Several years ago, when prices were dropping by double-digits every year, savvy sellers, realized that they would cut their losses by selling immediately, as opposed to waiting for prices to recover. This turned out to be a great strategy because their loss was minimized. Instead of losing 40% or even 50% from peak prices at the height of the boom, these sellers were able to sell at a 10% loss from the market high.
Many of the sellers during this period needed to buy another home. Another powerful reason for selling had to do with the loss being minimized during the repurchase of another home. The logic was that the losses incurred by selling an existing home at a lower price, would be at least partially covered by the money that would be saved by repurchasing at a lower price. It was a good strategy.
For example: Seller A had a home worth $600,000. It had dropped in value to $550,000. Seller A sold his home for $480,000, accepting a 20%, or $120,000 loss, compared to what the home was worth at the height of the market. Seller A then proceeded to purchase another home that had been priced at $500,000 during the height of the market. The Seller offered the same 20% less that he had accepted for the sale of his home and paid only $400,000.
The Conclusion: After losing $120,000 on the sale of his home, Seller A made up $100,000 on the purchase of another home. In other words, The Seller’s perceived loss was only $20,000, not the original $120,000.
This reasoning was sound, but the smartest sellers actually chose to sell now, then wait for prices to drop even further before they bought again. These sellers would accept offers for less than what their homes were worth, rent for a while, and then purchase after prices had dropped another 20%-40%.
For example: Accepting the fact that prices would drop dramatically, Seller B sold his $600,000 home (price during the market high), for $480,000, (a 20% loss from the market high). Instead of purchasing another home, Seller B chose to rent when rates were cheap, and repurchase when real estate prices were at or near the bottom. The market for a similar home subsequently dropped another 30%, which was a 50% drop from the market high.
The Conclusion: Seller B, put his $480,000 in the bank, and then purchased a similar home for $300,000. Seller B ended up with a nicer, more expensive home for $100,000 less than Seller A.
How does the Sell Now, Buy Later Strategy employed by Seller B above, apply to our situation now?
Many Sellers that are planning on selling, have every intention to purchase another home now. If prices are undervalued right now and equity will be recaptured to reflect more realistic prices in the next 5 years, why not reverse the strategy above, and BUY NOW AND SELL LATER?
According to many real estate experts and economists, like Henry Case, real estate prices are likely to increase at double-digit levels for the next several years. If a Seller waits to sell and buys now, he can make more money on the home he sells, and pay less money on the home that is purchased.
For example: Seller C decides not to sell his home for $500,000 today. Instead, he holds onto his home for 3 more years and lets it appreciate 30%. In 2014, he sells his home for $650,000. The conclusion: Instead of selling at the bottom of the market, Seller C recaptures another $150,000 in equity because his home appreciates rapidly.
But, Seller C recognizes that the home he is purchasing will be more expensive in the future so he decides to buy another home for $750,000. In 3 years, that home has also appreciated 30%, and is now worth $975,000. Seller C saved $225,000 by being smart enough to Buy Now. Seller C also earned another $150,000 by waiting to sell his home.
Seller C used a BUY NOW AND SELL LATER STRATEGY for a total gain of $225,000 + $150,000 = $375,000.