BusinessDesk's investment editor, Frances Cook, responds to readers' emails weekly to answer questions about money. Below you'll find her expert advice.

Hi Frances, 

I have a question and I’m guessing I’m not the only one curious about the answer.

We have been thinking of moving out of Auckland. We’d be selling our home and buying something coastal.

We have a mortgage of $200,000 and the house we’re looking at will take our mortgage down to about $50,000. We will want to do about $100,000 in renovations.

The house we’re looking at is coastal, with sea views, so we feel it could be a good investment.

The bank has said they’re happy to keep our mortgage at about the same, $200,000, for renovations. We want to have it lower.

Is it a good time to sell and buy? People are saying we’re buying and selling in the same market so it’s OK.

I’d love to know your thoughts, if it's possible?

Thanks, Frances.

T

Hi T

This is a slightly tricky one, because you’re not doing this as purely an investment – it’s also your home. So, this isn’t just a financial issue, it’s also a quality-of-life issue. 

For your own home, yes, the financials are important, but it’s also about stability, security, and finding somewhere that works for you long term. That’s why sometimes people say the only right time is when it’s right for you personally to make the financial commitment. 

If you have a steady job and you’re confident you can keep making repayments on the mortgage, then you might be willing to take a slight risk on how much your current home will go for, so you can secure your new life by the beach. 

There are always risks when you’re buying and selling a house, but right now things are quite uncertain, which makes the risks bigger because they’re harder to predict.

That said, we also definitely want to minimise those financial risks. So, here are the factors I would be considering. 

Have you had your current home appraised, to see how much a professional expects you could sell it for? Things are changing rapidly in the current market, and many sellers are having to drop their price slightly to make sure they sell.

Make sure you’re not relying on an automatic valuation from a website, or one that’s six months old. 

The other issue to consider is how long it would take to sell your current home. Would the sellers of your new house be willing to accept an offer that's conditional on you selling your current house? 

In the previous hot market, this type of clause could see an offer rejected by sellers, who were holding out for an immediate sale at top dollar. 

But now that things are slowing down, more and more people are adding in this clause, and it puts you at less of a disadvantage in the buying process. It could also really help you to keep your finances secure, and reduce the risk. 

Ask questions

When you get your house value assessed, you can ask for extra information, such as how long it's taking for houses to sell in your area. Registered real estate agents have access to databases that give them this information. They should also be able to tell you if that’s an increase in how long homes were taking to sell previously. 

From off-the-record conversations I’ve had with real estate agents, it’s not just that prices are dropping, it’s that it’s taking longer to sell houses now. 

A lot of people are still struggling to get a deposit together, and tough new lending rules mean some people aren’t getting approved for a mortgage when they would have before. Buyers may be keen to buy, but if you can’t get the finance together, it’s not going to happen.

You don’t really want to be stuck paying for two houses at once, so in a market like this, it could be worth making the sale of your current home a condition of the offer on the new place. 

Or, if you can stay with friends or relatives, you could get your current place on the market straight away. If you get it sold before making an offer on somewhere new, you could make a cash offer on the new house, confident in what you’ve sold for and knowing exactly what your financial position is. If you expect to have competition for the new place, a cash offer helps. 

The good thing about your situation is that, as long as your house actually does sell, you have a cushion if it goes wrong. You’re planning $100,000 of renovations. So, if you go to sell your current home, and it unfortunately doesn’t go for the amount you expect, you’re unlikely to be financially ruined by it. 

You’ll probably have to put some of those renovations on hold, which is disappointing, but it’s not the same as being locked into a new steep mortgage that you simply can’t afford.  

There's also the point that if you’re buying and hoping to stay in the new place for several years, then selling and buying at nearly the same time is likely to balance out. It’s often suggested you should stay in any home for at least five years, anyway, otherwise any increase in value can be eaten up by real estate agent fees and other costs from moving. 

Big financial decisions like this one tend to smooth out if you’re able to treat them as a long term decision and stick with them for a few years. 

As a side note, you mention that you’re considering a coastal house with sea views, because you want a good investment for the future. That sounds delightful, but it does throw up a red flag for me that’s worth considering. It might be worth seeing how far you would be above sea level, and if there’s any erosion risk. You can find information like this with the local council, usually on a LIM report. Some insurers also hold information about this. 

Insurance companies are already starting to forecast which parts of New Zealand will become uninsurable as sea levels rise from climate change. If a house is uninsurable, you can’t get a mortgage on it. If you can’t get a mortgage on it, it’s very unlikely you’ll be able to sell it later. 

It’s just one factor among the many to consider when buying a house, but it’s definitely one I’d keep in the mix. 

What experts think

Because this can be a tricky issue, I asked some experts for their thoughts on your situation. 

Here’s what independent economist Tony Alexander had to say:

As a rule, for someone buying and selling in the same market it makes little difference whether prices are rising and falling as long as the transactions are close together in time. 

"Risk arises if one sells, then waits before buying and ends up paying a lot more, as happened to many people last year. Many in 2021 were also caught out selling then finding few listings available when it came time to buy. 

"With prices falling, the risk reverses. If one buys from the ample stock of listings but then delays selling, one risks selling for a lower price than expected and competing against many other vendors. There is a risk of being stuck with two mortgages.  

In a rising market it is best to buy, then sell, and in a falling market to sell, then buy.”  

And here are some thoughts from Phirak Appleton, Real Estate Authority (REA) general counsel:

Deciding whether to buy first or sell first can be a dilemma in any market conditions. Our advice is first and foremost to ensure you have your finances and your support crew (legal advice, licensed real estate professional, insurer and building inspector) fully prepared. Also, make sure you give yourself plenty of time to weigh options and consider advice. This will help to ease the stress, regardless of which option you decide to take.

From there, deciding whether to buy or sell first will come down to your own preference and willingness to take on the risks of either option. There’s no definitive right way to go about it – each option comes with its own pros and cons.

Buying first can give you the luxury of time. You can hunt for a home that meets your wish list of requirements without a looming settlement date. 

On the other hand, this may be a trickier approach in terms of your finances and knowing how much you can safely offer. To secure the new home, you’ll need to come up with a deposit, which may be difficult if your equity is tied up in your current property. You may also end up in the situation of owning two properties for a time, which can mean two sets of bills to pay (such as home insurance, rates and utilities), as well as the cost of bridging finance to manage two mortgages. 

This extra financial strain can also mean you put yourself under pressure into accepting lower offers, particularly in a cooling market, just to seal the deal.

In comparison, selling first can give you a clear picture of your financial situation. You’ll know exactly how much money you have to work with and what you can afford to buy. 

However, once you’ve accepted a buyer’s offer, the clock starts ticking towards settlement day, which may put you under pressure to make an offer on a home that may not exactly fit your needs, because you need somewhere to live. It’s a good idea to try to negotiate a long settlement period on your own house, but this isn’t always possible, so you need to have a plan B ready. Try to understand what your short-term accommodation options would be, as well as the associated costs (such as moving your belongings twice and paying for storage).

Most indicators are that we are currently in a ‘buyer’s market’, which means you are likely to be able to move more quickly as a buyer, if you need to. This could make selling first a little more appealing, particularly if prices are cooling in your area. Remember, though, everyone’s circumstances are different, and there’s no clear best or safest option.

Hopefully this gives you food for thought. Best of luck with starting your new beach life!

Get more money tips when you listen to Frances' podcast, Cooking the Books:

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Send questions to answers@businessdesk.co.nz if you want to be featured in the column. Emails should be about 200 words, and we won't publish your name. Unfortunately, Frances is not able to respond to every email received, or offer individual financial advice.

Information in this column is general in nature, and should not be taken as individual financial advice. Frances Cook and BusinessDesk are not responsible for any loss a reader may suffer.