One of the most common planning activities my team works through with clients is advising them as they sell, buy and move homes. Lifestyles change, the cycle of life marches on and housing needs and desires evolve. What can be a daunting process for a family that may have lived in the same home for decades, is something we deal with quite often, and I think it’s helpful to walk through some common trends and best practices I’ve observed.
I often hear of this process as “downsizing,” but in my experience rarely is this a completely accurate term. There is a class of home builders who have understood what buyers at various stages of life are looking for in their 50s, 60s and even 70s in a home and have done a very good job at producing attractive home products for these markets. Homes with open floor plans, single floor living, lots of common space for hosting and small guest bedrooms with a large master suite are the most common trend I see, but each family is unique, and I’ve seen clients move to everything from condos to farms. One trend that is very consistent, however, is the new home rarely costs less than the existing home being sold, which is both “OK” and where the primary stress and planning challenges arise. So, let’s go over a few tips.
The real estate market in “upgrade” homes in Northwest Indiana, as well as many attractive retirement locations around the country, continues to be very tight. Homes in this segment of the market are often not listed for very long, and sellers are entertaining multiple offers soon after listing. So, one best practice is to have your ducks in a row before the shopping starts. For cash offers, realtors will often require a verification of deposit letter from a bank or investment firm certifying the buyer has the funds to close. These letters have to be “official” and take a few days to request and obtain, so having one in hand instead of scrambling at offer time can make an offer more nimble and reduce stress. The same applies to financed purchases, with many realtors requesting pre-approval letters from a bank or mortgage company for submission with an offer. These letters take even longer to obtain, up to a week or two, so starting this process early is definitely smart in a competitive market.
After the offer, but during the due diligence period before closing, it’s very important to make sure all the costs of the new home are understood. The primary surprise I see in this regard is with Home Owners Association (HOA) dues. Many developments offer lawn maintenance, snow removal and other amenities. The prospect of no longer cutting grass, shoveling snow, or taking care of a pool can be super attractive, but these services of course come with a cost. In addition, some neighborhoods require road and common area maintenance as well as other community-based features. It’s easy enough to determine current dues as this information will be available from the realtor and in the listing, where the surprise often comes in is with due increases and special assessments which may be on the horizon. While it won’t always be possible to anticipate these potential cost changes, it’s a good idea to request a copy of the HOA’s financials, and the minutes from the last year or so of HOA meetings. There is much to learn by reviewing these documents, and the HOA is usually able to provide them on request.
Then we actually have to pay for the glorious new abode. In my experience, families in this age range will often have considerable home equity in their existing home, sometimes being paid off, and will need to “transfer” this equity into the new home. Rarely does the timing of selling the existing home and closing on the new home work perfectly, so some sort of bridge financing is required. This financing may take a couple different forms, such as Home Equity Loans, or Home Equity Lines of Credit (HELOC) or a specifically designed bridge loan product. These loan products will require underwriting of credit, assets and income as well as some level of appraisal. This all takes some time. So once again, starting early on this process can reduce stress at offer and closing time.
Finally, the question of should retirement capital be used for a home upgrade comes up quite often. Unlike some radio and TV financial gurus who would say this should never happen, I work in “real world” financial planning and sometimes the answer is “sometimes.” The best approach is to holistically analyze the family’s retirement accumulation and income needs in the context of the new home, and then decide if using either a retirement plan distribution or 401(k) loan makes sense considering taxes and planning needs. This also takes a bit of time and effort, so, you guessed it, start early.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Stock investing includes risks, including fluctuating prices and loss of principal. No investment strategy can guarantee a profit or preserve against loss. Past performance is not a guarantee of future results. This material may contain forward looking statements; there are no guarantees that these outcomes will come to pass.
Marc Ruiz is a wealth advisor and partner with Oak Partners and registered representative of LPL Financial. Contact Marc at marc.ruiz@oakpartners.com. Securities offered through LPL Financial, member FINRA/SIPC.
