Whenever embarking on a new adventure, it’s always good to have a road map. Our map leads to a very important place; your goals. This blog is about what you want to know. We have spent the last few weeks asking everyone we know about what they would consider helpful regarding downsizing. In the process we found out that there are many, many sub-topics that people want to know more about. It’s not just a matter of selling your home in Los Altos Hills and moving into smaller home in Carmel-by-the-Sea. For many of us it isn’t that simple. We have different time frames, different things we would like to accomplish and different ways we would like to go about it.
One of our friends has a six bedroom house in Willow Glen, four children aged from 23 to 9 and wants to put a game plan together immediately for moving into a smaller home in Campbell. Others, like myself, are living with an older parent at home as well as our own young children and that leads to a different game plan all together. The one thing we have in common is that for the first time since we were teens, it’s about us! …Only this time we have the means of going where we want, when we want. For once, we don’t necessarily have to put the needs of everyone else above our own. So, please let us know what matters to you and here’s to the adventure!
Caroline & Darlene
Congratulations! Whether one is moving or not, we can all downsize our stuff from time to time. Whether from Menlo Park to Mountain View or from Los Altos Hills to Carmel-by-the-Sea, for those who are making the commitment to sell their home in order to downsize, getting rid of extra stuff has an added benefit. Whenever we sell our home there is an emotional component of detaching ourselves. Getting rid of extra stuff is a great way to start that process. By packing up extras that you intend to keep, personal family photos and knick-knacks, we depersonalize our space making it perfect for putting the house on the market and letting go. The process makes the house feel less like our own, but in a way that is exactly what we need to do to move on.
We suggest making a plan of which areas or rooms you would like to tackle first. Take the easiest ones first. If it has been a while since the last general clean-up, it can seem completely overwhelming to start anywhere else. Once you have decided what that area is exactly, then start with the easiest part within it. It can be a desk, bookshelf or pile of things you’ve been meaning to give to a friend. As simple as it sounds, cleaning out tends to have it’s own momentum. As you get going, it gets easier and can even be fun. Also, if you have the luxury of time, do not try to do everything at once. It can take on a life of its own. Set a time limit of no more than several hours at a time. That way there is a sense of accomplishment when you move on to the next activity of the day rather than a feeling that one has never done enough.
Within those three hours, take advantage of the advice of every home organizing TV show known to mankind and make three separate areas for “keep”, “toss” and “donate.” We recommend not letting those piles get too big. If possible, pack things that you would like to keep, but aren’t necessary for the time that you still living there. The toss items should go into the garbage or arrangements made for someone to take them to the dump for you. The same goes for the donation pile. If the donation pile grows to such gargantuan proportions that you cannot see yourself dragging everything to the car to give it away, then make arrangements with a charity to come and pick it up. This is a process that requires a lot of work and it’s important to take advantage of all the help one can get.
We have a wonderful client that is buying his first house in Campbell. He’s 25 years old and has a very good head on his shoulders. In going over his loan options, he asked us what we thought about the APR. Ah, that tricky Annual Percentage Rate… Well, when we all sat down and went over the numbers line by line he saw that the APR was a great place to start figuring out how much he wanted to spend on a monthly basis, but that there are costs associated with getting his home that are due at closing and that do get covered by the APR. As a matter of fact they either need to be paid in addition to your down payment or you need to take some of the money from your down payment to cover those costs. So, if your APR is dependent upon 20% down and you don’t anticipate needing the extra money for the closing costs, it could cause trouble. As a result, if you need to reduce your down payment to 17% because you need to cover the extra costs, your APR could go up.
When most of us see our loan paperwork we first go glassy-eyed at the volume of documentation we are signing and then proceed to deep breathing the second we see how much we are actually paying for the life of the loan. Somewhere between overwhelmed boredom and head-between-the-knees, come all the other costs that stare us squarely in the eye in the form of a HUD-1.
The HUD-1 is a document that you see at the very beginning of the process of signing the loan documentation and closing papers. It lists all the costs that are associated with this loan or sales transaction. In most cases the borrower/buyer gets a bit of a shock seeing that things like credit check fees, appraisal fees, inspection fees, property taxes, transfer taxes and all the costs from the title company are tacked on as well. We think that everyone should be aware of this because it can drastically affect the amount that you walk away with when downsizing. If you are downsizing from Campbell to San Jose and are expecting your down payment to cover costs, ask to see an estimated settlement statement that shows all the costs you can expect prior to closing. APR is part of the picture, but not all of it.
Lynnley Browning wrote a great piece for the New York Times that goes into this as well… Calculating the Annual Percentage Rate.
The Wall Street Journal recently published an article regarding banks requiring higher down payments these days. For those who are considering downsizing this article is noteworthy. Banks have been pushing for higher and higher down payments for several years now so this news isn’t exactly new. Since most banks make loans, bundle a bunch of loans together and then sell the loans to investors, it makes a lot of sense. Investors got severely burned with the number of people who walked away from their loans. By increasing the amount required, buyers put more of their own money at risk and are less likely to walk away from a property (and the accompanying loan.)
What this means for a seller selling their Los Gatos home and downsizing to Palo Alto is that there are a few things to be aware of both within the contract itself and during the time to close. Knowing in advance of what you are likely to run across will mitigate some of the stress that can be a natural part of any transaction.
In general, this requirement for more money down will shrink the pool of buyers getting a loan. However, in practice we have seen many more cash buyers than in past years. This is especially true of Cupertino, West San Jose, Los Gatos and Saratoga. Unfortunately, there has been a surprising increase in the number of mortgage companies that are creating unique loan products to address the needs of buyers who do not have enough money down. We do not think that those buyers should be ignored because every legitimate buyer is a legitimate buyer. What we do suggest is that you do your homework.
The contract will show you the financial terms on the first page. If this is a cash buyer, no problem. If however, there is a loan specified that seems to have too small of a down payment, call the loan officer and ask them what kind of loan the buyer is getting. Find out what conditions the buyer has to meet and if any of them are anticipated to be a problem. If the buyer has a low FICO score and cannot meet the condition to pay off certain debt – thereby increasing their score – then, from our past experience, the loan is very likely not to fund and the buyer cannot close. The last thing you want is to be packed and ready to move to your next home, only to have the buyer unable to perform.
We have clients looking to sell their house in Sunnyvale and move to Los Altos and the question of capital gains came up. In looking into a layman’s explanations for capital gains, we recently found a great publication from the IRS called Publication 523 for 2010. Now, this wouldn’t be an IRS publication if it didn’t leave you scratching your head a little bit, but it’s a great place to start to learn about capital gains and to get together a list of things to ask your tax preparer. You can’t know what you don’t know and this is a great place to start figuring out what you want to discuss.
IRS Publication 523
Recently, we represented a couple that wanted to downsize and the positives strongly outweighed the negatives. This is an active couple who were the original owners on their Cupertino 4-bedroom, 2.5-bath house. As the children grew up they moved away and three of them ended up in the Sierra foothills. The neighborhood also changed dramatically as many of their friends relocated to other communities. Overall, they no longer felt as strong a connection to their home that they had several years before.
After some research, they found a wonderful community in the Sierra foothills that was an exact fit for them for several reasons:
- They wanted to live in a community that makes it possible to live an independent lifestyle no matter how old they get. They also wanted to know that they would have support if one of them should break a hip or need extra care.
- They wanted to be close to family and this community is located minutes from two of their children.
- Most of the family events rotate between the homes of the children living locally. The fact that they would no longer be commuting from Cupertino to the El Dorado Hills meant less stress and worry for everyone.
The out of pocket expenses, when compared against the money that would be realized as capital gains, were small enough so that the move could be done without negatively affecting their quality of life and the excess invested for extra income. The emotional and financial needs were met for these clients and move has been a great thing for them.
There are many advantages to downsizing that cannot be denied. Done properly, a downsize can result in lower expenses, less maintenance worries and less stress. Just keep in mind that not every downsize is the same. There are two examples that stand out to us. An example today and one tomorrow, but they really show that what is right for one family is completely wrong for another.
The first involves a family that we have had the honor to advise for a number of years. They are a wonderful family with six kids and untold grandkids. The question became whether to keep their 6-bedroom house in Willow Glen or whether to downsize to a single story in Saratoga or Los Gatos. As we started to look at options, several things became clear very quickly:
- Their home is the social center of the family and they enjoy that part of life. The homes they considered were all not that much smaller than the one that they were considering selling because the dining and entertaining area required meant that homes tended to have at least four bedrooms.
- Almost all of their children are local; within 1 mile.
- After looking at the numbers it was cheaper to stay and renovate than it would have been to move. By the time we added up the costs of getting their house ready for market, commissions, cost of movers, cost to make the next property their own (a kitchen remodel was inevitably required) the expenses were very likely going to top $200,000. We compared that to several bids remodel their existing home and put in an elevator.
In this situation, it simply did not make sense to move. The costs outweighed the benefits. They would have spent a mountain of money to try to recreate what they already had and made it less convenient to be an everyday part of their family’s lives.
Cash flow is a must to consider when deciding whether or not to downsize. Financially, what can seem like a good decision at first may spiral into a massive investment down the road. Here are some of the things we recommend looking at before making a final decision:
- Your mortgage: Many people will make the decision to downsize well after they have paid off their home. However, the majority of us may make the move before we have that opportunity. With the way real estate is generally trending upward in the Bay Area, you may find that your money does not get you as much as you anticipated. If that’s the case, will you ultimately just be paying the same amount to have less house? It’s possible. Though carrying some amount of a mortgage may not be a bad thing. Sadly, the IRS and state do not give us a break when we downsize and consider retiring. Depending on your individual situation, having an interest deduction on your primary residence may still help you to offset your taxes.
- Maintenance costs: A common wish is to have a smaller space that is completely turn-key and safe. We work hard and now we want to take the time to play a bit more. Having a community where we can move in without too much upkeep, be able to lock up and travel for a few weeks and have it be safe enough that you don’t have to worry about it, is high on everyone’s wish list. Maintenance is an important part of that picture. When buying a single family home the cost of maintaining the systems (security, roof, plumbing, electrical, landscaping, painting, etc.) fall entirely on the individual homeowner. Consider looking into a community that has a good homeowner’s association running the property. Many of the costs associated with owning a home are taken over by the HOA. Though obviously the homeowners are paying the fees to fund the HOA, it does have the advantage of negotiating power. Contractors who bid the work may give a better price for, let’s say a roof replacement, because they want the bigger job. In the case of a condominium development, such as the majority of the units at The Villages in San Jose, you have one roof for several units, decreasing the cost to each homeowner. If the major systems in your home have been replaced and don’t need to have anything done to them for the next 40-odd years, this may not be a big consideration. For others, just knowing that you don’t have to deal with calling a plumber, roofer, painter, etc. may be worth it’s weight in gold.
- Propositions 60 and 90: Since property values have been steadily climbing for most of Silicon Valley, the state of California allows homeowners that are over the age of 55 to sell their primary residence and buy another of equal or lesser value and transfer your old tax base. The California State Board of Equalization has a wonderful site that explains these propositions very well.
- Staying local: One thing that is easily glossed over are the costs of moving farther away from your current home, family and friends versus staying closer to home. The cost of the physical move itself is fairly easy to calculate. The hidden cost is in the form of traveling back and forth to visit. The home that most people downsize to is one that they will likely stay in for ten years or more. Given rising gas prices, could it become prohibitive to travel as far and as often as you would like?
Recently, while listening to some friends talk about their real estate goals, the question of timing came up. When does one downsize? Alas, that depends upon your goals. Do you want to move from your Cupertino home to be close to the ocean? close to your kids? away from your kids?! How quickly would you like to make that happen? Everyone’s answer varies. As a friend, we recommend stepping back from your life for a quick second (very likely, that’s about all the time you have anyway) and make a list. The reason we start out this way is because it seems that almost all of the initial considerations boil down to time. Once you have that list, you can then decide how much time needs to be allotted for each item. Even financial implications are often a question of time. Here are some of the things we suggest thinking about:
- Do you have children that are still at home and, if so, for how long?
- Do you ultimately want to be close to them, and if so, are they at a point of their lives where they seem to be settled? No need to move from Mountain View to Seattle if in a few months your kids could move to Chicago!
- How much money do you need? We suggest talking to your CPA, Realtor and financial planners to help you with this one. Financial planners are trained to help determine the amount of money needed. If you are planning on using any of the equity in your home, your Realtor can help you figure out the timing, costs, etc. of realizing that equity. And finally, your CPA will of course be the best resource for planning the tax consequences of all this “downsizing” in the first place.
- How much space will you actually need? Your house in Saratoga has four bedrooms, but will two bedrooms suffice in that Palo Alto development that you have had your eye on?
- If you currently have a parent living with you at home, do you plan to have them live in the same community with you? live in the same home with you? move in with another relative?
These are the main considerations that we have seen to date regarding the question of timing your downsize. There are many other things to keep in mind and we would love to hear your thoughts on what you think would be helpful to consider as well.
Caroline & Darlene