Big Decision: Selling the House

[kkbmustang]

The Hubs and I have been talking more and more about FI and how we can get there. Selling the house is now on the table.  Here's what we're thinking. Please poke holes in the plan:

Our House: We owe $299k on it, bought it for $367.5k. 2700 sf, 4 BR/3 BA with a pool. Our house needs to be updated as in: definitely update 2 bathrooms, cosmetic updates to master bath, finish the kitchen remodel the Hubs is in the middle of, and replace the flooring in 2/3 of the house with hardwood to match the hardwood in the other 1/3 of the house. (Right now the flooring is totally schizophrenic.) I am getting an estimate on the work from a contractor/designer I know personally, although the Hubs can do some of the work himself. I've also requested comps for recent sales in the neighborhood from the real estate agent we've used for every move in the last 15 years.

The house across the street from ours, which is the same size/bed/bath combo as ours is listed for $535k, but it has been majorly updated.

We plan to sell this house in the next year or two, hopefully netting about $150k after closing costs and fees. With what we net, we'd pay off all of the student loans ($70k at 6.8% and higher interest rates), put a down payment on the new property, and keep a small amount in cash.

We plan on buying a condo/townhome closer to downtown in the urban area where biking/walking to stores, restaurants, Lowe's, etc. is totally possible. We even talked about getting rid of one of the cars once we do so.  School districts don't play into our decision since our kids attend private school and will continue to do so. 

We're thinking a 3 bedroom, 2 bath condo/townhome between 1700 and 2100 square feet. Not only would the cost be much less (based on a cursory search online for ones listed now, we can get one for anywhere between $225k and $350k), but our monthly expenses would also go down (property taxes, pool maintenance, utilities, car fuel, etc.).

We were planning on refinancing our house (currently at 5.25%), but now that we're thinking we'll sell it in 1-2 years that may not make sense.

Thoughts? Punch away.

[arebelspy]

We were planning on refinancing our house (currently at 5.25%), but now that we're thinking we'll sell it in 1-2 years that may not make sense.

Refi.  As in yesterday.

Don't let the fact that you might sell in a few years stop you.  Going from 5.25 to 3.25 on a 300k balance will likely pay for any costs very rapidly, enough that it's worth it even if you sell soon.  And on the chance that you don't sell, it will keep paying for itself over and over.

Make that your to do for tomorrow. Get quotes on a refi. Calculate the break even point. 

[kkbmustang]

I've already started talking to lenders, but I'm sort of in this weird place with my long term disability, etc. Not sure how that will affect refi prospects since my income is the larger of the two.

[arebelspy]

I've already started talking to lenders, but I'm sort of in this weird place with my long term disability, etc. Not sure how that will affect refi prospects since my income is the larger of the two.

The only way you'll know is by asking.

So consider this my face punch for you. Don't let the income/LTD problem or potential move be an excuse.

Talk to mortgage brokers and get the dang thing refi'd.  ;)

[kkbmustang]

Will do. :)

[freelancerNfulltimer]

Don't forget to factor in any association dues that come with condos or townhomes into your calculations. Those can easily be $300+ per month.

[sibamor]

*ignore the dates, just trying to line up your current payments to refinanced payments from being plugged into an excel amortization table

Loan as current 300k, 5.75 int, 2130.04/mo
Line  Date          Payment         Interest   Principle  Balance
131   8/1/2022     2,130.04   1,442.92   687.12   300,444.81
132   9/1/2022     2,130.04   1,439.63   690.41   299,754.40
133   10/1/2022 2,130.04           1,436.32   693.72   299,060.69
134   11/1/2022 2,130.04    1,433.00   697.04   298,363.64
135   12/1/2022 2,130.04    1,429.66   700.38   297,663.26
136   1/1/2023    2,130.04    1,426.30   703.74   296,959.53
137   2/1/2023     2,130.04    1,422.93   707.11   296,252.42
138   3/1/2023     2,130.04    1,419.54   710.50   295,541.92
139   4/1/2023    2,130.04    1,416.14   713.90   294,828.02
140   5/1/2023    2,130.04    1,412.72   717.32   294,110.70
141   6/1/2023    2,130.04    1,409.28   720.76   293,389.94
142   7/1/2023    2,130.04    1,405.83   724.21   292,665.72
143   8/1/2023    2,130.04    1,402.36   727.68   291,938.04
144   9/1/2023    2,130.04    1,398.87   731.17   291,206.87
145   10/1/2023 2,130.04    1,395.37   734.67   290,472.20
146   11/1/2023 2,130.04    1,391.85   738.19   289,734.00
147   12/1/2023 2,130.04    1,388.31   741.73   288,992.27
148   1/1/2024     2,130.04   1,384.75   745.29   288,246.99
149   2/1/2024     2,130.04   1,381.18   748.86   287,498.13
150   3/1/2024     2,130.04   1,377.60   752.44   286,745.68
151   4/1/2024     2,130.04   1,373.99   756.05   285,989.63
152   5/1/2024     2,130.04   1,370.37   759.67   285,229.96
153   6/1/2024     2,130.04   1,366.73   763.31   284,466.65
154   7/1/2024     2,130.04   1,363.07   766.97   283,699.68
155   8/1/2024     2,130.04   1,359.39   770.65   282,929.03

Total Interest over next 24 months: 35048.10




Refinance 30yrs, 3.75%, 300k, payment amount same
Month   Date   Payment   Interest   Principal   Balance
Loan   9/1/2011    -     -     -     $300,000.00
1   10/1/2011   2,130.04   937.50   1,192.54   298,807.46
2   11/1/2011   2,130.04   933.77   1,196.27   297,611.19
3   12/1/2011   2,130.04   930.03   1,200.01   296,411.19
4   1/1/2012           2,130.04   926.28   1,203.76   295,207.43
5   2/1/2012           2,130.04   922.52   1,207.52   293,999.92
6   3/1/2012           2,130.04   918.75   1,211.29   292,788.63
7   4/1/2012           2,130.04   914.96   1,215.08   291,573.55
8   5/1/2012           2,130.04   911.17   1,218.87   290,354.68
9   6/1/2012           2,130.04   907.36   1,222.68   289,132.00
10   7/1/2012           2,130.04   903.54   1,226.50   287,905.49
11   8/1/2012           2,130.04   899.70   1,230.34   286,675.16
12   9/1/2012           2,130.04   895.86   1,234.18   285,440.98
13   10/1/2012   2,130.04   892.00   1,238.04   284,202.94
14   11/1/2012   2,130.04   888.13   1,241.91   282,961.04
15   12/1/2012   2,130.04   884.25   1,245.79   281,715.25
16   1/1/2013           2,130.04   880.36   1,249.68   280,465.57
17   2/1/2013           2,130.04   876.45   1,253.59   279,211.98
18   3/1/2013           2,130.04   872.54   1,257.50   277,954.48
19   4/1/2013           2,130.04   868.61   1,261.43   276,693.05
20   5/1/2013           2,130.04   864.67   1,265.37   275,427.67
21   6/1/2013           2,130.04   860.71   1,269.33   274,158.35
22   7/1/2013           2,130.04   856.74   1,273.30   272,885.05
23   8/1/2013           2,130.04   852.77   1,277.27   271,607.78
24   9/1/2013           2,130.04   848.77   1,281.27   270,326.51

Total Interest over next 24 months: 21447.47

$13,600.63 in interest savings over next two years!

This could adequately cover your DIY improvements, more principle, or student loans!  I understand the logic that its not worth refinance every 1/2 to 3/4%. But this is two whole percentage points!

[kkbmustang]

Thanks for the math, @sibamor!!!

I'll refi.  We've got our real estate agent coming on the 14th to do a walk-through of the house and tell us where he thinks we need to focus our budget dollars in the house to get the maximum return on investment. He told us he thinks we'll be able to do very well on our house given what we paid for it and where the market is now. At this point, I think it's just a matter of getting the work done before we sell. The longer I think about it, the faster I want to move on it.

As for the townhouse/condo, there are some options available that don't have HOAs. Our first home was a condo, so we are very familiar with HOAs - the good, the bad and the ugly.

[tooqk4u22]

Agree with the refi....

But back to the OP, I was in a similar place last year.  Had a 2500 sf house that needed easily $50-70k to get in good condition.  I did the analysis of the market (realistic and not based on listings and brokers) and realized that if I invested in the improvements/renovations I would lose out give where actual sales were - I calculated I would have been out about $30k on the investment (including the commission on the higher sale price).  Instead, sold the house rather quickly because it was priced right and it was school season, bought another house that was about $35k less (net of the work that the new house needed) resulting in a $65k swing (lost investment plus savings from lower cost house).  Plus because the house is smaller/less the utilities and taxes are less to the tune of about $250/month. 

We were already thinking about moving/downsizing anyway and if we loved the house/neighborhood probably would have done the work and stayed.

[kkbmustang]

We're going to also get a quote on the construction costs. The Hubs has already half-way demolished the kitchen, so we're locked in there. The bathrooms need to at least have a little work done (not going hog wild with top of the line stuff) and the floors are just dumb. 4 different types of flooring: imagine stripes down the house with no continuity at all. Definitely a drawback. The Hubs can do some of the work himself - he's pretty handy. It's just a question of time and money.

[carolinakaren]

We are going through the same thought process right now.  Selling the house and moving to a smaller, less expensive condo can put my debt at a big zero, with some left over.  In our area houses aren't moving very quickly, but I think it will be better in the spring.  I like to think of an additional added benefit that many people don't mention when considering this type of trade off...  More free time because your house is smaller and easier to clean!  Less outdoor maintenance too!

[kkbmustang]

I'm right there with you. We just spoke with the realtor and he had pulled comps for sales in the area. Most are within a percent of their asking price. We're in a prime location with a huge lot.  Realistically, it will probably take at least a year or two for us to bankroll/complete the updates. But, it's good to know where our realtor thinks we should focus our time and money and as confirmation that what we were thinking was the right direction.

[carolinakaren]

Well, it sure sounds like you have thought this through and are covering all the bases.  We have some work to do before selling as well.  Our house needs new windows because some of the wood is bad, and we're removing the lovely popcorn ceilings!  (Yuck)

Happy remodeling Kkbmustang!

[twinge]

But, it's good to know where our realtor thinks we should focus our time and money and as confirmation that what we were thinking was the right direction.

But as tooq4u22 suggests, any advice the realtor gives you should be filtered through the fact that the realtor wants you to put your money, time and energy into improvements because that will lead to a higher and quicker sale thus a greater commission from less work and no risk on his or her part but a lot of cash outlay--first on the repairs and then on the higher commission.  Doesn't mean you can't tap their knowledge, but be aware when you are calculating ROI of their bias.  Many times once you calculate out the cost of doing things it makes sense to do the minimal, get firm quotes on the cost of doing the work, and then in negotiations with the buyer discount for undone items with quotes on hand.  To be sure, there is a risk that no one becomes interested in your house- but I think not fixing everything up is an underused strategy because people rely on the perspective of realtors who sensibly tend to  focus only on the higher price quicker sale and de-emphasize how what the actual ROI on the money you put in will be after cost/commission.

[kkbmustang]

Thanks. I just posted another thread because now I'm wondering if it wouldn't make sense to do minimal updates and then rent out the house. It's in a really great location and rentals in this neighborhood don't typically hang around for long. We've been wanting to get a rental, just hadn't thought about THIS house as that rental, but I don't see why it can't unless the numbers don't work.

[arebelspy]

Give us some numbers.

What's the house worth, what do you owe, and how much rent could you get?  How much is taxes and insurance?

Did you refi?  What's your rate and what's your P&I payment?  Is there an HOA?

[HawkeyeNFO]

REFI NOW!!!!   I refi'd last month, after being in the house for less than half a year.  2 days ago a $3000 check came in the mail - the lender credit on the refi was much greater than the closing costs, so that was my rebate. 

If you are planning to rent it out in the future, lock in the owner-occupier rate by doing the refi now.  After you rent it out, that rate won't be available to you if you try to refi.

[kkbmustang]

Give us some numbers.

What's the house worth, what do you owe, and how much rent could you get?  How much is taxes and insurance?

Did you refi?  What's your rate and what's your P&I payment?  Is there an HOA?

The house is currently mid-kitchen demo, but we can finish it for maybe $5k more. FMV now is low $400k. If we sink another $30-40k in updating bathrooms and replacing the floors, maybe $500k. Balance on mortgage is $299k. Rent around $2800/mo. Taxes per year = $8700. No HOA. In the process of refi. P&I would be $1500/mo. Insurance is $165/mo.

[Another Reader]

If I did the arithmetic correctly, your payment (PITI) will be $2,390 and you will have to finish the kitchen for $5,000 plus spend another $30-$40,000 on baths and flooring to get $2,800 in rent.  Ask yourself, if you had the opportunity today to spend $400,000 to buy a house, then another $35-$45,000 fixing up the house plus DIY labor to achieve $2,800 in gross rent, would you do this??  I certainly would not, because I would likely lose a lot of money on the deal.

The 50 percent expense rule really does work over time.  You have not accounted for vacancy and collection loss, repairs and maintenance, property management or any additional capital improvements.  If I could add $100,000 in value for some reasonable amount of time (assuming my remodeling skills were at a professional level) and $45,000 in materials, I would consider doing that.  And then I would sell the house to an owner-occupant and look elsewhere for investment property.

In the meantime, I would refi ASAP, preferably on a no cost basis, as you do not know how long you will stay there.

[arebelspy]

I'd skip the extra remodel (people always overestimate what a remodel will do to their bottom line.. usually you get back anywhere from 50-80% of what you paid, not more than you paid), sell, take the 80k equity (after closing costs), and invest it somewhere (or use it to pay down your new mortgage, or whatever floats your boat).

You're gonna lose money in the long run on that rent (it's cash flow negative),  gain some in equity (principal paydown), and unless you get some nice appreciation just not make much of a return at all.  You're basically taking the 80k you could make selling and getting no real return at best. Or you could take that 80k and invest it in dividend stocks or whatever and make +$2400/yr (plus potential capital growth).  Or put it as a down payment on a rental property, if you want a rental.  You just don't want this one, IMO.

EDIT: ran the numbers, see below.  You lose 5k/yr cash flow, you gain 5k/yr equity. You're basically paying 80k now and 5k our of pocket each year to pay down the house by 5k.   meh.


Rental Income: 2800x12 = 33600      
Vacancy/Loss (1 mo/yr): 2800
Gross Income: 30800
      
Expenses      
Property Taxes (annual): 8700
Insurance (annual - will be cheaper with just a landlord policy, let's say half your current policy): 1000
Maintenance & Repairs (rule of thumb is ~1% of value): 4000
Utilities (often due to laws landlords are on the hook for some, like sewer, even if tenant pays water and electric, but let's assume you don't have any except when vacant, so only $100/yr for the vacancy times): $100
Advertising: varies, usually property manager charges between half months and 1 months rent to get in a new tenant, let's assume lower end: 1400
Property management (10%): 3080
HOA: none?
Total Expenses: 18280
Expenses (plus vacancy) as % of Gross Income: 62% -- a bit above the 50% rule, but with as high as your property taxes are (25% of your gross all by themselves) I don't think you'll be able to approach the 50% average.  You may be able to get expenses down a little with less maintanence due to luck or by managing it yourself, but short of that, I think all of the above are quite reasonable estimates.
      
Cash Flow:
NOI (Cash Available - gross minus expenses/vacancy): 12520      
Mortgage (1500x12): 18000
Total Cash Flow: -5480
Cash ROI: -6.85% (on 80k equity -- 400k property value - 300k mortgage - 20k selling costs)      
Equity Accrued yearly: $4925*
Total Return: -555
Total ROI: -0.7%   
      
*A payment of 1500/mo on 300,000 mortgage on a 30 year note is a rate of about 4.4%.  Note sure why your rate would be so high, so I'm guessing some numbers are a bit off here (mortgage balance higher than 300k?).. nevertheless, let's assume that is correct.  In that scenario, you're accruing $4925 towards your principal year 1 (and growing each month, of course).

Compare that to buying an 80k house somewhere outright in cash that rents for 1000/mo.  Either way if you're considering being a landlord, that's an apples-to-apples comparison.  I'll let you run the numbers on that.

Only reason to keep the house, IMO, is it's the path of least resistance.

EDIT 2: If what Another Reader said is true, and you also need to do the remodel to get that 2800 rent, change all the 80k assumptions above into 120k, and this looks like an even worse deal.

[kkbmustang]

Thanks, that's what I was afraid of. My mom is of the opinion that we should try to sell it now, before doing any changes to finish the kitchen, etc., but she's never met a house that didn't require a gut job to be acceptable, so I'm a bit skeptical when it comes to her advice. But, the numbers don't lie, so maybe it's best to just try to sell it as is. Maybe put the kitchen back together so it's presentable but knowing we won't get that money back. I think it will just show better if we do. All work the Hubs can do himself with pretty low out of pocket cost on materials.

On the refi, I'm estimating the payment. We were quoted 4% because when I went through all of my medical stuff, I was late with some bills and stuff and my credit took a hit. That was with $3k in closing costs, so if we sell in a year or less, it makes no sense to refi to save $250/mo. And that's the path we're on. We're over having so much space, so much land, so much house, etc. We want a smaller place whether that's here or in another city or country. Whatever, we're just over this one.

[Another Reader]

If I were in your situation, I would clean up the kitchen, sell and move on.  If you are serious about moving out of the area for the right job opportunity for DH, then get right on the kitchen.  Getting that in decent shape will likely add a lot more value than the $5k in materials.

If your health is still questionable and you have taken some hits to your credit, you may want to think about renting.  That's especially true if you move somewhere new.  In your shoes, I would let things settle down before I bought another property.

[kkbmustang]

Yep, that's what the Hubs and I have decided. Next place we live will be a rental.