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I need help with options for buying our next house. We're in Silicon Valley, which is a ridiculous seller's market right now. Houses in our neighborhood are going on the market for $500k and selling for $650k with four bids in just a week!

Since you know you can sell in a week, yet the inventory's low enough that it may take you 6 months to find a suitable house to buy, we're left with either (a) buying first and selling soon thereafter, or (b) selling first and risking having to move into temporary housing. We're planning on (a).

Since it's such a competitive market when buying, we can't have a contingency on selling our house or we become tarnished. Our current house is now worth about $650k and we have $220k mortgage, so there's $430k equity locked up in it. So we need a down payment from other sources.

We have about $100k in stocks we could cash out. In discussions with our loan broker it seems the best other strategies are one or more of the following:

1. take a margin loan against the stock (which the lender won't look at)
2. receive gifts from others (we'd do as temporary loans from relatives)

Other things like bridge loans, loans against IRA/401k, etc, aren't an option because they come with a monthly payment that the lender will figure into our monthly costs.

Gifts -- since there are three of us (me, wife, daughter) we can receive $10k x 3 = $30k from each relative w/o incurring gift tax. We have *maybe* 3-4 relatives we could do this with. But it's a bit messy... gift letters, private loan notes secured by our current house, etc. All this just to bridge a 2-4 week window where we don't have the cash from our current house's sale.

We can't sell our house with more than a 1-2 month rent-back or we may risk losing the multiple bidder / overbid situation when selling.

So (at last) -- the QUESTION! Are there other creative approaches that we should consider here? It's quite a catch 22 in this market.

Thanks for your insights!
--Mook
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Gifts .... it's a bit messy... gift letters, private loan notes secured by our current house, etc.

Are you talking about receiving a "gift" above-board, but really securing a family-loan? I understand that this is only for the short-term (i.e. spanning the time between buying house #2 and selling house #1)

Is that loan/gift legit? Technically, aren't there potential legal/taxation issues involved?

I vaguely remember there being a specific loan for this type of problem (i.e. span time between buy and sell) - anyone know? (I am thinking "bridge loan" but don't know if that is the correct term...)

Jennifer
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"2. receive gifts from others (we'd do as temporary loans from relatives)"

a gift is not a loan

"Gifts -- since there are three of us (me, wife, daughter) we can receive $10k x 3 = $30k from each relative w/o incurring gift tax. We have *maybe* 3-4 relatives we could do this with. But it's a bit messy... gift letters, private loan notes secured by our current house, etc. All this just to bridge a 2-4 week window where we don't have the cash from our current house's sale."

I would suggest some caution; conspiring with your relatives to produce gift letters for what are in fact loans is generally considered fraud, and depending on the lending institution involved, can involve federal enforcement.

Also, your existing mortgage may prohibit juninor liens, placement of which wouild trigger defaults and possibly default interest rates and/or a calling of the loan.

Just my $0.02. Regards, JAFO
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Are you talking about receiving a "gift" above-board, but really securing a family-loan? I understand that this is only for the short-term (i.e. spanning the time between buying house #2 and selling house #1)

Is that loan/gift legit? Technically, aren't there potential legal/taxation issues involved?


Yes, that's roughly what I'm talking about. As long as the a gift to an individual is less than $10k then there's no gift tax. But JAFO brings up some scary legal issues ... do others concur on this? I know people do this sort of thing, just don't know how often or how risky it is.

I vaguely remember there being a specific loan for this type of problem (i.e. span time between buy and sell) - anyone know? (I
am thinking "bridge loan" but don't know if that is the correct term...)


Yes, I think you're referring to a bridge loan. Problem is that the lender on the house we'll be buying will include the monthly payment on the bridge loan as part of our monthly expenses, thus reducing our buying power, even though we fully plan to pay it off within a few weeks.
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Yes, I think you're referring to a bridge loan. Problem is that the lender on the house we'll be buying will include the monthly payment on the bridge loan as part of our monthly expenses, thus reducing our buying power, even though we fully plan to pay it off within a few weeks

Why can't you get the bridge loan from the lender who's financing the mortgage on the new place? That should take care of those issues.
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Well have you thought about renting and putting a lot of your stuff in storage till you find a place? That's what we're doing over here in VA where it is also a seller's market though not yet to your extreme (it's the lower end houses getting multiple bids). I know renting isn't always the best for people used to owning, but atleast your cash would be freed up for the down payment and you would'nt need to grab the first thing you see.

DLF
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<<<<<Yes, that's roughly what I'm talking about. As long as the a gift to an individual is less than $10k then there's no gift tax. But JAFO brings up some scary legal issues ... do others concur on this? I know people do this sort of thing, just don't know how often or how risky it is.>>>>>

I do not know often people do it, or how often they are caught --- just remember that "everyone else is doing it, too" is not a legal defense and will win you no more sympathy than it did from your parent(s) when you were a teenager.

Just my $0.02. Regards, JAFO

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Here is a thought or two;

The margin loan sounds like something your broker came up with because he does not want you to sell. With nearly any mortgage these days the lender will want to know where the cash came from. If you plunk 80K in your checking account from a margin loan, your lender will see the deposit, ask you where it came from and then hit you with a payment for the loan.

The gift thing is a terrible idea. I too see it done in the market place. But, that forces you to lie. The money is not a gift...right?...so lets not call it that.



Here is my recommendation: You need a bridge loan. There are several ways to do that.

1.) Go get a mortgage pre-approval from an great lender. Don't make rate your only choice on your decision. That will only get you a rookie that will screw it all up. Find a pro that knows what he/she is doing.

I have done hundreds of bridge loan for my clients over the years. Typically a lender will want your overall debt ratio to be in the 36%-40% range. It is not uncommon where a bridge loan is involved to allow that ratio to climb up to 60%. The logic is...this is temporary. As soon as your current home sells then the old mortgage and the new bridge loan would be paid off. Having a 100K of reserves for the lender to see is also great. My point is this. The bridge loan will get your cash out of the home, and the higher allowed ratio's will allow you to purchase what you normally would have been able to do.

The only drawback to bridge loans is that tend to be pricey. It isn't uncommon to pay 1% fee for the loan and prime plus 1 or 2 for the loan.

Which brings me to idea #2. Do you have anyone in your family that has the cash flow to give you a bridge loan. You don't have to get the bridge loan from a bank. A family member can lend you the equity in your home. You just sign a note and mortgage with your family member and give it to the lender. By doing this, maybe your family members will only charge you 2% interest or something. Thereby helping you in your qualification as well.

I hope this helps!

Dave Porter
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What about an equity line against your current home? You could use that for the downpayment on your intended residence. You'd be out the fees and interest, but wouldn't have to request family members or friends to do all sorts of gyrations. Just make sure there is no pre-payment penalty on the equity line!

Gary
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ASSUMING YOU HAVE GOOD CREDIT, GO TO A COMMERCIAL BANK, WHERE YOU HAVE A RELATIONSHIP AND GET A "BRIDGE"LOAN FOR THE AMOUNT YOU NEED. YOU MAY PLEDGE THE EQUITY YOU HAVE IN YOUR EXISTING HOME AS COLLATERAL. THIS IS A COMMON AND ROUTINE PRACTICE FOR PEOPLE WHO HAVE EQUITY, GOOD CREDIT AND A RELATIONSHIP WITH A BANK.
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As a Realtor (in Canada, but I suspect the rules are similar in the U.S.), I might recommend this strategy to get you the best price on your home and still not have to move twice or pay extra interest on bridge financing.

Negotiate the best price on the home you want today, but put in a LONG closing period, such as 90 to 120 days. Your offer would probably be very attractive to the sellers, in that it would give them lots of time to plan their own move, and would allow them to make their plans with a clear idea of how much money they will have in their pocket. Once that offer is accepted, you could then list your home for sale and get a deal set up with lots of time for your purchaser to pay you. If you are confident that your own house will sell, and you are prepared to price it reasonably, you would not need to make your offer subject to sale. I would probably still make it subject to financing, and have an appraisal done on your own home as well.

Once both offers have been accepted, your Realtor could probably gets the dates of the closing changed to move up the possession dates if you like.

Good luck with your move.

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With all that equity I would take a home equity loan and use that for your down payment. Since you only need to money for a few months the money that you get for the home equity would cover the payments. You can also elect to pay only the interest that would be tax deductable. After the sale of your home you can pay off the home equity loan at closing.
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The point is that official loans will figure the monthly payments and reduce loan qualifying amount.

I think if family are willing to give you gifts, close family that is, the paperwork is worth it. You can pay them back in your own time.

Lots of people do it. And frankly, I've always thought it odd that a loan company is supposed to be able to decide how much a person can afford. If you make all your payments, and you will if you have the kind of family willing to help out in an emergency, it is really none of the companies busineess.

Gathering gifts from relatives should not just be a province of the rich whose family members don't have to ask for the money back.
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Dave Porter and Quiksell both offered valid advice. As a Realtor in the white-hot seller's market of Washington DC, where every sale I've been involved with in the past year has had multiple contracts and prices are going way over list, I recommend a third alternative to those offered already:

Put your house on the market contingent upon you finding the home of your choice within a fixed period of time (30 days, as an example). At the same time, search diligently for the home of your choice. If you get offers on your home first, you can accept with the home-of-choice contingency (HOC). If you don't find a home you like and can afford during that time, you can simply cancel the sale and the buyer will get his money back. You are no worse off than you are now. Or, you can ask for an extension on the HOC contingency, Or you can agree to drop the HOC and negotiate a longer settlement date. As Seller in a Seller's market, you are in a position to dictate the terms, pretty much. Then you can go to settlement back to back on the house you are selling and the house you are buying. (Be sure to write in both contracts "Settlements to coincide").

I've worked this way with a number of clients. The buyers aren't thrilled with the uncertainty, but if they love your house, they'll be willing to wait. If that's too much ambiguity for you, then I'd recommend the bridge loan.

Best of luck to you in your purchase and your sale!

Bermie
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I think you need to find a big real estate company help you buy your new house and sell your old house at the same time, So they will provide a short term "bridge loan" to you, normally about 60 days and rates is very low. It is because they want to have the business. The formular is

Estimate your recent house value in market X 70% substract your mortgage in bank = Equity
i.e. $650,000 x 70% - $220,000 = $235,000 (Equity)

Real estate company will borrow you $235k for 60 days in about 4% interest. You try your best to looking for your new house within this period.

Good luck
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Dear Mook: As a retired realtor in NJ I know what you're going thru. We've had roller coaster markets here in the past and are going thru a sellers market right now. Best bet is to do a streight contingency deal. Go find a place, put a minimum amt down as a good faith deposit and make the seller of the home you want an offer contingent upon the sale of your home. If your offer is accepted all is well. You've tied up the house of your dreams while you get your's sold.
No messy loans, transfers, etc.Of course you're not in the greatest barginning position when buying that way but if you find what you want maybe it's worth it.

I'd also give some thought to your option #2. Depending upon what you are looking for in a home and how long you "might" consider renting, my guess is that the markets will change once we get a new US President. Out by us the real estate peaked in the late 1980's and took a nose dive in 1990.

Food for thought.
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This is exactly why the market is in a frenzy. I recently sold a house. If I waited, I might have gotten more, how much is not known. We are like lemmings following the herd. If everyone just sat back and relaxed we wouldn't have this craziness. However, humans are nitwits, and so inflation rears its ugly head. Wait until the Feds, as if they don't know, put the housing in costs in context, it will be inflation, to the nth degree.
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1.Consider asking your employer for a loan with a balloon payment. They may be able to give you a competitive interest rate with the principle and interest rate payable on close of your new house. You may have to sign a contract stipulating this and your company's lawyer may be sitting with you at closing but it's worth a try.

2. A bridge loan worked for me on my last house. This is where knowing your banker and your banker knowing you comes in handy. Ask for a loan with a balloon payment at the closing of your present home. You will have to specify a time...make it long enough...say 60-90 days. You make only one payment and if you can make it sooner than when you had agreed you have saved some interest.

3. A line of credit. Again, knowing your banker is key. You will have to submit your tax returns etc and use your securities as collateral if you don't have that "relationship".

I would try not to cash out securities..since it would trigger capital gains. The trick is to use "OTM"...other people's money.

Carl
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1.(correction) Should be...that the employer's loan is due on closing of your present home, not the one you are trying to buy. Your employer may insist on having a first lien on your new home until the loan is paid off.
I was able to convince an employer to do this when I was hired and asked to move. If your employer has a venture capital department this is where the money is.
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Although it's been many years ago, we once took out a bridge loan in order to close on a new house six weeks before the sale of our old house went through. The builder we were purchasing from suddenly got a better offer than ours and gave us a short window in which to close or lose the deal.

The buyers of our old house were still mired in the mortgage approval process and could not move up their closing to accomodate us. This all took place during a very hot market and the loan appraisers were all backed up for weeks, which slowed the mortgage approval process for everyone.

So we went to the lender who had already pre-approved us for our new purchase and asked for a bridge loan for the six-week period. It was no problem, but I do remember one critical requirement was that the lender had to see a fully executed purchase contract for our old house before they'd give us the bridge loan.

I don't know if this is still a requirement, but if so, you might have to at least get a contract on your old house before proceeding with your purchase plans.


Jeanie
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My recomendation is to not "Buy backwards" , it will cost you! become a seller before a buyer and parlay the hot maket into a short term rent back. If your property is clean and attractively (at market) priced the buyer will figure a way to accomadate your possesion goal. remember you are charged with setting them and accepting all terms? everthing is negotiable!
then once you have a deal you can shop in earnest with 30-45 days til closing and 2-3 months perhaps in rent back. It works best if buyer of your place is in rental and can extend. You must get familiar with the market and have a suitable plan b house if your first choice sells prior to offer. This is the least stressfull because you have a fallback position that you will move out and rent (double move) only if unsuccessfull at locating suitable move up propoerty in a relatively longer time frame?
good luck
...db
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I suggest that you seriously consider selling your house before entering a contract for a new home.

First, if you put a contract on a new home before your existing home is sold, you might feel pressured to take an offer that you would not ordinarily consider satisfactory. I have friends who recently found themselves in this situation. In order to get the house they wanted, they ended up accepting a low offer and paying 6 points for the buyer. They also ended up in a rent-back situation and were pressured to leave before their new house was finished. (The new owner showed up with all her stuff in a U-Haul before they had moved out.) They ended up having to store their entire house for a week and stayed in a hotel. This whole transaction cost them thousands more than it should have.

I know it's hard to rent when you're used to being an owner, but I think it might be well worth it to rent for a few months and to take your time in finding the home you really want.

The second thing I have to say about your situation is that borrowing money from family and friends is a disaster waiting to happen. Suppose you encounter delays or unexpected problems and your relatives have to wait longer to be repaid. Additionally, I wouldn't risk trying to pass loans off as gifts. Not just from a legal stand point, but I have a feeling that one or more relatives might be uncomfortable signing a statement saying that they are giving you the money and they won't ask for it back. Your entire funding plan could unravel at the last minute.

Selling and buying houses simultaneously is such a juggling act. Take your time so that you can make the most Foolish decisions possible and end up with your dream home.

Good luck!

Bill
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Thanks everyone for all the suggestions! While the renting option may seem appealing, we are willing to stay where we are if we don't find the right house, so the risk of selling first is pretty big. Plus moving into a rental runs the risk of being out of the market while it's moving up, which it's done a lot in the last 6 months.

In the housing market we're in right now there's no doubt we can sell this house within a week of when it goes on the market. All houses in Silicon Valley that are priced well are selling at this rate. If the market slows we might not get as much overbidding but it will sell given the low inventory level.

We're going with gifts from family members and a small margin loan for the stocks we aren't selling off (we've sold several).

Mook
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