Pros and Cons of House Trading

There are many good reasons to consider a home trade, and the top one for many traders is the peace of mind in knowing that your home has sold. Trading is a good option for people who have to relocate quickly for a job or just simply want to sell their house and get on with their lives. The transactions of house trading usually happen much more quickly than during the typical selling process, which could feasibly help a homeowner trying to avoid a short sale or a foreclosure. Another big pro is that you're more likely to receive the appraised value for your house, allowing you to preserve the equity you've built. Since you're dealing directly with the owner of the other property, both parties in a trade can agree on property values they're comfortable with that aren't dictated by foreclosures or short sales in the neighborhood. This is a big boon for people who own homes in declining markets.

Trading homes also makes it easier to get bank financing. Most homeowners have a hard time getting a loan for a second home before theirs is sold, but as long as you have a contract to sell your current house, banks don't count your monthly mortgage payment against your income when you apply for a loan. Also, having a better income-to-debt ratio often allows you to get better terms for your next mortgage. Upgrading is more of a possibility than ever because more homeowners are looking to downsize since the housing bubble has burst.

Builders benefit from trading because they're moving their inventory in which they have a considerable investment. Plus, they usually have the staff to do repairs and renovations necessary to increase the value of the traded-in home.

Of course, with the pros come some cons, the main one being that beggars can't be choosers. You most likely won't have the same flexibility to pick and choose details that you would like in your new house as you would if you were negotiating a regular sale. And though you may make it into the neighborhood you want, it may not be on the particular block you desire.

Another minus is if the selling and buying don't happen all at once, you could wind up stuck with two mortgages. For this reason, it's recommended that one title company is used for both transactions to avoid this scenario. Another issue that could come up is if one of the parties owes more on their house than it's worth, they'll probably have some difficulty qualifying for a loan.

1031 Exchange

Trading investment properties has been popular for years because it gives investors the opportunity to upgrade or transfer their holdings to a new area. But the biggest plus is that it allows them to defer capital gains taxes, which are hefty taxes that Uncle Sam charges on the profits from investment properties when they're sold. To qualify, investors must follow the rules for what the IRS calls a 1031 exchange. This means they have to trade for "like-kind" properties, which doesn't dictate what the condition of the new property must be, but does mandate what the property is used for. Also, there's no trading out of the country.