CARL WATTS & ASSOCIATES

June 13th, 2011

www.carlwatts.com
office@carlwatts.com
Washington DC
 tel/fax 202 350-9002
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House Exchange
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With this title, you are probably thinking of house exchange as the economical, comfortable way to vacation far from home, which seems to have been popular for some time now. But this is not what we have in mind.


The house exchange this newsletter is about is also called house trading, as well as permanent house swapping, and is another feasible alternative to selling and buying a house. Simply put “I buy your house and you buy mine”, meaning two homeowners (or sellers) agree to purchase one another’s homes.

Real estate experts presume that this more unconventional alternative is steadily gaining popularity for two main reasons:

  • In a down housing market, most people are nervous about buying a new house before selling their old one. With a house trading, typically both sides close simultaneously and the homes transfer titles at the same time, thus offsetting the risk of dealing with two mortgages at once or having to borrow more after purchasing a new house because the old one didn’t sell for as much as they thought it would.
  • The second reasons seems to be the internet impact. More and more people rely on the internet to gain information and make transactions; it is now easier than ever to find the suitable party for a house trading just by navigating the internet. In addition to that, web sites initially dedicated to short-term vacation home swaps only, are now specialized in permanent house trading as well.
So, what reasons would you have to consider this option?

House trading is another choice for people who are having a hard time selling their home, either because of the declining market or because of a hard to sell property, but who find it necessary to do so for various reasons.

They may need to buy a new home because the present one is too small or too big; because they have a good job offer in a different location; because they need to move closer to their family.

If you are in a similar situation, trading houses may offer you a number of advantages:

  • It is a good option for value preservation. With a house exchange, both you and the other party can agree on property values you are comfortable with and not the values dictated by foreclosures and short sales in the area. You may no longer be forced to accept offers far below the current appraised value, and be able to use any accumulated equity towards the down payment on the new home;
  • It eliminates double mortgage payments, as you pay off the mortgage on your existing home and obtain a new mortgage on the new home on the same day;
  • It may be easier to obtain financing on the new home. Since contracts require a closing on the same date for both properties, the bank will not use the monthly payment from the current mortgage as a liability, nor will it use the old mortgage balance in total loan to value ratios. Having fewer liabilities helps you to qualify for the new loan and negotiate better mortgage terms;
  • It can reduce moving hassles, like having to pay for storage of belongings and short-time rental for a place to live while in search for the new home;
  • You may be able to save on commission and advertising fees as a seller if you find a property match by owner;
  • If involved in short sale exchange transactions, this can actually help you close on your new home before your credit is negatively impacted by the short sale;
  • As a more of a “general interest” advantage, house trading can actually generate sales during a down market.
So, how does house trading work?

The two parties (homeowners) enter into a written agreement that the homes will be sold to each other on the same day, at the same time. The agreement states that either both homes are sold or neither of them are sold.

Once the homes are closed on, the parties vacate their property and assume responsibility of the other property. In order for the swap to work the two parties must both agree upon the swap and must have the ability to leverage the properties; either in existing equity, borrow power or cash.

If house trading looks like a suitable option for you, here are a few steps and aspects you should consider:

  • Contact a licensed real estate appraiser for a complete appraisal of your home, including a neighborhood analysis and a comparative study;
  • Check your financing options beforehand and get pre-qualified for a mortgage. You will need to inform your lender that you will be selling your current home at the same time you purchase the new home;
  • You may need a lot of time and patience to research and look for online services by yourself to list your house for trade and find a suitable new home. (If you don’t want to do the trade process yourself, consult a real estate agent if they listed a property or to help find your exchange property);
  • Once you have located a property, contact the owner directly to exchange information and negotiate a deal. You should be very cautious as some sellers may not disclose certain things about their properties. Make sure you go and look at the property in person, get a home appraisal, inspection, title search, and so on;
  • You and the other party should agree to use the same title company to facilitate the title search, escrow process and closing, as this may save time, money and confusion in fulfilling a simultaneous closing;
  • In every step of the process you should consider the advice of a real estate lawyer to ensure the transaction flows as smoothly as possible.

House trading is not for everyone; you may have to become more flexible and be willing to settle for something other than your dream house. But in times like these, you may want to consider all the options.

If you are motivated to move based on various factors (i.e. employment, marital status, financial considerations, etc.) you may want to be more open to the idea of an exchange and less concerned with property amenities if the move can help you to meet specific needs, avoid a short sale, or prevent foreclosure.

As far as the IRS is concerned, if you have gain from the sale of your main home, you may qualify to exclude all or part of your gain from your income on your tax return. If you meet the ownership test, the use test, and you did not exclude gain from the sale of another home during a two-year period before the date of the sale, you may claim an exclusion of up to $250,000 if single and $500,000 if married filing jointly.

And, by the way, don’t forget to check our next newsletter, especially if you are a real estate investor, or just have a second home, a vacation home, or a rented piece of property that you would like to use in a “like-kind” real estate exchange.