Author Topic: Selling at a loss to move to a cheaper area?  (Read 5816 times)

DW

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Selling at a loss to move to a cheaper area?
« on: January 26, 2015, 09:06:39 AM »
Hey Mustachians,

Long time lurker here with a real estate question. My wife and I have 2 young children and our current home is getting cramped. She stays home with them so it is particularly painful for her.

Our current home was purchased for $227,000 in early 2008. We rolled in closing costs and put 0% down. (Ohh the mistakes I have made) The loan is currently at $196,000 at 4.125%. I should be able to sell it at $209,000, writing a check for a few grand after realtor fees.

I currently live about 10 miles from work in a desirable part of town-- I am considering moving to an area that is also 10 miles from work with lower priced homes. We would be fairly close to all schools and places we frequent. Maybe not biking distance but close.

I should be able to get a larger home at $180,000 or less while putting down a full 20%. I'll have to steal $8,500 in contributions from my Roth to make it happen. The end result is a slightly quicker drive to work, less cash on hand, $8,500 less in retirement, and a $144,000 mortgage with a sub 4% interest rate.

Is this an OK financial move taking into consideration we'll get the larger home without sacrificing good schools or my quick drive into work? I do not expect my current home's value to bounce back to what I bought it at for another 2-3 years. After the move I expect to be able to max out the pre tax 401k. I am not hardcore FIRE, but I do expect to be there in 15 years or less.

-DW


James

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Re: Selling at a loss to move to a cheaper area?
« Reply #1 on: January 26, 2015, 09:52:22 AM »
So this will cost about $25k in realtor fees, plus thousands more in moving expenses. That eats up all your savings from a cheaper house, and takes some money out of "employment" for you by draining it from your Roth.


So make sure you are not minimizing the cost of this move. You are getting a larger house at roughly the same cost to you as your current house, but the value will be much lower in the future when you sell. And the value of your retirement savings at that future point will be much lower as well.


This better be exactly what you need, because it is costing you an awful lot. Can you describe the size and function of your current house and what space you are hoping to increase?

DW

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Re: Selling at a loss to move to a cheaper area?
« Reply #2 on: January 26, 2015, 10:20:31 AM »
Hey James,

I will be able to secure 5% realtor fees on the sale of my home, at roughly $10000. I expect closing costs on the new home will run about $5000.

I do agree that this transaction will cost an awful lot. I aim to get a house with good bones, 1+ acre, with most of the boxes checked that we will need until the kids move out. I will rent if I do not find the house at a good deal right away.

Our current house is a 3/2 with 1350 sq ft and a full basement underneath. No dining room. Eat in kitchen with a modest living room. The basement has a 350 sq ft den and the rest is unfinished / garage space. The ceiling is low so it would be hard to create more finished space in the basement with the duct work. That wouldn't solve our living space issue upstairs anyways.  It's in great shape and I would expect only cheap repairs if we stayed here.

The next house would ideally have a larger living room / dining room and be fairly open. 4 bedrooms or potential for 4 would be a plus. We enjoy hosting family and friends on a regular basis. Somewhat outdated at a lower price would be great since I like to dabble in remodeling.

11bravo

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Re: Selling at a loss to move to a cheaper area?
« Reply #3 on: January 27, 2015, 05:09:26 AM »
I had the same thought in 2012 after living in a home that we thought was too large and expensive for our family. We sold our home for 325k and had to bring 20k to the table for realtor fees. We then proceeded to purchase a home for 245k / 7k taxes. This lead to a savings of around 300 - 400 / monthly. Was it worth it for us, probably not although we are enjoying our new community. Think long and hard about this and then when you come to your decision think again. It may be the right thing but may not. It sounds like the new home is approximately the same price so there will be minimal savings if any considering the fact that you will need to bring money to the table. Whatever you do Good Luck!

Luckyvik

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Re: Selling at a loss to move to a cheaper area?
« Reply #4 on: January 28, 2015, 04:20:21 AM »
Is there a possibility of renovating your current house so it's more 'open plan'?


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James

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Re: Selling at a loss to move to a cheaper area?
« Reply #5 on: January 28, 2015, 07:49:21 AM »
In the end, it doesn't sound like a terrible idea. Where you live is important, and what you live in is important. It has a great affect on your life, so it is worth getting yourself set with what works for you.

DW

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Re: Selling at a loss to move to a cheaper area?
« Reply #6 on: January 31, 2015, 01:10:31 PM »
Luckyvik, I already have too many upgrades in the current house for the neighborhood. We'd get a terrible return for the investment with what an expansion would costs. We could yank a wall down between the kitchen and living room but that would require a full kitchen remodel which someone had already done before we moved in.

We are going to move forward with the plan but there will be a hard limit on the minimum sales price. If it doesn't meet, we like the house enough to stick around another year or two.

Thanks for the responses guys. Looking forward to more conversations in the near future.

Dicey

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Re: Selling at a loss to move to a cheaper area?
« Reply #7 on: February 01, 2015, 08:36:02 PM »
I think I'd sit tight for another year during which I'd shop hard for a bargain as close to work as possible. Any possibility of keeping the current house as a rental when you move to a bigger place? I think I'd favor that approach. You could rent it out for a couple of years and then sell it when prices recover.

ShoulderThingThatGoesUp

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Re: Selling at a loss to move to a cheaper area?
« Reply #8 on: February 02, 2015, 06:11:06 AM »
How many years of the property taxes and mortgage interest would you be paying at once if you cut your anticipated check to the realtor?

capital

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Re: Selling at a loss to move to a cheaper area?
« Reply #9 on: February 08, 2015, 06:25:58 PM »
Have you put any thought into selling the house yourself, especially with a spouse whose work is in the home, no tight timeline, and a good idea of what selling price you're aiming for?

DW

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Re: Selling at a loss to move to a cheaper area?
« Reply #10 on: February 08, 2015, 06:36:06 PM »
Shoulder*, about 7 months worth for the selling agent; assuming with FSBO we'd still pay 3% to the buying agent.
Ehgee, My wife has her hands full with 2 kids and we needed some expert advice since we've never sold a house before. Next time around we may do FSBO.

GuitarBrian

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Re: Selling at a loss to move to a cheaper area?
« Reply #11 on: February 14, 2015, 01:42:08 AM »
A numbers approach.

Since I don't know your exact numbers... I am using estimates, and if they aren't very close you will have to recalculate.

227,000 at 4.125 for 30yr is 1,100 a month. Because you said you put little 0% down and still are not below 20% LTV, pmi is ~100. (this may be wrong, but I will use $100 for simplicity)
Property taxes are assumed at 2,000 a year. This is probably lower than true number, because you say a "few" grand is 7 months...

You paid $62,000 in interest so far. Along with $8,600 in PMI, and $14,000 in property taxes.

You are near break even in equity. So all your "principle" portion has been lost. It has cost you $115,000 over 7 years to live there. Which works out to $1,366 a month.

If you stay and continue paying 1,100 a month (plus $100 PMI for 3 more years until @80%) you are looking at 107,000 more in interest over 23yrs. To change this number, you would have to increase your payment above 1,100 (dropping the $100 pmi after 3 years). $1366 a month for 3 more years, then 1266 a month for 20yrs. $353,016 over 23 years. At which time you have a 210,000 asset. So, $143,000 in lost money.

Assuming you sell for $209,000 and pay closing fees of about $1,000 (rough cost of title insurance) and a 3% commission to both seller and buyer, selling costs of  $14,000. You are looking at $195,000 and then adding 1k and netting $-1000.

You have $27,500 in cash. And are willing to hold back 8,500 in roth contributions.

Moving costs are on average $1,100 for a short move like you are planning.

Plus various costs with a new house... 2k-5k I would say to be safe.

27,500+8.500+1,100+3,500= -40,600 + -1000 = -41,600

So I estimate that the move will cost you 41,600 immediately.

Now to look at the savings :)

Mortgage payment on new house is $680. Taxes are less. I will assume $1,800 a year. So $830 a month = +$535 a month or $6,420 a year.

30yr 144k at 3.9% costs 100k in interest. Very similar to your current 107k remaining. Due to you being 7 yrs into it is why the similarity. (note, payments are not the same 680vs1100)

Adding $420 to your mortgage payment (thus keeping your payment @ 1,100/mth) will save you 57,000 in interest (43,000 in interest). Payoff date is 14yrs 4mths. After which you only have taxes @ 1,800 a year. So 23yrs will cost...

$231,200

After which you will have a $180,000 asset. So, 51,200 in lost money.

A savings of $92,000

$3600 further savings due to no PMI. And $16 a month in saved taxes which is not added into the equation.

Bringing your total to $100,016 saved.

Your 41,000 outlay will save you more than double.

Another way to look at it, a 4% return on 41,000 for 23yrs compounded monthly is 102,000.


There are other options,

These use a 10 year outlook vs 23.

Lets say you jump up your current payment to 2k per month on your current home. You pay off your 196,000 in 10 years, with 43,400 in interest. A total of 240,000. Plus 20,000 in taxes. Ending with $210,000 asset = $50,000 lost money.

You buy new home, pay 2,000 per month and pay off in 6yrs 11mths, with $20,300 in interest. For a total of 164,300 + your down payment 36,000 = A total of 200,000. Plus 18,000 in taxes. Ending with $180,000 asset = $38,000 in lost money.

$12,000 positive.
$13,100 with the PMI savings. (paid off at 11 months @ 2,000/mth)

Would you invest 41,000 at 3.2% simple interest for 10 years?


One last thought. Your downpayment portion of the 41,000 (36,000) isn't exactly a "cost" it is an investment. The "cost" is the 5,000 in direct expenses.

It is also my opinion that you will recoup the -8500 IRA. As you are only shifting the money for a tax free investment account to a tax free personal house.


This took a lot longer than I had planned. I hope it makes sense. With the savings I see over the longer term... plus your desire for a larger more comfortable place. I think this is a positive change. One that will make sense for your lifestyle and finances.

DW

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Re: Selling at a loss to move to a cheaper area?
« Reply #12 on: February 14, 2015, 08:27:19 AM »
Wow GuitarBrian-- Nice detailed analysis. Thanks! This syncs up with the simple analysis I did. I had to sit down with a coffee and re-read the numbers 2-3 times :)

A few tweaks but it's a wash--
- No current PMI (took me 2 years to find a company to refi with no PMI via HARP, did that in 2012)
- 5% (2% selling agent, 3% buying) commission to sell
- taxes are dirt cheap here  ($1,100 for the current property). The new property should be less as you mentioned.

I do feel pain in that I'm taking money away from VTSAX to put into a property that will return much less on average.

More info on my current finances:
cash:  $30,000
Roth:  $11,500 (would be stealing up to $8,500 in contributions for down payment)
IRA:    $19,000
401K:  $85,000



« Last Edit: February 14, 2015, 12:18:23 PM by DW »

GuitarBrian

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Re: Selling at a loss to move to a cheaper area?
« Reply #13 on: February 14, 2015, 01:02:03 PM »
Yeah, it got a bit out of hand last night. I like stuff like this :)

With new numbers... Just cause I wanted to recalculate to see the difference.


Property taxes 1,100 a year.

You paid $62,000 in interest so far. Along with $6,000 in PMI 2007-2012, and $7,700 in property taxes.

You are near break even in equity. So all your "principle" portion has been lost. It has cost you $106,100 over 7 years to live there. Which works out to $1,200 a month.

If you stay and continue paying 1,100 a month you are looking at 107,000 more in interest over 23yrs. To change this number, you would have to increase your payment above 1,100.

Cost over 23yrs...

1100*23
+196,000 Principle
+107,000 Interest

$329,000
-210,000 asset

$119,000 in lost money.


Assuming you sell for $209,000 and pay closing fees of about $1,000 (rough cost of title insurance) and a 5% commission. Selling costs of  $11,500. You are looking at $197,500 netting $1500.

Moving costs are on average $1,100 for a short move like you are planning.

Plus various costs with a new house... 2k-5k I would say to be safe. Mostly loan closing costs.

36,000 (downpayment) + 3,500 (2-5k various costs, averaged) + 1,100 = 40,600

So I estimate that the move will cost you 40,000 immediately.

Now to look at the savings :)

Mortgage payment on new house is $680. Taxes are less. I will assume $990 a year. (10% less) So $762 a month = +$430 a month or $5150 a year.

30yr 144k at 3.9% costs 100k in interest. Very similar to your current 107k remaining. Due to you being 7 yrs into it is why the similarity. (note, payments are not the same 680vs1100)

Adding $420 to your mortgage payment (thus keeping your payment @ 1,100/mth) will save you 57,000 in interest (43,000 in interest now). Payoff date is 14yrs 4mths. After which you only have taxes @ 990 a year. So 23yrs will cost...

990*23 taxes
+144,000 loan principle
+43000 interest
+40000 downpayment+costs

$249,770
-180,000 asset (House)

51,200 in lost money.

A savings of $67,800

Taxes are figured this time vs first post.


One other way to look at it.

If you don't add extra to the payment... Basically calculating over 30 years.

New House,
144,000 for 30yrs at 3.9% costs 100,000 in interest.

144,000 principle
100,000 interest
36,000 downpayment
29,000 taxes

309,000 over 30 years.
-180,000 House
129,000 lost to interest and taxes.

$858/mth
 

Current House
1100*30
+196,000 Principle
+107,000 Interest

$336,000
-210,000 asset
$126,000 in lost money.

$933 a month

Switching houses in this instance will net you a savings of $27,120 which is basically a wash, due to the price difference in the properties. Even though, I still can't calculate a real negative scenario where selling and buying is a detrimental decision.


There are other options,

These use a 10 year outlook vs 23.

Lets say you jump up your current payment to 2k per month on your current home. You pay off your 196,000 in 10 years, with 43,400 in interest. A total of 240,000. Plus 11,000 in taxes. Ending with $210,000 asset = $41,000 lost money.

You buy new home, pay 2,000 per month and pay off in 6yrs 11mths, with $20,300 in interest. For a total of 164,300 + your down payment 36,000 = A total of 200,000. Plus 10,000 in taxes. Ending with $180,000 asset = $30,000 in lost money.

Still
$11,000 positive.


10yrs outlook, 23yr outlook, 30yr outlook

In all cases it is either a tie or very close...

clarkfan1979

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Re: Selling at a loss to move to a cheaper area?
« Reply #14 on: February 15, 2015, 07:52:13 AM »
It doesn't seem worth it to me. If it seems worth it to you then I guess go for it. If you were moving closer to work I think everyone here would be more in favor.

theadvicist

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Re: Selling at a loss to move to a cheaper area?
« Reply #15 on: February 17, 2015, 02:09:01 AM »
My first thought when people tell me they need a bigger house is: "Really? Or do you just need less stuff?". Just something to think about.

Olivette

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Re: Selling at a loss to move to a cheaper area?
« Reply #16 on: February 17, 2015, 04:02:23 AM »
My first thought is "where do you live?" because if you live in Florida small is fine also cheaper to cool down and the outdoor is always available.
If you live in one of the places that has horrible winters, you may need a bit more space inside, sure you will pay more to keep it warm but you won't feel like a prisonner.

DW

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Re: Selling at a loss to move to a cheaper area?
« Reply #17 on: March 21, 2015, 03:55:56 PM »
Quick update:

We're under contract for $216,500. Cash offer, no repairs after inspection. We've yet to find the house for us and have to be out in 40 days. Time to look at rentals!

Olivette

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Re: Selling at a loss to move to a cheaper area?
« Reply #18 on: March 21, 2015, 04:49:16 PM »
congrats!

GuitarBrian

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Re: Selling at a loss to move to a cheaper area?
« Reply #19 on: March 22, 2015, 10:02:38 PM »
That is great! Congrats :)

DW

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Re: Selling at a loss to move to a cheaper area?
« Reply #20 on: April 04, 2015, 01:47:42 PM »
We found a 2450 sq ft house (in our neighborhood) a street over from a park and 1/3 of a mile from the elementary school for a hair under 200k.

I will be moving myself so we should net almost 9 grand during the swap, which will allow us to do a few DIY Mustachian improvements to the house (insulation, reflective foil in the attic, windows). I lose my unfinished basement but I think this will force us to get rid of some unnecessary stuff and live a little leaner. We're gaining about 700 sq ft of finished space over our current house though, as well as picking up two bedrooms. There's a nice carport to line up the bikes so we'll be able to hit the road at the slightest whim (right now I have to move the van out of the basement to get the bike + trailer out).