, making it hard to come up with the necessary capital for a new purchase. Sure, you could take out a mortgage on the new property and write a contract with a contingency for the sale, but this could hinder your purchasing power. Buyers don’t like everything hinging on a contingency. 

The seller of the property you are interested in is likely inundated with offers in this competitive housing market. It’s difficult to compete with all-cash and no contingency offers if you still have a house that you need to sell first. 

However, you can still make a competitive offer on a house and get your dream home with a bit of planning.

4 Smarter Ways to Raise Capital

Here are our top four ways to raise capital for your home. If you consider any of these tactics, you might want to talk to a financial advisor first. 

1.     Margin Loan

Many people have capital tied up in the stock market and their investment portfolio. While you may not want to sell your positions in order to buy a home, you could take out a margin loan that allows you to borrow against your investment portfolio. This allows you to make an offer that will be treated like cash, which can help you win bidding wars more handily. 

The benefit of a margin loan is that there are no credit checks and no credit reporting, and you get fast access to your cash in just one to two weeks. If you intend to make a full-price, fast-close offer on the new property, this is one method you may pursue. 

You can also deduct interest that you're paying on your margin loan against income generated from your portfolio. This is called the investment interest expense deduction. There are limits and a few rules to keep in mind, but it can be a valuable deduction.

Then, once you sell your current home, you repay the loan. It’s perfect for short-term bridge financing until your current home sells. 

This is generally a better option than 401(k) loans, which take you out of the market.

2.     Home Equity Line of Credit (HELOC)

 If you’ve built up equity in your existing home, a home equity line of credit (HELOC) might be the right move for you. This allows you to tap into the money you have already paid toward your principal and use the funds to secure a new home. Much like a margin loan, a HELOC can be paid off when the home officially sells.

However, the process to secure a HELOC is typically slower and can be more expensive than your typical margin loans. Interest rates are often variable, which can be good if interest rates are low but can rapidly change in the future. It also contributes to your debt-to-income ratio and requires your bank to do a full underwriting process.

3.     Selling Stock

Don’t want to take out a loan? You still have options! Potential homebuyers can opt to liquidate some assets to free up capital for a down payment or a full cash offer. Selling stock positions can fund your full down payment.

The downside here is that it could trigger some tax pitfalls. The sale of your stock can trigger large federal and state capital gains taxes, especially in Washington. 

This may result in a double whammy if you also sell your home in the same tax year. 

Selling stock is not ideal in a down market when you may not get the full value of your sale. This ultimately reduces your purchasing power. 

In other words, choosing this option should depend on market conditions. You may want to wait until stocks are up to sell, even if it will trigger those capital gains taxes. Instead, a smart strategy is to consider selling high-basis assets first. 

4.     Use a Combination of the Above

Of course, you do not necessarily have to choose between the three strategies. For example, you can combine a margin loan and a stock sale for a powerful short-term cash strategy. Focus on the home you want to purchase now, sell your existing home later, and then repay the loan when it officially sells. 

You can take a tailored approach depending on your liquidity and tax situation.

Which Strategy Is Right for You?

Determining which strategy is right for you depends on your financial portfolio. It will ultimately be determined by the amount of liquidity you have outside of your retirement accounts, the size of your current home equity, current market conditions, and your overall tax picture and timeline. You need to take a more comprehensive look at your finances to pinpoint the right money move.

Selling stock can be great when markets are high – especially if it aligns with other goals you might have, like reducing concentration risk. You can sell off enough of your concentrated stocks to reduce the risk, then cover the rest with a margin loan or HELOC. When your previous home sells, you can reinvest those funds into a more diversified portfolio.

Generally speaking, we like margin loans if they’re available to you. Fast access to cash means you can make a powerful, all-cash offer and close on a house you like quickly – without impacting your long-term financial outlook. 

Everyone has a different situation, so consult with your financial advisor to model your unique path forward.

Start Your Next Chapter with Consilio

There can be a lot of fun in the home-buying process, like touring potential new homes and imagining your life in a new place! But managing the logistics and figuring out how to finance the home? FAR less fun.

Consilio can help you develop a strategy that gives you a competitive edge in a housing market where all cash offers and no contingencies are winning the bid. We offer fiduciary and wealth planning services, primarily for tech professionals with unique payment structures containing RSUs and stock options. 

When you’re thinking about purchasing a new primary residence, give us a call and let’s make sure you’re set up for success!

DISCLOSURES:

The information provided is for educational and informational purposes only and does not constitute investment advice or legal advice and it should not be relied on as such. Consilio Wealth is not a law firm, and our employees are not legal professionals. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor's particular investment objectives, strategies, tax status or investment horizon. You should consult your attorney or tax advisor.

The views expressed in this commentary are subject to change based on market and other conditions. These documents may contain certain statements that may be deemed forward looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur.

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