All Posts Tagged: Downsizing
I have jokingly told real estate agents looking for clients that they should go knock on the front door of every two-story house where the current occupants have lived for at least 20 years. There’s a good chance those owners will be in the market sooner rather than later.
Half of Americans ages 50 to 64 intending to move said they sought a smaller house, and among those 65 and older 66% wanted a smaller home, according to a 2012 survey by the Demand Institute.
There are lots of reasons to consider downsizing, including hopes of lowering monthly housing costs, cashing out equity that’s built up in a home, reducing maintenance responsibilities, or finding a change of scenery. Before you rush to unload your place, however, weigh the pros and cons.
1) Sticker shock: Like lots of empty nesters, I fantasize about moving from the suburbs where my kids grew up into the city where I could be a kid again — close to dining and entertainment, maybe walking to my office in downtown San Francisco. But the suburbs-to-city move would come at a price.
In my case, the median home price in the city east of San Francisco where I live is about $720,000, versus San Francisco’s median price of just under $1 million, according to Zillow. On a price-per-square-foot basis, San Francisco is 127% more expensive than Walnut Creek, where the median is $394 per square foot compared to San Francisco’s $894 per square foot. If you sold an 1,800-square-foot house in Walnut Creek that you owned outright at the median sales price, you’d have enough cash to buy a place in San Francisco under 800 square feet. (To keep it simple, my example excludes the various costs of buying or selling either home.)
2) Contingencies: Selling to buy another home, or buying contingent upon selling your current home, can be tricky. In hot markets it can be difficult to find a seller willing to accept an offer that is contingent on the sale of the prospective buyer’s current home. Think through your strategy. Will you rent for a time after selling your house? Can you arrange to stay in your home after the sale until you find a place to buy?
Talk to your real estate agent about market conditions to understand your options. When you find a place you want to buy, learn the seller’s motivations so you can tailor your offer. Maybe the seller is waiting to move and would value an offer from a buyer who is flexible about the move-in date.
3) Emotions: This one is always difficult to assess, but consider the emotional attachment you and your family have to your home. For some people it’s no big deal to say good-bye to the homestead, but others are attached to the memories and idiosyncrasies that come with an old house. Many children value coming “home” for holidays to the place they grew up. Only you can determine the weight to give to the sentimental aspects of your home, so I just encourage people to not underestimate the significance and to communicate openly so everyone understands what is being considered and feels comfortable expressing their views.
4) Taxes: When I hear friends talk about selling their family home so they can buy a condo with all cash or with a substantial down payment, I encourage them to talk to a tax professional. Certainly, a small, stable monthly payment can be attractive, particularly in retirement. But we all know an advantage of homeownership is that in most cases mortgage interest on a primary residence is tax-deductible. In the early years of a $300,000 mortgage with a monthly payment of $1,860, around $700 of the payment will be interest, which amounts to a roughly $8400 deduction on federal taxes. So you (side by side with a tax professional) should do the tax math to evaluate the financial pros and cons of renting or lowering or eliminating your mortgage payment.
5) A final thought: If you plan to pay cash for a smaller place to help you live on a smaller income that you expect in the near future, consider establishing a home equity line of credit now to have as part of your “security blanket.” I recommend talking to a financial advisor or retirement planner about your options.
Keep in mind that lenders typically charge an annual fee for maintaining a home equity line of credit, even if there is a zero balance. But the small cost may be worth it to have access to a line of credit. If you foresee a reduction in your income, through retirement or other change in circumstances, remember that any future application for credit will be based on your new income stream.Read More ›