Human nature is such that people seems to have no satisfaction in every thing we do. This includes the purchase of a house. In Canada it is estimated that homeowners sold their houses and purchased new ones every five years in average. The common reason of selling and buying new houses is to upgrade their houses from smaller to bigger ones. Selling your house and buying a bigger one is not always fun because there is inherent problem on it if you don’t plan ahead of time.
The usual motivation of people buying bigger houses is to catch up with friends and relatives who have purchased bigger houses despite paying higher mortgage payments, property tax, property insurance, and utilities. They don’t mind paying more just to satisfy their ego.
An example was a couple owned a five bedrooms 2,800 square-foot house with finished basement. Just after three years they decided to sell the house and purchased a brand new 3,500 square-foot house. After signing the necessary papers for the purchase of a new house, they immediately listed their house for sale. The house was exposed in the market for seven months and it was not sold for the list price was above the market value. The couple believed their house would command a higher value because they spent so much money for finishing the basement. In the meantime they already waived the condition on financing of their purchase of the new house although they have not secured a mortgage approval from any financial institution. They thought that mortgage approval was not a problem because both had good jobs and good credit ratings.
Two months before the closing of their purchase of a new house, their existing house was still in the market, there was no buyer. Meanwhile, the husband lost his job. When they went to a bank to apply for a mortgage, they were turned down because the husband was without income. They finally closed the purchased of their new house with a mortgage from private lender with exorbitant cost and high interest rate.
Unfortunately, the couple was unable to sell their old house until after six months from the closing of their new house. As a consequence, they paid mortgages for two houses for a period of six months. Their lack of proper planning cost them more than $25,000.00 for their unnecessary expenses in paying two mortgages and the cost of securing a mortgage from a private lender.
When you plan to sell your house and buy a new one, do your homework ahead of time - determine the reasonable market value of your existing house by talking to real estate agents and secure your financing first before waiving the condition on financing for your new purchase to avoid the problem encountered by the couple in the above case scenario.
Adam Aspilla is a Senior Financial Counselor of the Debt Clinic of Canada Inc. and the author of the book, You Can Negotiate All Your Debts. He also writes a biweekly column, “What Matters In Life” in “Taliba Newspaper. For free initial, professional and confidential consultation, please call 905-306-7572.