How Does Trading a House Work?

June 12, 2020


trading a house

Have you ever heard of trading a house? We recently spoke with a seller who literally spent years trying to sell her home, with no luck. After a couple of years of her house sitting on the market with no movement, she decided it was time to think outside the box — so she tried a different strategy. 

Rather than spinning her wheels continuing to search for the right buyer, she decided to go after sellers in the market who were interested in trading homes with her. Fast forward a few months, and she was signing closing documents and preparing to trade her home with a homeowner in a different state. 

So what is the moral of the story? No one needs to feel stuck if they are having trouble selling their home. If you’re willing to think outside of the box and consider all of your options, including trading a house, you can find a solution! 

How trading a house works 

Homeowners are becoming more open to the idea of trading or trading in their homes — especially homeowners who are in the market to sell their home to downsize, want to upgrade to a bigger or nicer home, or who are interested in relocating. But actually, home trading has been going on for a while now, even if it hasn’t always been very well known to home buyers and sellers. 

However, the word “trade” can be misleading to some sellers, since the term sometimes leads people to think the exchange is as simple as switching keys and moving in. 

While it’s not that simple, fortunately, trading your home doesn’t have to be an overwhelming task. To put it simply, trading properties means that instead of one transaction, you have two transactions that happen at the same time — one to sell your home and one to buy the house from the same person (and ideally on the same day). 

There are still lenders involved and money does still change hands, since the financial process of trading your home is similar to that of a traditional home purchase. You will still need to qualify for a mortgage loan with your lender, put down a down payment, and also have a closing, where you will sell your home and buy your new home in two separate, but simultaneous, transactions. Your existing mortgage is paid off at this point, and then your mortgage for your new home begins. 

With both the sale and purchase happening at the same time, it is as if the two parties are trading home, which is where the term comes from. Having both transactions occur at the same time helps to ensure that you won’t wind up having to pay for two mortgages at the same time. Working with an experienced real estate agent who has experience with these types of transactions can be especially helpful. 

What if the homes aren’t of equal value? 

Often, the homes involved in a grade aren’t of equal value. Many, if not most, homeowners who are looking to trade their house are either in the market to move up, for more living space or to upgrade homes, or move down, to cut expenses or downsize. 

Maybe you have recently gotten married and you are outgrowing your current home, a 2 bedroom condo. Or perhaps your kids have all moved out of the house, and now you’d like to downsize and have more time and freedom to travel. Either way, there is likely another homeowner out there who is looking for what you have — and also has what you are looking for. Homeowner trades of homes of unequal values are really just selling two trading homeowners’ homes to each other, with both parties benefitting from the sales. 

But, how does it really work? 

The house traders will sign separate purchase and sale agreements for each of the houses involved in the trade. The contracts spell out the specifics of each transaction, including the price of each property. If one house is valued higher than the other (which is often the case, as mentioned above), the buyer of the more expensive house will pay the seller the difference at the closing. In other words, if you are trading your $300,000 to upgrade to a $500,000 home, you will be responsible for paying the other party the difference, or $200,000, at closing. 

As we also mentioned earlier, if either of the properties has an existing mortgage in place, the lender will be paid at the closing, in the same way they would in a traditional home sale. Also as with any traditional sale, the buyer in a home trade can also get a mortgage loan to help pay for the new house, in case the difference in home values is too much. Anyone who needs a mortgage in a home trade should include a copy of their sales contract along with their application documents, as proof to the lender that there will only be one mortgage once the closing occurs. 

The advantages and disadvantages of trading your house 

As with any major financial decision, it is important to keep in mind that there are both advantages and disadvantages to trading your home. One big advantage that many traders report is not having to deal with many potential buyers traipsing through their home or submitting lowball offers. It can also be much easier to coordinate your move, since when you are trading, your moves can occur simultaneously. Both parties involved can avoid the hassle of having to put their furniture into storage for an undetermined amount of time, as opposed to a traditional sale, when you are also rushed to find a new home after selling yours. 

Of course, trading your home isn’t for everyone. For instance, if you owe more on your mortgage than your home is worth, you will likely have difficulty qualifying for financing. The only way a trade would work is if you pay the lender the difference of what you sell your house for and what is still owed on the mortgage. 

Also, homeowners who are in a hurry to move or who are not flexible in what they want in a home may have limited options. Since not every seller on the market is open to trading, you may find that your options are somewhat limited in your search. 

Selling and Buying a home simultaneously with Reali

Simultaneously selling your old home and buying a new one is stressful and complicated. With Reali Trade-In, it’s easy to find and move into a new home, before your old one sells. Contact us when you’re ready to get started!

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