What Is House Trading & How Does It Work?

House trading involves selling your home to someone while buying their property. You essentially swap residences. This can spare both parties the irritation of showings and the expense of agent commissions while giving each party their new next home.

Trading homes isn’t done every day, but it can occasionally be an option that works for the parties involved. Learn more here.

What Is House Trading?

House trading means that you sell your home to someone and simultaneously buy their place.

You’re likely familiar with home exchange programs when it comes to vacations. You dash off to a lovely apartment in Paris, and the owners come to your city to enjoy all that it has to offer. Both parties enjoy a vacation with a much lower price tag. Maybe you’ve even thought, “Can I trade my house for another house?” and daydreamed about a permanent swap with another homeowner.

With real estate trading, this kind of switch is made permanent. Perhaps you’re outgrowing your compact two-bedroom house as your family expands, and the empty nesters down the street in a four-bedroom are looking to downsize their home. You could proceed with a house trade, selling and buying each other’s places simultaneously.

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How Does House Trading Work?

Think of trading real estate as a win-win. You want to sell your house. You find a home you like, and the homeowner is interested in buying your home too. It happens.

What comes next? Can you trade houses with someone? Yes. There will be two transactions at once. You sell your home to the Joneses, and they buy yours, typically on the same day. Because you’re selling and buying at the same time, it’s much like a trade. This is not a simple transaction, though. You want the stars aligned on that day.

However, there are some similarities to buying a home the traditional way. Expect the home-buying process checklist to be the same:

•   Qualifying for a home loan

•   Getting a home inspection

•   Doing a title search

•   Closing with simultaneous transactions.

You pay off one mortgage, if you have one, and take on a new one if needed. At the same time, the other party will sign their purchase and sale agreement.

As much as doing all this at once may feel overwhelming, the upside is that you won’t have two mortgages on your hands at the same time. If both homes are owned free and clear, then the only money matters are transfer taxes and closing costs.

You’ll probably want a real estate lawyer who knows how these deals work at your side.

Recommended: How to Buy a House When You Already Have a Mortgage

What If the Homes Are Unequal in Value?

It’s quite probable that the two homes won’t be of equal value. That’s not a deal-breaker, though. What matters is whether each house meets the needs and desires of the other party.

It’s important for both parties to order home appraisals. If one home is more valuable than the other, the buyer of the more expensive home pays the seller the difference at closing.

How Common Is House Trading?

Home trading is not something that happens every day, but as people continue to search for creative ways to fulfill their dreams and technology helps connect like-minded folks, house trading has its place in the array of home-buying options out there.

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Pros and Cons of Trading Your House

Here’s a look at the upsides and downsides of trading houses. On the one hand, there’s something to be said for this unconventional way of buying and selling a home.

•   You may be able to buy a house without a Realtor®. If there is no real estate agent involved in the trade, both buyer and seller keep the money they would have shelled out to their agent.

•   You eliminate some of the hassle of moving day. Because both parties are working in concert, it makes orchestration of the move easier.

•   You skip the whole dog-and-pony show of potential buyers traipsing through your home and the stress of having it look perfect for showings.

•   You also may find that getting financing when trading a home is easier. Some homeowners encounter hurdles qualifying for a mortgage before their home is sold. However, if you have a contract to sell your current house (which you would in a home trade), your lender won’t count your monthly mortgage payments as debt if you apply for a mortgage.

Having this improved debt-to-income ratio can allow you to qualify for better terms on your new mortgage, which just might save you a ton of money as well.

Real estate trading isn’t without its issues, however. These are some of the concerns related to trading houses instead of selling in a conventional manner.

•   If you’re in a hurry to move, you may not be able to find someone who wants a house swap as quickly as you want to move.

•   In a big-picture way, house trading may mean you have fewer options, you may not get the neighborhood you have in mind, or you may not find a home with all your dream features.

•   If you owe more on your mortgage than your home is worth, you may have trouble getting financing. The only way a trade would work is if you pay the lender the difference between what you sell your house for and what is still owed on the mortgage.

•   Issues could arise as you think about how to swap houses with mortgages. If for some reason the purchase and sale don’t happen at the same time, you could be stuck for a time with two mortgages.

Who Typically Trades Homes?

Home trading is usually a transaction between individual homeowners, although sometimes investors who own properties might trade homes within their portfolio with one another. Friends or relatives, older homeowners who wish to downsize, and people moving for work are among those who may be more likely than the average homeowner to engage in a house trade.

Common Scenarios for House Swaps

Here are a couple examples of how a house trade might play out:

The upsize, downsize trade A couple living in a small two-bedroom home is expecting their second child. They decide they would like to look for a larger place. They want to stay in their neighborhood, as it has great schools and their eldest child is starting kindergarten in the fall. And given that the baby is due in a few months, they want to move soon.

Meanwhile, an elderly couple living in a large house around the corner is thinking about downsizing into a smaller place. They, too, wish to remain local, as their children and grandchildren are in the area. Word travels quickly that each is looking to buy a house, and soon enough they are connected by a neighbor and start talking about a trade. Both properties are appraised, and the young couple agrees to pay the downsizers the difference between the two home prices. The larger house is a bit bigger than they were looking for, but there is very little for sale in the local market so they decide to move forward.

Once they are able to secure a mortgage for the new, larger home, the two families schedule a double closing. Each is represented by a lawyer in the transaction, and they also have to pay for title searches and title insurance. But no real estate agent is involved in the trade.

The job-transfer trade A marketing manager in a midwestern office of a large packaged-goods company sees an opportunity to move into a better job with her company by transferring to the Philadelphia headquarters. She owns a small house that she inherited from her grandparents, and she puts it on the market, but also posts on her social-media accounts that she is open to trading her midwestern house for a place in Philly.

To her surprise, she receives a message from a woman in Philadelphia who is looking to sell her condo and move back to her midwestern hometown. The two schedule virtual house “tours” and swap appraisal information. The Philly resident is head over heels for the midwesterner’s house. Meanwhile, the condo is satisfactory to the midwesterner as well — maybe it doesn’t have everything she wants, but as a first stop in the city, it’s fine, and she thinks it will hold its value.

In this case, the properties are valued about equally, and the two agree to a trade. Since neither of them has or needs a mortgage, the deal moves ahead with speed.

When House Trading Makes the Most Sense

As demonstrated in the two scenarios above, house trading makes the most sense when owners want to move soon and are willing to be somewhat flexible about what property they are buying. House trade has the added benefit of saving on real estate agents’ fees, so it may be especially appealing to cost-conscious consumers.

Trading Houses vs Conventional Selling

With home trading there’s a good chance you will be able to avoid using a real estate agent if you find your trading partner on your own, be it a relative, colleague, friend of a friend, or from a website. You can also avoid the hassle of staging your home and showing it to prospective buyers.

There are some things that are pretty much the same. Both parties may need new mortgages, and both may want home inspections. Both will probably want attorneys present.

Trading Homes	Conventional Sale
Likely no real estate agent	Usually buyer’s and seller’s agents involved
Small market	Wide market
Deal with one buyer	Handle multiple offers

Legal and Financial Considerations When Trading Homes

Owners who are trading properties will want to hire an attorney who is familiar with real estate trades to help ensure that the trade is binding and all the appropriate paperwork is filed. And they will go through most of the same steps as anyone purchasing a house in the conventional way.

Mortgage Transfers and Financing

If one or both of the homeowners in a house trade needs a home loan, the first step will be to secure financing if one or both parties doesn’t already have mortgage preapproval. A lender will require an appraisal of the home, and each owner will need to determine the size of their down payment, screen potential lenders, and decide on a lending partner.

In rare cases, one or both parties may have a mortgage that is assumable, meaning the mortgage can be transferred with the house to the new owner of the property. This can be an attractive feature when mortgage rates are high, but it’s a pretty unusual situation. Both parties will also need to arrange for homeowner’s insurance on their new property.

Title, Inspection, and Closing Requirements

A title search will be necessary to ensure that the person selling the home does in fact own it. And one or both homebuyers may want to arrange for an inspection of the property they are acquiring to safeguard against any costly surprises after they take possession. If the inspection reveals any serious issues, it may be necessary to remedy them or to negotiate a change in home price before the closing. Good communication is essential throughout these processes so that both parties involved in a house trade can arrive at the closing date with all their ducks neatly in a row.

The Takeaway

Trading homes is a viable option for house hunters who find a trading partner who wants to own their home. While the home exchange approach is decidedly nontraditional, the steps of securing a home loan (if needed) and closing will be familiar.

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FAQ

Does house trading have tax benefits?

A house trade is still a sales transaction, so the tax situation is the same as it would be in an ordinary sale. When you sell your residence, you have to pay capital gains tax if your profit is more than $500,000 (for a married couple) or $250,000 (for a single person). It’s a good idea to seek advice from a tax advisor when preparing your return after a home sale.

Can two people just trade houses without buying and selling?

In theory, two people could trade houses without two sales transactions, but the likelihood that this would happen is small. The two houses would need to be of equal value, which is unlikely. The deed would still need to be recorded which involves a title search and lawyers. And if one or both parties has a mortgage, that would further complicate matters.

What salary do you need for a $400,000 mortgage?

Assuming a down payment of 7% (on a home priced at $430,000), and an interest rate of 7.00% on a 30-year loan, you would need to earn $130,000 per year to qualify for a $400,000 mortgage. Your credit score, income, and debts will influence the exact salary number for you.

How do mortgages work when you trade houses?

If one or both parties in a house swap has a mortgage, the process will probably work much the way it does if you were selling or buying a house as an isolated transaction. You’ll pay off your mortgage and take out a new loan, and the other party will do the same. If all goes well, having both transactions happening at the same time can prevent either of the parties from having to hold two mortgages simultaneously.

Is house trading a good option in a slow real estate market?

House trading may be a smart choice in a slow real estate market because, provided you can find someone to trade with, you won’t have to list your home and keep it open for viewings for months on end. Nor will you have to sit through round after round of price cuts in order to get a buyer. If you can find a trading partner, the deal can be done quickly and without involving a real estate agent (though you will want to hire a lawyer familiar with house trades).

Photo credit: iStock/AndreyPopov

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