The Risks of Buying Before Selling: A Toronto Real Estate Dilemma, Especially in 2024

In Toronto's ever-evolving real estate market, sellers often face a critical decision: should they buy a new property before selling their current one? While the allure of securing your dream home is tempting, the risks associated with buying first can be substantial, especially in a market characterized by increased inventory and low buyer activity.

Imagine this scenario: You find a beautiful property listed at $1.2 million with no conditional period and decide to buy it, securing a 3-month closing. You’re thrilled about the new purchase, but now the pressure is on to sell your current home. Realistically, it will take about 2-3 weeks to get your house market-ready. Given that it's summer, a typically slower season for real estate, you might expect it to take an additional 3-4 weeks to sell. However, with the market slowdown, your property could potentially sell for a lower price, around $1.075 million.

This situation poses several financial risks. The difference in sale price alone ($125,000) can significantly impact your budget and financing plans. Moreover, carrying two mortgages, handling maintenance costs for both properties, and the potential stress of managing two homes can quickly become overwhelming.

In this blog, we will explore the various risks associated with buying a property before selling in Toronto’s current real estate market. We'll delve into financial strains, market uncertainties, bridging loans, and the emotional toll of this approach. By understanding these risks, you'll be better equipped to make informed decisions and navigate Toronto's real estate landscape successfully.

Stay tuned as we unpack these risks and provide practical strategies to mitigate them, ensuring your real estate journey is as smooth and stress-free as possible.

1. Financial Strain

Double Mortgage Payments: If the current home doesn’t sell quickly, sellers may have to cover mortgage payments on both properties, leading to significant financial strain. This can quickly deplete savings and lead to financial instability.

Possible Solution: Consider negotiating a longer closing period for the new property to allow more time to sell the current home before starting payments on the new mortgage. Alternatively, you can explore a "sale and leaseback" arrangement, where you sell your current home but lease it back from the new owner until you move into your new property.

Down Payment Dilemmas: Sellers might have to use savings or bridge loans for the down payment on the new home if the equity from the current home isn’t available. This can deplete emergency funds and increase financial risk.

Possible Solution: Set aside a dedicated savings fund specifically for the down payment of the new home. Additionally, look into home equity lines of credit (HELOCs) as a temporary funding source, which often have more favourable terms than bridge loans.

Increased Debt: Taking on a new mortgage while still holding the old one can increase overall debt, potentially impacting credit scores and financial stability.

Possible Solution: Before making a purchase, consult with a financial advisor to understand your debt-to-income ratio and ensure that you can handle the additional debt load. Refinancing your current mortgage to lower monthly payments can also provide temporary relief.

2. Market Uncertainty

Price Drops: With increased inventory and low buyer activity, there’s a risk that the seller’s current home might not sell for the expected price, or at all, in a reasonable timeframe. This can significantly reduce the funds available for the new purchase.

Possible Solution: Get a pre-sale home inspection and make necessary improvements to increase your home’s appeal and value. Additionally, price your home competitively based on current market analysis to attract more buyers quickly.

Longer Time on Market: Homes may sit on the market longer, causing delays in freeing up capital tied to the current property. This can lead to increased carrying costs and financial stress.

Possible Solution: Enhance your home’s marketability by staging it professionally, investing in high-quality photography, and working with an experienced real estate agent who has a strong marketing strategy.

3. Bridging Loans and Costs

Bridge Financing Costs: Bridge loans can be costly, with higher interest rates and fees, adding an extra financial burden. These loans are typically short-term and can accrue significant interest if the home doesn't sell quickly.

Possible Solution: Explore other financing options such as HELOCs or personal lines of credit, which may offer more favourable terms. Additionally, negotiate the terms of the bridge loan to reduce interest rates and fees if possible.

Qualification for Bridge Loans: Not all sellers will qualify for bridge loans, especially if their financial situation is already stretched. This can limit options for financing the down payment on the new home.

Possible Solution: Improve your credit score and reduce existing debt before applying for a bridge loan. Alternatively, consider using savings or gifts from family members for the down payment to avoid the need for a bridge loan.

4. Stressed Negotiations

Desperation Selling: Sellers may feel pressured to accept lower offers or unfavorable terms to ensure a quick sale of their current home. This can result in financial losses and missed opportunities for better offers.

Possible Solution: Plan your sale carefully by listing your home during peak market times and using competitive pricing strategies. Additionally, have a backup plan, such as renting out the current home if it doesn't sell quickly.

Less Negotiating Power: Holding two properties can weaken a seller’s negotiating position, leading to less favorable selling conditions and potentially lower sale prices.

Possible Solution: Strengthen your negotiating position by getting pre-approved for a mortgage on the new home and having a flexible closing date. This can make your offer more attractive to sellers and give you more leverage in negotiations.

5. Emotional and Psychological Impact

Increased Stress: Managing two properties and the associated financial burdens can lead to significant stress and anxiety, affecting overall well-being and quality of life.

Possible Solution: Work with a real estate agent who can handle many of the logistical aspects of buying and selling. Additionally, seek support from friends, family, or a professional counselor to manage stress and maintain a healthy work-life balance.

Decision Fatigue: Constantly making critical decisions regarding both properties can be overwhelming, leading to potential mistakes and burnout.

Possible Solution: Create a detailed plan and timeline for the buying and selling process, and delegate tasks to trusted professionals such as real estate agents, financial advisors, and moving companies. This can help reduce decision fatigue and ensure a smoother process.

6. Market Timing Risk

Misjudging Market Conditions: If the market shifts further towards a buyer’s market, the current property might depreciate more quickly than anticipated, leading to financial losses.

Possible Solution: Stay informed about market trends and work closely with a real estate agent who has a deep understanding of the local market. Consider selling your current home first or including a sale contingency in your purchase offer.

Changing Interest Rates: Potential fluctuations in interest rates can impact the affordability and carrying costs of maintaining two properties, leading to higher monthly payments and financial strain.

Possible Solution: Lock in interest rates for the new mortgage as early as possible to protect against rate hikes. Additionally, consider fixed-rate mortgages to provide more predictable monthly payments.

7. Carrying Costs

Maintenance and Utilities: Sellers must cover maintenance, utilities, and property taxes for both homes, increasing overall expenses. This can lead to a significant financial burden, especially if the current home doesn’t sell quickly.

Possible Solution: Reduce carrying costs by minimizing unnecessary expenses and performing only essential maintenance on the current home. Additionally, consider renting out the current home temporarily to cover costs until it sells.

Insurance Costs: Insuring two properties can add a significant cost burden, further straining finances and potentially impacting savings and investments.

Possible Solution: Shop around for insurance policies to find the best rates and coverage options. Some insurance companies offer discounts for multiple properties, so explore these options to reduce costs.

8. Impact on Future Plans

Delayed Goals: Financial strain from holding two properties can delay other life goals or investments, such as retirement, travel, or education expenses.

Possible Solution: Create a financial plan that includes a buffer for unexpected costs and delays. Work with a financial advisor to ensure that your long-term goals remain on track, even if there are temporary setbacks.

Impact on Retirement or Savings: Extended financial obligations may eat into retirement funds or other savings, affecting long-term financial health and security.

Possible Solution: Prioritize financial stability by maintaining an emergency fund and avoiding high-risk financial moves. Consider using a portion of the proceeds from the sale of your current home to replenish savings or invest in retirement accounts.

Weigh Your Options Closely

Sellers need to carefully weigh these risks and consider options like securing a longer closing period for the new home, arranging a sale-first strategy, or consulting with a financial advisor to ensure they can handle the potential financial burdens. Proper planning and understanding of the current market dynamics are crucial to mitigate these risks.

Please keep in mind that many factors can contribute to the risks outlined, including your price expectations, the current market need for your home type, the neighbourhood you reside in, the demand from buyers, unique features of your home, and more. In some scenarios, buying before selling might be the better option. However, it's important you speak to a trusted real estate agent and get a home evaluation before making any risky decisions.

If you're thinking about buying or selling a home in Toronto and want to navigate these challenges with confidence, please feel free to reach out. Let me help guide you through the decision-making process and ensure you make the best choices for your financial future. We are a team of agents with decades of experience to help you navigate Toronto’s ever-charging real estate market.