Author Topic: When does it make sense to downsize?  (Read 3930 times)

jrhampt

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When does it make sense to downsize?
« on: July 29, 2016, 06:36:19 AM »
My spouse and I have been looking at downsizing our house, but the transaction costs are steep, and house value is a bit below where we bought (we paid $250k) .  We currently have a home over 2500 sq ft, counting finished basement.  We have lived in it for 8 years and have no mortgage.  It has far more space than we need, and the lot is hard to maintain, but utility bills are low as we've made it more efficient since we moved in, and it has all the modern conveniences we could possibly want.  It's a relatively newer house for our area, so it hasn't had any major issues since we bought it.  If we put it on the market now (based on analysis by realtor with recent sales in our neighborhood), we might get $225-$240k, but we lose an additional 5% to realtor fees.  We are looking at a couple of older, smaller houses on smaller lots at the $150k price point.  Advantages would be that property taxes would be cut in half (this is a big deal since we pay $8300 in property taxes each year) and the smaller lot would be easier to maintain.  In addition, as interest rates are very low, we have locked in a rate for a 15 year fixed loan (no points) at 2.625%, which would free up some money to invest after we sold our current home.  Disadvantages would be that it's risky to get an older home, as the maintenance costs might end up being equal to or higher than at our current newer home.  Also, we'd probably end up doing $25-30k worth of work on the home to upgrade old systems and do deferred maintenance on the property.  So, is it worth the transaction costs, the hassle of moving, the time spent to fix up the new house, and the risk that our house might not sell quickly in order to have lower property taxes and a smaller house/lot in the long run?  My best guess is that we'd end up with $225k after realtor fees on the sale of our current home, and spend $175k on the cost of the new home after upgrades.
« Last Edit: July 29, 2016, 06:44:53 AM by jrhampt »

sis

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Re: When does it make sense to downsize?
« Reply #1 on: July 29, 2016, 07:56:00 AM »
Can you list it as a FSBO?  If you price it appropriately you can get multiple offers and save the 2.5% seller commission. 

jrhampt

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Re: When does it make sense to downsize?
« Reply #2 on: July 29, 2016, 09:29:40 AM »
Can you list it as a FSBO?  If you price it appropriately you can get multiple offers and save the 2.5% seller commission.

I don't think we would do it FSBO; as a buyer, I wouldn't want to deal with an FSBO, and I think as a seller, especially in my area, you need the ability to pre-screen people who are seeing your house to make sure they're qualified buyers.

frugaliknowit

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Re: When does it make sense to downsize?
« Reply #3 on: July 29, 2016, 09:37:28 AM »
Why would you have a mortgage on the new purchase while you currently own your home "free and clear"?  Do you really want to invest with a hurdle (similar to a margin account)?

crispy

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Re: When does it make sense to downsize?
« Reply #4 on: July 29, 2016, 09:43:49 AM »
In your case, I don't think it really makes a ton of financial sense to do it so I would only consider it if you want to have a smaller place.  We downsized last year, but we had a decent sized mortgage and had gained a ton of equity in our house.  We also had a lot of wasted space.  In our case, it made sense even with some renos.  We ended up ditching 100K in mortgage debt and our monthly savings are close to $1000 per month (lower mortgage payment, lower utilities, no HOA, and lower taxes). We will also be mortgage free in a few months.  I would evaluate to see if it makes sense for you.

sis

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Re: When does it make sense to downsize?
« Reply #5 on: July 29, 2016, 10:02:03 AM »
Can you list it as a FSBO?  If you price it appropriately you can get multiple offers and save the 2.5% seller commission.

I don't think we would do it FSBO; as a buyer, I wouldn't want to deal with an FSBO, and I think as a seller, especially in my area, you need the ability to pre-screen people who are seeing your house to make sure they're qualified buyers.

If you are willing to work with buyer's agents then you can often get well qualified buyers.  Anyway, we are looking at buying a very competitive FSBO right now... but that's to be determined.

Would you be willing to rent out a room or two of your house while you wait for the market to rebound?  That's another way to wait on downsizing.

ZiziPB

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Re: When does it make sense to downsize?
« Reply #6 on: July 29, 2016, 11:02:05 AM »
Knowing where you live, I would do the same and list with a realtor.  No way, I would do a FSBO. 

Are you thinking about staying in the same city?  Would the smaller place be your FIRE home?  Why do you want to downsize?  Have you thought about moving somewhere with a much lower tax rate and better services?  I am very concerned about the finances in our city and if I had plans to stay locally when I FIRE I would consider moving back to the town where I used to live.

PhysicianOnFIRE

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Re: When does it make sense to downsize?
« Reply #7 on: July 29, 2016, 11:11:51 AM »
Can you list it as a FSBO?  If you price it appropriately you can get multiple offers and save the 2.5% seller commission.

I don't think we would do it FSBO; as a buyer, I wouldn't want to deal with an FSBO, and I think as a seller, especially in my area, you need the ability to pre-screen people who are seeing your house to make sure they're qualified buyers.

I've bought and sold homes we lived in without a realtor. You need the local title company to be involved, and you might consider a lawyer, but I wouldn't hesitate to do it again. In 2 transactions, we saved about $40,000 for a little bit of work. I probably made $2,000 an hour doing that.

Beats any day job.

jrhampt

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Re: When does it make sense to downsize?
« Reply #8 on: July 29, 2016, 11:17:52 AM »
ZiziPB, yes, definitely not FSBO. 

We did look at other several other towns in CT but in the end we really like the convenience of this one being close to so many highways (and family, doctors, library, etc.) and not having to deal with well and septic systems (city water/sewer is not available in so many other places with lower tax rates).  I think our town has decent services - which ones are you referring to that you think should be better, specifically?  I also have concerns about the finances of this town and would prefer to have less invested in the real estate market, but I think CT as a whole is in trouble, not just this town.  We have decided to stay in state for the foreseeable future because of aging family members.  The home we are considering is actually right across the street from the university (CCSU) so we think it would be easy to resell if we needed to. 

In answer to frugalikenowit's question - why would we have a mortgage when we don't have one currently - the interest rates are so low at 2.625% that we would just prefer to invest that cash right now.  It would be a small enough mortgage payment that we wouldn't mind paying it.

ZiziPB

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Re: When does it make sense to downsize?
« Reply #9 on: July 29, 2016, 11:25:50 AM »
I used to live in Farmington and miss the fabulous library and the low taxes :-)  I know you don't need a good school system, but it does make a difference in your ability to sell in the future.  Something to think about.

Have you considered a condo?  I rented in the condo complex that is across the street from Target for a short time and loved the size and location.  Prices are very good there.

jrhampt

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Re: When does it make sense to downsize?
« Reply #10 on: July 29, 2016, 11:30:11 AM »
I used to live in Farmington and miss the fabulous library and the low taxes :-)  I know you don't need a good school system, but it does make a difference in your ability to sell in the future.  Something to think about.

Have you considered a condo?  I rented in the condo complex that is across the street from Target for a short time and loved the size and location.  Prices are very good there.

Ah, the library.  With the library lending system, I just request items from wherever and show up at the front desk when they're available. 

The condo is an interesting idea...I actually rented in that same condo complex over 15 years ago.  I saw one unit up for sale recently, but it was around $100k.  Not sure that's substantially better than what we're considering.  Now that the inspection report is back, I may see if I can either get the seller to fix some things or lower the price a bit more.

ZiziPB

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Re: When does it make sense to downsize?
« Reply #11 on: July 29, 2016, 11:37:19 AM »
I used to live in Farmington and miss the fabulous library and the low taxes :-)  I know you don't need a good school system, but it does make a difference in your ability to sell in the future.  Something to think about.

Have you considered a condo?  I rented in the condo complex that is across the street from Target for a short time and loved the size and location.  Prices are very good there.

Ah, the library.  With the library lending system, I just request items from wherever and show up at the front desk when they're available. 

The condo is an interesting idea...I actually rented in that same condo complex over 15 years ago.  I saw one unit up for sale recently, but it was around $100k.  Not sure that's substantially better than what we're considering.  Now that the inspection report is back, I may see if I can either get the seller to fix some things or lower the price a bit more.

That's what I do as well, but the library in Farmington was just a wonderful hangout spot if you wanted to read and peruse magazines, browse through the books...  No complaints with the selection at our library, but the facilities are just gross and so dirty!

The units in the complex I'm thinking of go for low to mid $100s.  The unit I rented was newly renovated, had a garage and was about 1700 sq ft.  I wanted to buy it but the owner was not willing to sell at the current prices.

Choices

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Re: When does it make sense to downsize?
« Reply #12 on: July 30, 2016, 04:24:05 PM »
Where would you be happiest in 5 or 10 years?

Or, if you didn't own your current house and were to purchase a home today, which would you choose?

If you're trying to decrease yardwork, the condo option is a good idea. Renting for a while is another option if you're considering moving to another area in a few years.

Beardog

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Re: When does it make sense to downsize?
« Reply #13 on: July 31, 2016, 04:10:48 PM »
...  We are looking at a couple of older, smaller houses on smaller lots at the $150k price point.  Advantages would be that property taxes would be cut in half (this is a big deal since we pay $8300 in property taxes each year) ...  Disadvantages would be that it's risky to get an older home, as the maintenance costs might end up being equal to or higher than at our current newer home.  Also, we'd probably end up doing $25-30k worth of work on the home to upgrade old systems and do deferred maintenance on the property.  ...  My best guess is that we'd end up with $225k after realtor fees on the sale of our current home, and spend $175k on the cost of the new home after upgrades.

In some respects, older homes may be better built than newer ones.  I'm not sure how new your current home is, but the quality of wood and the size of the structural elements used in home construction has significantly deteriorated over time.  For this reason, I prefer older homes, i.e. built from about 1960 and older.  You can sometimes get older homes that have been very well maintained by their owners. 

If you can cut your taxes by one half ($4,150 per year), that would result in a $62,000+ savings over 15 years, with likely higher savings as your taxes go up.  Add to that lower cost of heating.  And if you spend $25-30k to upgrade old systems and do deferred maintenance, it seems that you may have overcome your concern about maintenance costs.  Your overall cost of owning the property may be lower over time, i.e. smaller heating and cooling systems needed, less plumbing to maintain, smaller roof to replace, etc. 

jrhampt

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Re: When does it make sense to downsize?
« Reply #14 on: August 01, 2016, 12:16:05 PM »
...  We are looking at a couple of older, smaller houses on smaller lots at the $150k price point.  Advantages would be that property taxes would be cut in half (this is a big deal since we pay $8300 in property taxes each year) ...  Disadvantages would be that it's risky to get an older home, as the maintenance costs might end up being equal to or higher than at our current newer home.  Also, we'd probably end up doing $25-30k worth of work on the home to upgrade old systems and do deferred maintenance on the property.  ...  My best guess is that we'd end up with $225k after realtor fees on the sale of our current home, and spend $175k on the cost of the new home after upgrades.

In some respects, older homes may be better built than newer ones.  I'm not sure how new your current home is, but the quality of wood and the size of the structural elements used in home construction has significantly deteriorated over time.  For this reason, I prefer older homes, i.e. built from about 1960 and older.  You can sometimes get older homes that have been very well maintained by their owners. 

If you can cut your taxes by one half ($4,150 per year), that would result in a $62,000+ savings over 15 years, with likely higher savings as your taxes go up.  Add to that lower cost of heating.  And if you spend $25-30k to upgrade old systems and do deferred maintenance, it seems that you may have overcome your concern about maintenance costs.  Your overall cost of owning the property may be lower over time, i.e. smaller heating and cooling systems needed, less plumbing to maintain, smaller roof to replace, etc.

On the homes' relative age - current home was built in the 1980's, while future home was built in 1920.  It was interesting to get the quote from the insurance on the 1920 home - I expected a lower premium since it is a smaller house, but the premiums are basically the same due to the older construction being more costly to replace.

Dee18

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Re: When does it make sense to downsize?
« Reply #15 on: August 01, 2016, 12:49:22 PM »
My house was built in 1920.  I would never buy another house of that age unless all the windows had been replaced, the electrical system had been redone to modern standards (with adequate outlets), the basement had been waterproofed, and the walls had been insulated.  I learned the hard way.  :)

jrhampt

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Re: When does it make sense to downsize?
« Reply #16 on: August 01, 2016, 01:55:43 PM »
My house was built in 1920.  I would never buy another house of that age unless all the windows had been replaced, the electrical system had been redone to modern standards (with adequate outlets), the basement had been waterproofed, and the walls had been insulated.  I learned the hard way.  :)

Good to know!  The electrical and heating systems have been redone, although it still has original windows (with storms).  The basement opens to the outside (garage under house), so I'm not too concerned about moisture.  It looks like there has been insulation blown into the walls, but that is a concern.