Author Topic: Confusing real-life word problem: I'm not exactly sure what the question is!  (Read 5172 times)

LadyMaWhiskers

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Mustachians - see if you have a take on this. It's not a very mustachios situation, but it's a financial question, and I trust mustachians.

Caution: we are entering #richpeopleproblems territory on a steep grade waterslide, straight ahead...

This is not my issue either, it's my mom's...good times so far, thanks for reading.

 -Mom owns a house, no mortgage. Value roughly $2M.
 -Mom is 70, recently retired, single (widowed)
 -Mom cares for and intends to leave an inheritance to support the lifelong care for special needs daughter, currently age 40, life expectancy is a complete wild card
 -Mom's net worth is in the neighborhood of $5M: this house, inherited IRA from husband, her own IRA/401ks, partial ownership in real estate LLC
 -Mandatory IRA distributions & social security begin this year and will roughly supplant previously earned income (she states she does not know if it will be more or less than previous salary). The situation is one where MBA meets anxiety disorder
 -Special needs trust for daughter exists and is being left out of the discussion

Ok, the question!

Believe or not, this house, that honest-to-goodness could be sold for $2M in the next 30 days...and I bet I could get a cash contract at $1.8 in 24hrs...is in terrible shape. It's an original 60s tract home, 3bed/2ba with some wonky extensions and "upgrades" done by our beloved handyman. It's truly a wonder the skylights have not fallen down.

Mom wants to rehab the house. Sort of. Maybe my brother is strong arming her a bit on that. It was her parents house in retirement, is well-situated, and she's pretty attached to it. I have floated the idea of buying a different house, but that seems emotionally out of the question. My brother recently did a $600k upgrade to his house (which was my mom's before and which we grew up in and which she gave to him a couple years ago in very similar wonky-handyman shape.) He probably increased the market value of that home $1M by doing the $600k renovations, with the market obviously having moved up a bit in that year.

What the hell? Why is this lady posting this on an anonymous internet board??

Ok, now that that's out of the way:

My mom wants to take a 15yr mortgage to pay for the renovations to her house and she wants to cap the costs at $500k. She just met with the architect and got a ballpark of $700k for what she wants. The $500k scope seems dangerously unsatisfying (although in a way, how could that possibly be??)

It seems to be that all of the following are logical interpretations of this scenario and reasonable options to put on the table. My ask-a-mustachian question is, do you agree, and can you offer any alternatives/additions?

1. Consider trading houses. Find something with the natural light she's craving and that's already upgraded. Let some silly person buy this house and spend away on fixing/replacing it

2. Stay in this house, and go with the pricier rehab and borrow the money. Consider the balance sheet effects of this to be neutral, since the fixed-up house is likely to be worth at least as much as current value + cost of reno. Consider the interest costs to be like rent. This is the most likely to appeal to mom.

3. (Head explosion territory) Sell the house and rent? Investing $1.8M and drawing off 4-6% gives $6000-9000 per month.

4. Stay in the house and sell stock to pay for renovations. This is very hard to palate with the current market conditions

What have I overlooked, mustachians?

James

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Staying in the house is an emotional issue, not financial. If she is unwilling to move then she is unwilling to move. She can afford to stay in the house, so if that is her choice I wouldn't fight it, just make sure she understands cheaper options exist if she wanted cheaper options.


Renovation is not something that can be figured out here. Make sure she gets at least three estimates from different places, and going to a contractor instead of an architect will probably help lower the cost below the $500k number she prefers. One ballpark from one guy is not enough to know much of anything about what can be done at what cost. I would guess if she lets this architect start on the house for $700k the final cost would be a million...


So start networking and finding a few different quality places to get estimates from. Let them know she has a hard cap at $500k, and make a solid list of what needs to be done vs what are extras. After getting all the estimates she can decide whether to increase her cap or not, but the mortgage sounds appropriate if the money must be spent.


I would absolutely argue that selling the house and renting or buying something small makes sense, but I don't know how much sense. How much attachment to the property is there, how much less would the rent or cost of a house be, where would she be willing to relocate to and what effect would that have on her mood and enjoyment of life. She has enough money to make those intangibles mean something in the decision, so spend time fleshing her true feeling out. She may really like the idea of moving rather than the frustrations of a remodel, but feel like leaving would be abandoning the house that cared for her these many years. These issues are complicated and emotional, so don't try to be all factual and financial, really allow the conversation to be gradual and long and over multiple occasions.


Overall the situation is hard, it's easy to see the net worth and not feel sympathy, but that kind of money can certainly add stress along with removing stress. Good luck with advising toward a good solution.

former player

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Financially you say that your mother is not clear what her income in retirement will be and at the same time she is planning to take out a mortgage.  The fact that she doesn't know what her retirement income is going to be also suggests that her finances generally may be slightly chaotic - or, alternatively, that she doesn't want to talk about her finances with you, in which case there's nothing you can do about them.

What is the inheritance situation?  Your brother has had the gift of a house: will that be taken into account in the inheritance?   Would the house have to be sold after your mother dies, or would one of her heirs take it on?   If no-one is bothered about an inheritance, the financial questions become fairly irrelevant as you mother probably has enough to borrow to do up the house, live by spending down capital if her resulting income is insufficient, take out a reverse mortgage on the done-up house and live there happily until she dies broke.

Apart from finances, your mother seems to have conflicting issues: she has an emotional attachment to the house but wants to live in a house with more natural light.  Which is more important?  Would it be cheaper to knock the existing house down and start again on the same plot?  Where is she going to live while the construction work is going on - even if the existing house is to be renovated rather than knocked down I wouldn't recommend her staying put through half a million's worth of construction work.

The financial, house and inheritance issues will need some careful negotiation if the family as a whole is to come out of this one well.

GrowingTheGreen

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In terms of your mother being a worrier, there are few things as stressful as living through a remodel.  It can be hell.  I would think that this would be an important consideration for her, but maybe one that she has not thought of.

seattlecyclone

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Seems like you should be able to tear down and rebuild a 3 bed/2 bath house for much less than $700k.

okits

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Retirement income: should be comparable to past years, between $300-400k.

Just double checking this figure: your mother + sister having been living on $25,000 a month (minimum) and will continue to do so?  Roughly 10% of her non-house, non-trust-fund-for-sister assets a year?  (I get that there may be income sources besides the assets.) I'm asking because at this level of income and wealth, it seems odd that there isn't a financial professional somewhere already in the picture who can help with information and the decision-making process.  Possibly she was widowed recently and her husband/your father was DIY for all financial matters, but it seems likely there's an accountant or investment advisor of some kind somewhere in the background who has a sense of the full picture.

If there is a financial professional somewhere in the picture (who has a clearer picture and who your mother knows), he or she could be helpful in sorting out the situation and offering advice. Sometimes the exact same advice one offers to a parent is only taken seriously when an unrelated professional gives the same counsel. 

Beyond emotional considerations regarding the house, your mother sounds overwhelmed by her situation and wanting to be told comforting things.  She doesn't know her income, or if her assets are enough to support your sister upon her death as well as live how she wants now, and you haven't mentioned any actions she's taking to find out this information.  Without this information it's hard to assess the risk of the big house reno or the opportunity cost of it (e.g. would downsizing the house be the only way to guarantee an inheritance for your sister that would make your mother feel comfortable?) Maybe a financial professional can suggest solutions you haven't considered yet (like life insurance on your mom that will take care of your sister beyond all doubt, once your mom passes.)

Ideally, you could get your mom to pull together the relevant financial information and to see someone (therapist, financial planner, whoever she'll see) to work through some of her worry for the future, indecision/avoidance, hoarding tendencies, attachment to the house, etc.  She can reno the house if she wants, but it's self-deception to think that's cost effective without at least examining if this is actually a need, within her means, or if there are alternatives.

Finally, acknowledge that this is a hard situation.  All your efforts to help may fail.  It's still worthwhile to try to bring some order, logic, and clear-eyed examination to the situation in the hopes it will help your mom make better decisions and live better.  Best wishes. :)

DebtFreeBy25

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I'm wondering if there's a niche market for estate planners who are also family therapists. It's seems that the real issues here are worry and persistent insecurity, not money. If it were possible to move your mother to a more logical way of thinking about her assets, the decisions would become more clearly defined and less fraught. The only way to get there is by working through your mother's underlying issues with material possessions and money.

This advice comes directly from my personal experience. My mother is a hoarder and compulsive shopper. Simply cleaning up her mess and starting over wouldn't work. The underlying OCD and self-soothing habits would need to be addressed before real progress could be made. I, myself, am very frugal and a worrier. Those behavior patterns are part of my personality and not something I can easily overcome. Understanding where mentally/emotionally those behaviors came from is the foundation for combating them with logic.

Catbert

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I know you don't want to get in to a discussion of your special needs sister, but where would she logically live if she survives your mother?  If its not alone in the $2 million house maybe that's an argument for getting a cheaper house that's already fixed up or renting.  A major re-model is stressful even if you aren't living there.  A thousand choices to be made and probably unhappy surprises if its an old house.

I know that there is some provision for senior citizens in California that lets them take their low property tax assessment to a new house if the new house is a lower price.  IIRC its a one time benefit.  I can't remember if you have to be changing counties.  Worth figuring it out if that is a major impediment to her moving.

If she does remodel the current house definitely get a mortgage rather than cashing out 500K of stock and paying capital gains.

cchrissyy

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Option 3, selling, sounds like the big mistake here.
 If she sells, there will be taxes on however much it has appreciated while she owned it.  If she owns it until death, you or the trust or whoever inherits it will get that day's value as your new cost basis, meaning dramatically less tax owed if you decide to sell it at that time.

cloudsail

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You have to pay capital gains tax on your primary residence?

LadyMaWhiskers

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You have to pay capital gains tax on your primary residence?

When it's over $250k/$500k (single/married), yeah you do.

cloudsail

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You have to pay capital gains tax on your primary residence?

When it's over $250k/$500k (single/married), yeah you do.

Ah yes, I forgot that we were in #richpeopleproblems territory :)

DebtFreeBy25

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This advice comes directly from my personal experience. My mother is a hoarder and compulsive shopper. Simply cleaning up her mess and starting over wouldn't work. The underlying OCD and self-soothing habits would need to be addressed before real progress could be made. I, myself, am very frugal and a worrier. Those behavior patterns are part of my personality and not something I can easily overcome. Understanding where mentally/emotionally those behaviors came from is the foundation for combating them with logic.

Do you feel that this behavior stems from loss and trauma? That's my sense. Everything went way downhill when my mom's mother died. The traumas were years back, but that was the tipping point. I hate not being able to help.

For my mother I think it's a psychological condition that isn't being managed. In good times, it was easier to hide her compulsive shopping and hoarding tendencies, but they've always been there. (And she has a closet full of every single magazine she and my father ever received in the 1980s to prove it.) I do think that trauma and loss trigger more extreme behavior.

For me, I attribute my money (and only money) hoarding to the insecurity that comes from experiencing cycles of poverty. Growing up there will times when my family was solidly middle-class and other periods where we were scrapping together change to buy food. From an early age I knew that I did not want to ever go through those extreme lows again so I paid off all my debt including my mortgage as quickly as possible and try to save for the great flood of rainy days. Sadly I don't think I would have been able to save anywhere near as much if I were an optimist.