What will he be renting? Something equivalent, or smaller and with less amenities? What will happen to his utility costs? How will he invest the proceeds, and how does that return (after tax) compare to the expected appreciation on his home? How much leverage is on the house?

Mtn asks some great questions, and this is a timely post since DH and I are wrestling with a similar question, but for different reasons. We are also in our early fifties, so not retiring yet. We certainly do not need to invest $20k to sell our house. We want to downsize significantly now that the kids are grown, and frankly we are tired of the maintenance of a large corner lot yard, huge utility bills, etc. The question for us is whether to cash in hugely in a very hot market, but then have to rent or buy something in the same market (even though our costs will go down due to downsizing) or just stay put until we are ready to leave the area for a less expensive one. If we did buy, we would net enough out of our current house to pay cash. We would use the additional disposable income for our first love-travel. I know we would have to fork over lots more in income taxes without the mortgage deduction, though. It's not a simple answer, and I suspect neither is your client's.

He would probably be renting an apartment or a very small house.

This house is very small, three rooms and under 800 sq ft. He bought for around $125K and the peak value of the house pre 2007 was probably $320K or so, but it's dropped significantly since then.

If he still had the original mortgage and was more than halfway through it, that would be fine, but I know he's refinanced and cashed out at a higher house value (although not at peak value) and I doubt any of that cash out remains.

In other words, I don't think he is going to net $100,000 or anywhere close, and given his past behaviors he would not fully invest the proceeds and leave them alone either.

I also don't think he can rent anything for much less than his current monthly carrying costs unless he moves to a remote, low-income neighborhood.

So, why does he want to rent instead of own?

I removed my post because by the time I posted it most of what I said had already been said by others.

This post was edited by Fun2BHere on Wed, Sep 17, 14 at 18:01

Unless he is planning to move out of the area (or out of the country), I can't imagine you are missing anything, unless there is a health condition he has not told you about.

Is the property located in a high property tax area? Maybe he has a lot of credit card debt and this is an opportunity to clear everything and start over with just his rent.

Of course, from the info you provided, it doesn't sound like the smartest thing to do. Here the rents just keep going up and up.

Sounds like there is a possibility that he is upside down in the house. Is it perhaps a short sale?

Texanjana -

You won't have the mortgage interest deduction --- btu you won't have the mortgage interest, either.

The question is how does the aftertax cost of owning (ie after the deductions) compare to the cost of renting.

Often, unless you 1)plan to rent something of far less value than your home, due to location, size or amenities or 2)plan to take the money out of your home to invest it in something you believe will give you a much better return than housing, you may as well stay put.

Texanjana -

You won't have the mortgage interest deduction --- btu you won't have the mortgage interest, either.

The question is how does the aftertax cost of owning (ie after the deductions) compare to the cost of renting.

Often, unless you 1)plan to rent something of far less value than your home, due to location, size or amenities or 2)plan to take the money out of your home to invest it in something you believe will give you a much better return than housing, you may as well stay put.

I have to agree with you Pal - if he refinanced as you think he probably won't get near as much as he expects, especially if he needs to invest money just to market it.

All 3 of my adult children live in Philly and are actively looking to purchase their first homes - they're primarily looking in No Libs and adjacent areas of Fishtown. They've been sending me the listings that they like. It amazes me to see what these properties are listed for ....and how much the last sale price was...many of these townhomes are listed for less than the owners originally paid.

Yesterday I checked the listings for 8 places - 4 of the 8 were listed for less than the owners paid for them eight years ago which is the same time frame as your client. Some have been on the market for a while and the owners are slowly lowering their prices.

You are also correct about rent. Knowing what my kids pay in rent he'll have a difficult time finding a suitable place. Even my daughter who is living in a neighborhood that I consider slightly 'iffy' (11th and Green) is paying over $1000 a month for 4 rooms and a teeny plot of grass. Her kitchen is a walk through to the bedroom and is so small she only has one drawer, a half size dishwasher (who knew they made them that small?) and no room for a microwave unless she puts it in the living room.

Does your client's place have a yard? DD is an avid gardener and she's willing to give up interior space for her garden. And she's tied of dealing with a first time landlady who doesn't speak English and who won't address safety issues. We're hoping to find a place that she can finally call her own.

He's not upside down or in a short sale situation, but I don't think he is going to be netting much from the sale. Not enough to make it worth it, in my opinion.

I don't think we live in a particularly high-tax-rate area considering it is urban. Our property taxes were under-assessed for years. But essentially you are paying your landlord's property taxes if you rent.

It doesn't make sense to me. Would you feel comfortable asking him more about it? Maybe phrase it like, "I wonder if this would be a good idea for me, but I can't quite put it together -- just how does it work to your advantage?"

I would Not be able to rent my house for what I am paying for my mortgage--that's fairly typical on comparable-sized houses vs. rentals in this market.(Taking the down payment into account, of course.)

I know that historically one thing that happened to this client is his financial advisor ended up going to prison because he was essentially Ponzi-scheming his clients.
But in the intervening decade or so, the refinances and other financial things that this client has done have really been for naught. In fact, he was talking about taking a trip with some of the proceeds from the sale. He doesn't know how to save money. At all. By default, he is saving some money by owning a piece of real estate in a slightly improving market.

I am getting Nothing in interest with some of my savings, but at least I am saving it. I think he would be spending it, and getting Nothing in interest with what amount he managed to save. I just don't see this working.

I think you have been hired to do a job for a client. While it does not seem to make financial sense, do what he is asking. Many people make bad financial decisions due to ignorance or emotions. Either way, it is simply not your job to try to figure out his motivations. If he asks your advice re: financial advisor, then offer a name or two. Seriously, Pal, you are a caring person but there are times when you might have to bite your tongue (pun intended)!

It may be more behavioral than financial.

Sometimes, the emotional responsibility of home ownership has lost its appeal or can seem to be an overwhelming burden.

Don't discount the "grass is greener" appeal of I can move when ever I choose, I don't have to pay for repairs, and I lock the door and travel when ever I want.

Of course that fails to account for lack of privacy, neighbor's cooking smells, cigars, crying babies, loud TVs, and late night poker parties. As well as no ability to "pay off" the mortgage and live payment free in retirement.

I guess my point is, I see it as that person is looking for freedom from long term responsibility. But the cost of that freedom is the loss of the long term benefits everyone has given above.

bonnieann, that's my conflict. On the one hand, I don't want to interfere. On the other hand, I don't want to do a job that facilitates a client spending money he really doesn't have but hopes to net from the sale of a property, when I am not at all sure he will net enough to make the entire venture worthwhile.

Julie,
I think that part of the appeal is the "no strings" but I know a Major motivation for this client is to be able to add to savings and I don't see that part of the plan working.

I think there are people who just don't like the reality of fiscal responsibility - or maybe any reality that does not fit into their perception of "the way things SHOULD be." I know people like this.

In some ways, a person's relationship with money is a lot like a relationship with another person.

Even if you knew for sure that he was making mistake, I don't think he would believe that he's making a mistake because he sees what he wants to see.

Based on the additional information, I think your assumptions are correct, Pal. I also agree that he probably won't listen to you and will continue to be irresponsible with his money or lack thereof.

I saw the other question first but got more info here. Assume it is the same person you are talking about. He may be like my brother and figure he's always going to be working. Even at that, like you, I don't know that it makes sense. But he may not plan to ever retire and figures someone or somewhere will take care of him if he can't work.

I happened upon an online discussion of folks who figured there was no reason to save because then you just had to spend it later to get put in the same home you'd wind up with the state or someone paying your way. I don't think any such options exist here, so the idea of being old and on the street is pretty terrifying to me. Besides, I'd rather be in control of my options than dependent on others. But it sure was an eye-opener.

Some people can't see past the cash. They will see the cash from a sale and figure out some way to justify getting their hands on it. Of course they have reasoned it out, in their own way, but their thinking skills are generally faulty and incomplete. With people who think about money this way, well it seems they don't understand money at all, and wind up broke, declaring bankruptcy and continuing the cycle. If you think there's any chance of making him see the light, by all means try (why not?), but if not, then it's just not your concern, unfortunately. Some people cannot be helped in this way.

Any idea what his monthly income is or what the future for that is? Does he have a short life expectancy based on poor health or family history? Has he or will he shortly receive an inheritance?

The parents of our friends are beginning to die and you can always tell the size of the inheritance by the spending or retirement that is done about 3-6 months later.

On the other hand. my DH and I are 61 and although we don't have a mortgage, downsizing from a house to a townhouse doesn't make financial sense. We can't clear enough between the two to make it worthwhile. And renting at our age is very poor money management sense. With the longevity on the two sides of our families and current good health we will probably live until we are in our 90's. We know this and have financially planned for it. If it doesn't happen our kids will be sitting pretty.

You just never know the back stories.

IMO any responsible professional would have similar worries in a case like this.

Additionally, if a client like this ends up destitute a few years later, it will not help the professional reputation of anyone who assisted him into that position.

At the very least, if you continue to operate on his behalf I would get some sort of signed statement acknowledging that he is opereating contrary to advice.

IMO some situations like this could lead to lawsuits, whether or not there are any realistic grounds.

I think that as a professional, you can do the best job you can for him and give him the best advice that he requests from you to prevent the situation from being even worse.

I think that what you are missing is just that some people have a different relationship with money and different objectives short-term and many just cannot deal with the long-term. We recently went through a discussion like this with some family members. It was touchy because of the relationship constraints. One individual had received their trust at the age of 55. They bought a new, bigger house, and paid somewhere in the range of 50-60K for some unneeded remodelling, bought a new car, covered a child's wedding, etc. All that money was gone. The state they live in has no income tax but has high property taxes so they have had trouble paying those and other things (we get collections calls for them).

To deal with this, they wanted to sell the house and rent a nice apartment ($1200 a month). Our fear was that they are in their 60s, will want to retire at some point, are limited to an enlisted military pension and Social Security upon retirement and that at some point, whether they want to work or not, they will no longer be able and that then, rents go up, etc. and any money they get from the house, which they say would be saved, would more than likely be gone as they do not do well with large chunks of money. I suspect there is a good chance these relatives could be living with us at some point in their lives, as they will have no other options.

He grew up in a working class/lower middle class environment. His mother is alive, and she owns a house with a mortgage, because they moved around the time the father retired. I doubt there will be a significant inheritance.

I actually know people who are incurring debt upon the death of their parents instead of inheriting money. The parents houses still carry mortgages, or if there is no mortgage there is a home equity loam, they take a long time to sell so the families are paying monthly carrying costs, they have minimal life insurance if they are the surviving parent. When the estate is settled, perhaps there is something left over after the debts are covered but that's about it.

One of my friends paid about $12K in funeral costs out of pocket and is paying the mortgage and home equity loan, taxes and utilities on a house that is lingering on the market. This money will be recouped when the estate is settled and the house sells but at this point they are paying out a couple thousand dollars a month. And this was technically an upper middle class family with a house in an upper middle class neighborhood. The "inheritance" when all is said and done is not going to be a windfall, by a longshot.

I put a lot of time and calculations into this post, and then when I saw the other thread was full, I didn't want to lose it, but boy sure didn't want to start another thread, so I will put it here.

I know there will be no convincing some, regardless of what I post (reminds me of the old line from Cactus Flower...) but I can't stand having so much misinformation out there. So in the hopes of clarifying the logic and the results of home ownership vs. stocks, here is my final example.

----------------------------------------

Note: ALL of these numbers exclude inflation. All of this data is based on national statistics. So this isnâÂÂt what happened to my Aunt Sadie anecdotal stuff.

To go with the âÂÂmagicâ 30 years that Tibbrix is so fond of, letâÂÂs start with 1985 and run through 2014. (Both are non-recession years so make for a valid comparison.)

The median price of a home in 1985 was $84,300. At that time, 20% down wouldâÂÂve been $16,860, and the fixed mortgage rates at that time included 2.5 points so someone wouldâÂÂve needed $18,546 to purchase the home. The monthly payment for the mortgage (principle and interest but not taxes and insurance) wouldâÂÂve been $750 per month.

Using the Case-Shiller index (which, unlike median home prices, prices the same quality home over time) the value in 2014 of that home would be $110,644. (Remember this excludes inflation.)

If instead the person chose to rent a place for $750 per month and not having to make a downpayment, instead invested the $18,546 in the S&P500, their investment (including dividend reinvestment but again excluding inflation) in 2014 would be worth $187,871. (And please donâÂÂt argue back that the rent wouldâÂÂve gone up...we are excluding inflation from all the calculations.)

Note, this doesn't require the renter to have "scads of money lying around to invest"...it only requires that they have saved up the same downpayment the homeowner would have and leave it in the investment just as the homeowner would leave the downpayment in the house.

(BTW, HUD data shows in 1985 monthly rents including water, sewer and trash was $342, so $750 per month would have been a reasonably good sized rental unit. Other anecdotal data point I came across suggested someone in CA north of Hollywood was paying $440/month for a 2 bedroom house in 1985. So to assume $750/month in rent is not unreasonable...it would've yielded very decent housing at that time.)

So glad I didn't post anything in the other thread. :)

I'm a homeowner. It's paid for and I'm grateful. Its value at this writing has probably doubled since I bought it in 1999. So has everything else, so I'm not really feeling flush, unless I sold and left this expensive area.

Back in 1985 we lived in a $500 rental on one acre and we loved it. The owners decided to sell for something like $140K and offered us first crack. We didn't have a pot to piss in besides paying our monthly bills, so it was out of the question. If we'd had enough for a downpayment and could qualify for a home loan, we'd have jumped on it.

If we'd had the money for the downpayment, I doubt we'd have invested it in lieu of buying a house. We just weren't that smart or able to wait while the money increased, hopefully, risk and all.

I can't claim that homeownership as an investment is better than renting and investing the rest. When I was a renter, I didn't have anything left over. When my husband was alive, we weren't very good at saving money.

I'm a 6 on the Enneagram. I crave security. As a renter, we received one too many letters telling us they were selling the house and we had to move. Too many landlords saying no pets.

Disclaimer: How did an adult life of no extra money saved result in home ownership and no mortgage after 5 years? We bought our house for nothing down in 1999 with a G.I. loan. My husband took out a life insurance policy to cover what was owed in case something happened to him. It did. He died in 2004. In 2006 I paid off the house. Many encouraged me to invest that wad of cash. I didn't have the balls to do it.

I live within my means, pay cash for everything, including home improvements, have enough liquid cash for a new roof or furnace and beyond, "loan" money to my grown daughter with no expectation of being repaid, although sometimes she surprises me, in a good way. :) I have a decent pension with good Kaiser coverage. I continue to save and invest. I don't believe in spending as much as I can before I die, which could be any day as we never know. It would give me great pleasure to know that after I'm gone something will be left for my daughter.

I have friends in their early 50s who will work another 6-8 years. Both will have slightly better pension payouts than I currently enjoy. Their house is also paid for. They plan to sell the house and rent a smaller apartment in the nice senior community in our town. I think it makes good sense for them and they will be in Fat City.

So this homeowner hopes to net about $130 k from the sale. I don't know how valid this calculation is. What I determine from this number is rhat after fifteen years of mortgage payments is that he hasn't made progress in building equity.
I think at this point the accidental equity the house has built on its own by increasing in value would be best kept as forced savings in the house rather than as cash for investment in the hands of this rather poor financial planner.

How fascinating that on this, the original thread, everyone has advocated for Pal's client to NOT sell for financial and security reasons, versus the otherâ¦.

Curious.

I think blfenton explains it perfectly. Financial wisdom has nothing to do with what might get you a greater return. People who own homes are more likely to have a much more secure retirement than people who've rented their entire lives. That, to me, is financial wisdom, even if those homeowners didn't get some imaginary financial windfall by renting, rather than buying, and investing some imaginary (for most people) amount of cash they had from not buying a house.

On the practical side, Pal, have you looked at sourcing a ductless system for your client's AC needs? When we bought our ugly duckling lake house it had 40 year old electric baseboard heat (that appeared to be possibly DIY), no ductwork and a single, plug in air conditioner that jutted out beside our front door. (Not exactly visually appealing.)

We researched the options and got quotes for a traditional furnace and central air, heat pump, geothermal, and the ductless heat pump system. Because we're living here, efficiency and comfort were big considerations. We decided on the ductless system for those reasons, but the price was a pleasant surprise too. It came in at 60% of the cost of the traditional system or ducted heat pump. It was WAY less than geothermal.

I know we live in an area where labor is much cheaper but we paid just $5K for our system, and are waiting for an energy company rebate of $1500. In addition, our electric bill fell by 2/3rds the first month. Just an option you might consider.

Yes we are getting quotes for that. He doesn't want splits and I keep reminding him not to do what he prefers but rather what a buyer could expect since he's selling. I think he's afraid he will change his mind, not sell, and then have a system he doesn't like esthetically.

He often changs his mind so perhaps this is a realistic concern.

We told friends about it when we were in the planning stage. A couple of them stated they would never go with that kind of system because they didn't want the unit hanging on the wall. I respected their opinions. Funny thing is, after the installation, none of them noticed it. I had to point it out. Even the recent design grad, who came to help with a gallery wall, was halfway through hanging the art -on THAT wall- when he stepped back and said, Oh, what's that? To each his own though.

Perhaps Pal's client is worried about housing prices going down. Afterall, the Boomers are in their downsizing years, so there should be a glut of houses coming on the market, and I've read recent articles about Boomers having to sell off 2nd homes as they realize they don't have enough retirement money, and then there are the Millennials with weak job prospects who can't afford to buy houses -- none of these point to healthy real estate values. If he thinks his house's value will drop significantly, then it makes sense to cash out and not have money tied up in real estate.