Simultaneously buying and selling a property can be quite a tricky endeavour. If you put your property on the market, get a great offer and accept it, you now face the prospect of having to vacate your property without having anywhere to go. Being under pressure to quickly find a property to buy before you have to leave your own property is far from ideal as you may find yourself under pressure to buy any property to avoid being homeless on closing day.
However, if you start your property search before putting your property on the market, it can be quite challenging as you don’t quite know what your budget for your new purchase will be as you don’t know what price you will receive for your old property. If you do find a property within your expected budget, while you can make an offer subject to the successful sale of your existing property, you won’t be taken too seriously compared to buyers who are ready to transact. So what to do?
What is Your Budget for Your New Property?
This depends on the net proceeds of the sale of your existing property. The net proceeds amount to the total sale price of the property minus any expenses such as conveyancing, estate agency fees and perhaps storage and removal fees. This is the money that you will take forward to buy your next property. For some, typically those trading down, these funds will be sufficient to buy their next property outright ie no mortgage required so they will be cash buyers for their next property. More typically though, the proceeds are used as the deposit for the purchase of the new property.
The difficulty here is that it’s not possible to know with certainty what the net proceeds of the sale of your current property will be until it’s actually sold. You can of course make an estimate by searching for the sales price of similar properties to yours on the property price register as well as asking prices on Daft / MyHome. This should give you a good idea but nothing is certain until the contract is signed and the money is in the bank.
This is also a good time to speak to your bank / lending institution / broker to get an idea as to the mortgage that they are likely to lend to you for the new property. Remember that you are no longer a first time buyer which typically means that you will need 20% of the value of the new property as a deposit in cash and not the 10% applicable to first time buyers. However, there are exemptions here whereby non-first-time buyers can pay a 10% deposit so if this is of interest, be sure to speak to a broker about that option. One quick note is that if you have lived continuously in your property as your principal residence, then no CGT will be due but if you have rented it out for any period, then there will be a CGT liability. It is worth speaking to an accountant to quantify this to avoid a nasty surprise later on.
Selling First & Then Buying Your New Property
This is probably the most logical approach for most people as it gives you clarity in terms of the precise amount of funds on hand for the purchase of the new property. It does however create the conundrum of where to live between closing the sale of your old property and moving into the new one. The ideal option here is if you have parents with whom you can live while you are house-hunting. This takes all the pressure off and allows you to build up more savings for use on the new property. You can watch the market patiently until your dream property comes and then bid on that from a position of power as you are ready to go ie not in a chain so will be taken seriously by the vendors. For those without the parents option, renting is the next best option. Obviously, this isn’t ideal as if the rental property is furnished, you will incur storage costs for your furniture. The high price of rent may chip away at your savings over time and some landlords may insist on a 12 month lease albeit you may find your dream home in month two. If renting, be sure to have a provision in the lease that if you do find a property to buy before the lease expires that you have the option to find a new tenant that can take over the lease from you without you forfeiting your deposit. With your money in the bank and your finance approval in place, you can go house-hunting with confidence.
On occasions the buyer of your property may agree to rent it to you for a period of time after the sale closes. If they are amenable to this, it is an ideal solution as means you only have to do one move once you find your new home. In reality, most buyers won’t be willing to agree to this as they will be anxious to move in.
Selling & Buying Simultaneously - Not for the Faint-Hearted!
Perhaps the best approach here is that once you have received an offer on your existing property, start shopping for your new one. Set up alerts on Daft and MyHome and start attending viewings. This will help you assess what properties are on the market, their prices, the strength of the bidding and so forth. If you find one that you really like, you could consider making a conditional offer. This is whereby you say that you will buy that property for €x on the condition that your property sells. This is not as an attractive an offer as one from someone who is ready to transact eg a cash buyer or someone with mortgage approval and the deposit in cash in the bank. You are said to be “in a chain” in that your offer only comes to fruition if the sale of your property closes.
However, if the vendor has no other better offers or yours is higher than the others, then your offer will be considered; the fact that you have an offer on your property will lend credibility. If your offer is accepted, you will be asked for a refundable booking deposit and to engage a solicitor to act for you. The solicitor that you have engaged to sell your property would obviously be the ideal candidate to handle the purchase of the new property; many solicitors offer discounts if handling your purchase as well as your sale. You will now be incurring legal costs for your solicitor to represent you in the purchase of a property that will only conclude if the sale of your property completes. There is a risk here that the sale of your property may fall through and as a result, so does the purchase of the new property ie you have neither sold your old property nor bought a new one but have incurred legal fees on both failed transactions. Alas this probably is a risk that you have to take if you are trying to minimise / eliminate the time lag between the sale of your property and the purchase of the new one.
Assuming that the conveyance for the sale of your property is going well, the conveyance for the purchase of the new property can proceed in parallel. A crucial point here is in relation to the conditionality of contracts. Suppose that the buyers of your property, let’s call them Jerry and Laura, are willing to sign contracts for the purchase with a conditionality clause allowing them to rescind without penalty if for any reason their finance is not forthcoming at closing.
Such conditionality clauses were recommended by the Law Society of Ireland in 2009. This was to protect purchasers from a situation whereby they have signed unconditional contracts on the strength of a letter of offer from a bank only to have the bank withdraw or reduce the funding on offer in advance of the close. The banks were concerned that the property’s value had fallen between sale agreed and closing and as such were insisting on a revaluation in advance of the close. Where the value was deemed to have fallen, the associated finance on offer fell proportionately leaving the buyer in a very difficult situation. The vendor in such instances was entitled to withhold the booking deposit and even sue for specific performance ie to force the buyer to complete the purchase at the contracted amount. In order to avoid this situation, the Law Society issued this guidance in 2009:
2009 Law Society Guidance
In short, this clause states that the buyer can walk away without penalty if their finance is in any way altered by their lending institution in advance of closing. This seems totally reasonable and many solicitors representing purchasers will insist on such a conditionality clause, as per the advice from the Law Society. However, suppose that the property that you are buying is being sold by someone who in turn is relying on these funds to finance the purchase of a new build property; let’s call these people John & Mary.
The builder is insisting on an unconditional contract from John and Mary on the basis that his lender won’t release funds to him to commence building the next phase in the development unless unconditional contracts are in place for all units in phase one. John and Mary are in turn insisting that you sign unconditional contracts for the purchase of their property; they are equally trying to buy and sell at the same time ie to move directly from their current property into the new one with no interim step. A lot of moving parts as they say! However Jerry and Laura, based on their solicitor’s advice, are holding firm with their insistence on the insertion of a conditionality clause. The hypothetical situation now is as follows:
- Jerry and Laura have agreed to buy your property with conditionality on finance.
- John and Mary are insisting that you sign an unconditional contract to purchase their property.
- The builder will not accept a conditional contract from John and Mary.
So what happens now?
For you to sign the unconditional contract to buy John and Mary’s property is very risky. If for any reason, Jerry and Laura’s finance is withdrawn or reduced, they can withdraw their offer without penalty. You however are obliged to complete the purchase of John and Mary’s property, although you now have no funds to do so. You are at risk of losing your deposit and being sued for completion of the purchase despite having no funds.
As a result of the issues being caused by some vendors insisting on unconditional contracts and some solicitors insisting on conditionality, thereby creating a logjam like the above, the Law Society reviewed their recommendation in relation to conditionality clauses in 2017. However, they doubledowned on their 2009 position that buyers are exposing themselves to too much risk if they sign an unconditional contract. So in the above situation, the only way to get the deal done is to go against your legal advice and sign an unconditional contract despite only having a conditional contract to buy your property. That would be a stressful few weeks between signing and closing! Alternatively you would have to convince John and Mary that you will only sign a conditional contract and they should insist on the same from their builder. Many solicitors will tell you that in the current buoyant economic circumstances, unconditional contracts are signed daily and close without issue. It really depends on the solicitor with whom you speak. However, there is no getting away from the fact that you should match the contract to sell with the one to buy ie if the contract to sell has conditionality, so should the one to buy as otherwise you are exposing yourself to potentially pretty catastrophic risk.
2017 Law Society Update
Buying First & Then Selling
This will be a minority sport as most will require the proceeds of their old property to finance the purchase of their new one. However, if you have sufficient funds on hand to purchase the new property without needing to sell the old one immediately, there are a couple of things to bear in mind. When you move out of your old property, you may decide to rent it out for a period while you sell it. Be careful here as while in theory, you simply need to serve the tenants with the requisite notice once you want them to move on again, some may dig in and refuse to leave thereby potentially frustrating the sale.
Having two mortgages isn’t for everyone and you will often hear people say “the rent will cover the mortgage”. Those who say this are usually forgetting that rental income is treated like any other income and if the owner is on the higher rate of tax, they will be paying tax on the rent at north of 50%. Will 48% of the rent (the bit you get to keep) cover the mortgage? That is before you factor in ancillary costs like maintenance, Local Property Tax, management charges and so forth. Also keep in mind that any rent you set with a tenant will tie the hands of the new owner so be sure to get market rent to ensure that any would-be buy-to-let investor isn’t hamstrung by you agreeing to a low rent.
Hopefully this article was of some use. Of course, if you would like to speak to one of our qualified estate agents, we would be delighted to hear from you.