real estate facts of life

Let’s say you live in a hot realty market (Los Angeles, for instance). Let’s say you own a house. And you thank your guardian angels that you bought when you did, else you’d be priced out and still renting when you’re eighty nine. But still. You want to sell someday, even someday soon, you want to sell and buy a nicer place or, well, not nicer maybe, but in a more peaceful location, somewhere you'd want to stay for a while. But you don’t have wads of cash stuffed under the mattress or between the couch cushions. So you need the profit from your house sale to buy another house.

These days, the market’s so hot you need to prove to any prospective sellers that you’ve got immediately accessible cash for the down payment – we’re talking over a hundred thousand dollars here – plus a piece of paper from the bank that says you’re pre-approved for a loan for the rest. No way will you get a house if you say “Well, I’ll buy your place if and only if I sell mine.” That kind of contingency only works if they need your offer. And they don't. They have two or three or thirty others to choose from. This is very much a seller’s market. If you want that new house, you have to make a hard cash offer.

But if you sell before you buy – which is how you’d get that cash down payment – then you have to buy a place pretty damned quick. Otherwise you end up renting while you continue looking. And while the market continues rising. And while your equity-built nest egg that looked so sizeable six months ago might buy you a rundown shack alongside a freeway. But who can buy a house that quickly when there’s so little housing inventory? I mean, this isn’t a sweatshirt, this is your future home. You can't just pick up the first for-sale item on the shelf, y’know? It could take months to find the right house. Maybe a year. Prices can rise 25% in a year. That’s what they’ve been doing around here. Sell before you buy? Not so smart.

So what do you do? How do you cover yourself in the gap between here and there? Well, this past Sunday a realtor gave me the answer and yesterday another confirmed it. It’s simple, really. You take out a line of credit on your current house, one that’s big enough to cover the down payment on a new house. You don’t actually use the equity line; it lies dormant until you need that money for an actual payment. If you draw on it just after your offer is accepted but just before you enter escrow, you've found the sweet spot. The trick is that you have to take out less than you think your house will sell for. You have to leave yourself a cushion in case you’ve screwed that calculation up. That’s the scary part, making sure you find that middle ground.

Then you get pre-approved (even if it means showing the loan company a somewhat, um, non-traditional rental agreement wherein a friend signs on as your renter for the minute or two you’ll need such a person) and you’re ready to rock and roll. Or at least go window (and door and living room and back yard) shopping.

So simple. Borrowing from your present to pay for your future. Almost elegant. Of course, the real trick is finding that elusive next home to bid on. Equity line trickery won’t help with that.

Posted by Tamar at June 8, 2004 09:43 PM