February 11, 2021
February 11, 2021
Buck and Starla Harrison didn’t plan to downsize from their suburban Seattle home of 32 years until they fell in love with the picturesque community of Edmonds, on the water north of Seattle. They looked at a few homes in Edmonds and realized they couldn’t afford to buy there. After running what-if scenarios with their financial planner, they decided to rent.
The Harrisons sold their three-bedroom home in five days with one full-price offer of $600,000. After expenses, they walked away with $550,000. They created a reserve account with $24,000—about a year’s worth of expenses—and invested the rest. The couple pays $2,850 in rent, $100 for utilities and $100 for renters insurance monthly for a two-bedroom, two-bathroom apartment with a water view.
In today’s seller’s market, buyers, like the Harrisons, who want to downsize face quite a hurdle. Home prices are high, and inventory is tight. In August, the national median home price hit $310,600, up 11.4% from a year ago, according to the National Association of Realtors. Currently, there’s only about a three-month supply of existing homes for sale (four to six months is considered balanced between sellers and buyers). “The inventory of homes right now is like toilet tissue was this past spring,” says Cindy Marsh-Tichy, a real estate agent in Punta Gorda, Fla.
Bidding wars are common and it’s easy to overpay, especially if you have cash from the sale of your previous home burning a hole in your pocket. You’ll preserve more of your equity by following these tips.
After looking at a few homes, ask yourself, “What would I find acceptable to live in for the price I’m willing to pay?” says Colleen Ketcham, a senior real estate specialist in St. Paul, Minn.
Don’t overlook the cost to sell your current home, including updating, repairing and staging, as well as a real estate agent’s commission, typically 5% to 6% of the sale price. Even if you pay cash for your next home, you will still need to cover property taxes, hazard insurance and homeowners association fees. The cost to move belongings from a three-bedroom house locally (within 100 miles), excluding packing service, ranges from $480 to $800, according to Homeadvisor.com. The cost to move out of state ranges from $2,200 to $5,700, depending on the distance and weight.
Without a home to sell, you can make a noncontingent offer, which sellers prefer. You also won’t be tempted to settle for less than you would otherwise get for your former home or need to take a bridge loan to close on the new one, says Marsh-Tichy. A bridge loan is pricey and can be hard to get.
If you buy a fixer-upper for less, set a limit for how much you’ll spend on improvements. Lyle Benson, a financial planner in Towson, Md., recalls clients who made selling a large, expensive home a key part of their financial plan. But instead of adding hundreds of thousands of dollars to their retirement savings, they spent it all redoing their new home, imperiling their plan.
Up to $500,000 in gains from the sale of your home are excluded from taxes if you’re married filing jointly (up to $250,000 if you’re single), as long as you’ve lived in the house for at least two of the past five years. For example, if you are married and bought a house a decade ago for $300,000 and sell it for $600,000, your $300,000 profit is tax-free.
When the Harrisons moved, their tax accountant, who lives nearby, told them they would love their new home, but they’d better get used to the “seven-page credit-card bills” that result from proximity to plenty of great restaurants.
Are you looking to buy a house? Before you start going on showings, contact the loan officers at Wintrust Mortgage to discuss your options.