How much less $ to make downsizing worth it?

lafdrSeptember 21, 2012

I was wondering what all of you think the cost difference needs to be between houses to make a "cost downsizing" move worth it. There is a certain amount of $ lost in selling to the realtor commisions, repairs, actual moving costs that needs to be factored in. Not to mention the emotional stress and cost of buying/selling moving. Utility and yard maintenance costs in a smaller house are less. In my case, the property taxes are lower on my existing house since they were based on the purchase price years ago. So even a less expensive new to me house would have higher property tax.

We do not need to move, we can afford our bills. But I think I have been using less cost, less commute, and less yard work to justify moving and getting something different.

I think this is a logical (there are actual numbers that could be calculated) but also emotional.

Just wondering your thoughts on this: is there a price of house difference that would make a move a smarter financial decision?

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kirkhall

If you have lived there a long time, why are you worried about the "cost" to close (REA expenses, etc)? You have equity in your house, I hope.

I think of downsizing savings as what you gain by downsizing... Do you have a mortgage now? Will you when you move? If no, and no, then it will be easy to figure out what you gain, monetarily, when you downsize. Sale minus commissions and costs minus the new purchase price. What do you walk away with? Is that worth the cost of the move?

If you don't have a mortgage, and will get one, then it probably doesn't make sense, financially.

That doesn't mean you shouldn't do it. Finances aren't everything, but they are a factor.

    Bookmark   September 21, 2012 at 12:10PM
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weedyacres

Sure, you could put math to that. Put the costs of selling and moving in one column and the annual savings (including the negative savings of higher taxes) in another column. Divide column 1 by column 2 and that's how long it'll take to be a break-even proposition for you.

If your RE commissions will be $20K, closing costs $2K, moving costs $5K, that's $27K. Add any closing costs for the new house, if you have to get a mortgage.

If your utilities will be $100 less per month, your gas costs will be $100 less per month, and your yard work costs $50 less per month, but your taxes $75 more per month, that's a net savings of $175/month. You could also include the value of your time spent commuting and working in the yard.

27,000/175 = It'll take 154 months, or almost 13 years to recoup your selling costs. Of course, your numbers are different, but hopefully you get the idea.

    Bookmark   September 21, 2012 at 8:50PM
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kats_meow

Well, when we downsized I looked at the total cost of owning the house we had. The house did have a mortgage on it so some of the cost was the interest on the mortgage payment (less tax savings). That house had very high maintenance costs and so the costs of owning that house were very expensive. I modeled on a spreadsheet extending out several years what it would cost to sell the house and buy another smaller house with lower maintenance costs. In our case the savings were substantial and would "pay back" the sales costs within less than a year.

    Bookmark   September 21, 2012 at 10:25PM
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lafdr

Thanks for your comments. Duh! It should have been obvious for me to make a spread sheet and see how many months/years it takes to break even/get ahead. I was just roughly thinking the numbers in my head. I am not worried about closing or moving costs, but it does subtract from the cash I would walk away with. The original goal was a new home with no mortgage. But with current interest rates that may not be the best choice.All of your comments have been very helpful, this gives me a spread sheet to work on and I can plug in various scenarios as far as new home cost, sale price of my house, unexpected expenses etc.

    Bookmark   September 21, 2012 at 11:36PM
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azmom

I think weedyacres forgot to include net gain from selling your current home. Assume you will have net gain, otherwise why do you want to move to a smaller home just to break even?

You could make a spreadsheet with two categories "asset" and "Liability", list and compare every single cost under one of the two categories.

If you have net gain after the selling and you use the gain to purchase a lower priced new home mortgage free. Your next home will be less value than the current one, but you save monthly mortgage payment. If you take out a new loan for the new home, and invest the net gain, you need include the projected gain/loss from your investment as well as the mortgage payment, and tax deduction.

Don't forget to use compound interest formula where it applies.

    Bookmark   September 22, 2012 at 12:43AM
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weedyacres

I wouldn't include gain or loss on a home in the calculation. This gain or loss exists whether or not you sell the house, it's not a result of moving.

If there's a mortgage involved, then I would include the difference in the interest payments only, not the principal, because, from an accounting perspective, that's a transfer from one asset (cash) to another (home equity), not an expense.

I concur with your original goal of downsizing to a house with no mortgage. I wouldn't borrow money on it just because interest rates are low. In fact, our plan when we sell our house is to do just that: pay cash for something half the size. How cool would it be to have no payments at all except utilities and taxes? Plus, look at the $3-4K you'd have to pay in closing costs to get that mortgage. Much cheaper to just write a check, pay a lawyer and a title company and be done with it!

    Bookmark   September 22, 2012 at 8:50AM
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runninginplace

Weedyacres, yes you do have to include profit (if any) because of course that is part of the entire financial impact of moving. If you don't move you don't get the profit just as you don't incur the expense.

You can't ignore that, the calculation isn't accurate or complete if you do.

Ann
(vaguely recalling those MBA accounting and finance classes)

    Bookmark   September 22, 2012 at 9:28AM
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lafdr

Great points. The original plan was to find a new home that cost less and could easily be paid for outright from the sale of current home, with money left over even to invest. BUT......started looking at houses and I am drawn to houses that are LESS then my current house, but not as much less as I originally had hoped for! (Current house only has a home equity loan with very low minimum payments, but we pay over that. SO new house has to be less then current home, including paying off this home equity loan)

    Bookmark   September 22, 2012 at 11:25AM
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weedyacres

The fact that a house is worth more or less than what you paid for it is independent of whether you sell it. I think you're confusing putting cash in your pocket (from a capital gain) with an increase in income.

Let me put some numbers to a few different scenarios to explain where I'm coming from.

example 1: You bought your house 20 years ago for $200K and it's now worth $400K. If you sold your house and bought another one for $400K in the next town over, would you put a $200K gain in the calculation the OP is trying to make?

example 2: You bought your house 20 years ago for $200K and have completely paid it off. You sell it today for $200K and buy a house for $100K cash. Would you call that $100K gain because you've got that much more in cash?

The value of the house is already on your balance sheet, net of any mortgage liability. Selling it just eliminates the liability and transfers the asset from home equity to cash. Your net worth hasn't changed, nor have your monthly expenses, as a result of the sale.

    Bookmark   September 22, 2012 at 12:00PM
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sheilajoyce_gw

We are empty nesters with a two story house with 5 bedrooms upstairs and a bedroom downstairs that is the office. We could not even find a studio apartment in the area for the price of our monthly mortgage payment let alone a smaller house or condo. The house still can manage all our kids and grandkids at family get together times, which is the other major reason we are still here. The kids can visit at the drop of a hat and we can accommodate them comfortably. I learned to keep our roomy house from friends whose kids could not manage the cost of a visit to their downsized homes and the necessary hotel rooms.

    Bookmark   September 22, 2012 at 3:25PM
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azmom

Here is what I am coming from, hope it covers most of the calculation:

OP intends to purchase a less expensive new home by moving. Net gain is loosely defined as difference between price of the current home and price of the new home. net-gain = (price of current home - price of new home).

If the current house value is $400K, mortgage balance and home equity loan are $100K, cash purchase price of a new place is $200K, OP would free up $100K home equity for investing. $100K = $400K-$100K-$200K. In addition, she does not need to pay mortgage at the new place.

The amount OP owes in the current home is relevant, the less it is, the more cash would be available for investing.

Using the same example, if OP has a great investment opportunity to turn $100K into $180K after cost in 6 months. This $80K gain and the savings from eliminating mortgage payments could offset the selling/moving costs.

OP, the decision of getting a mortgage depends on how you would invest the home equity. We just locked in a 10-yrs no closing cost mortgage for 2.75%. Factoring in the income tax rate, the borrowing cost is indeed attractive.

    Bookmark   September 22, 2012 at 4:12PM
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weedyacres

If there's an investment opportunity with an 80% return in 6 months I'd be leveraging up the wazoo to buy in. I'm afraid those are few and far between. :-)

If they want to free up home equity to invest, they could do that by borrowing it on their existing house (with a tax write-off for the interest). Thus selling the home doesn't magically increase net worth, it just changes it from one form to another. That's why I wouldn't include it in the calculation.

BTW, sorry OP for the hijack. :-p

    Bookmark   September 23, 2012 at 5:30PM
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Artichokey

Slightly aside from the straightforward financial calculations, is your current home one where you can age? Are you looking at needing to move at some point (if all goes well!)? If your current home isn't one where a healthy 75 year old year or 80 year old could live independently, and you'll need to move eventually, there's some benefit to doing so while you're young enough that moving would be easier and it would be easier to do whatever renovations you'd want to do in the new place.

    Bookmark   September 25, 2012 at 6:43AM
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