Big bucks at stake in decision to buy or sell first
The decision whether to buy and then rely on a quick sale of the family home, or to sell first and hope the market doesn't take off is one that can have significant financial and logistical ramifications.
There is one question that is typically raised in an unpredictable market, where buyers are nervous about sudden market movements adversely impacting their financial position.
Upsizers and downsizers fear trading homes in a moving market. While the ultimate concern is loss of deposit in the event of their property not selling in time for settlement of the new acquisition, there are other fears (and opportunism) at play for many.
It’s the balance of fear and greed that can sometimes catch buyers and vendors out.
In an upwards moving market, vendors will usually prefer to purchase first and then tackle their sale, because buying in today’s dollars and selling in future dollars is appealing.
As an example, if a market is trending upwards at 12 per cent per year, a broad brushstroke price increase on a million-dollar property equates to $10,000 per month.
If a seller secures a $1 million property in September and then sells their current $1 million home in December, they will stand to gain not only a price advantage on their purchase (i.e. the new home will be worth circa $1.033 million by January), but they will also capitalise on their purchase, which will also have a value at a similar magnitude by settlement.
From a net equity point of view, the property buyer who times their sale and their purchase optimally can achieve a significant price advantage.
But the reverse situation can also arise.
The buyer who purchases in a declining market and sells could be distressed by the net financial result.
If they pay $1 million in today’s market and sell an equivalent property for $1 million three months later in a market that is declining at 12 per cent, they’ll have a shortfall of around $30,000 when they sell and their earlier acquisition will have also devalued.
Different markets add complexity to timing
So, how do buyers and sellers time their purchases and sales advantageously?
Consumer sentiment counts for much of this speculation.
The reality is that none of us can predict future house movements, but even if we could, would it be a simple exercise? Not at all!
There are multiple reasons why this would be challenging.
To start with, upgrades and downsizes are not usually comparable. Price points are often varied, as are dwelling types.
An upgrader could be selling a unit and buying a house. In contrast, a downsizer could be selling a large family house and buying a luxury apartment. These dwelling types can take different directions in two-speed markets.
Secondly, seasonality counts for a lot. Plentiful spring listing volumes are quite different to winter droughts. If a buyer is selling in one market and buying in another, even a balanced market will provide different conditions in each of these seasons.
Thirdly, but most importantly, scarcity needs to be considered. If the property being sold is particularly scarce and unlikely to attract a large buyer pool, the vendor needs to consider the likely impact of a long sales campaign.
Days on market can exceed three months when a property is particularly unusual or compromised.
Few things in real estate are more stressful than purchasing a new home, only to find that selling the current home is more difficult than initially expected.
Short of price discounting and the stress that comes with a high-pressure situation, the risk of not selling and settling in time to fund the new purchase could present a much greater nightmare. The worst-case scenario for a purchaser who misses settlement date would result in the loss of deposit and potential further financial losses via legal action.
On the flip side, a purchaser must evaluate the likelihood of a scarce property being identified and purchased in a particular timeframe.
Scarcity can impact purchase timeframes significantly. If a seller is successful with their sale but requires a lengthy time period to find their next home, they may find themselves renting in the meantime or finding a short-term solution that creates its own headaches, such as staying other family members for a few months.
The upgrader as an example
Let’s take, for example an upgrader example. A family in an inner-ring community who are looking for a four-bedroom, two-bathroom, dual living area house with off-street parking options will not only find the search a complete challenge, but when they do locate a suitable option, they’ll likely find that several other cashed up buyers have also identified the same home.
Large land allotments with off-street parking are not abundant in the inner-ring locales, and many young families find it hard to break away from their connections in their former neighbourhood.
From day care to primary school, close friends to medical care and gyms, they will be reluctant to upgrade and move out of the area.
A critical step that they must take is to assess the viability of their search and frequency of their resultant acquisition. If a four-bedroom, two-bathroom, dual living area home with off-street parking only comes up on average every six months, then the buyer needs to factor that in to their search time.
Looking up the sold tab on a search engine and scrolling through past sales in date order will quickly reconcile this measurement.
In addition, they need to identify whether the market is moving up or down. In a market that is trending upwards at 12 per cent this particular dwelling could trend at an even higher rate, (as 12 per cent is only an average figure, and family homes generally outperform smaller houses, units and apartments).
In this particular case, an upgrader may be better placed to buy first and sell later. The alternative represents lots of packing and moving twice.
One thing upgraders and downsizers should consider is the merit of moving in the same market. Trying to time markets carries all kinds of risks, and if the dual transactions can be managed in tandem, the threat of market movements will be irrelevant.
A good tip I will share is that of a flexible settlement. A long period that can be shortened with ample notice is a great way to approach what can sometimes be considered a precarious task.
