What would you do?

[Keim]

My wife and I have a friend that is going through a nasty divorce. She is financially strapped, and is thinking about downsizing her home so she can improve cashflow. She currently owns a large-ish home, with an attached one bedroom mother-in-law apartment. She is trying to sell it for $285k, and move into a home in the $175-$200k range. Her realtor will make 15% on the sale. I assume she has very little equity. She is psychologically paralyzed, and has been asking our opinion on what to do on many matters, but not directly in the area of real estate.

Here is my dilemma:
The apartment is worth about $400 per month. Buying a new $175k-$200k home will result in a mortgage of $1058-$1200/mo. Based on prior conversations, her current home must be about $1700/mo. My calculations show very little advantage to moving, if she is willing to consider renting out the apartment. Especially once one considers the set-up costs of a new home, moving costs, etc. I am concerned that in her current state she isn’t thinking things through, and hasn’t considered that renting out the apartment may allow her to keep her home.

I should add that I do not believe the home will sell quickly at $285k.

What would you do? And, do you see any errors in my calculations?

edit: RE in the poll = Real Estate

 

[Katsmeow]

I voted for number two but I would probably start out not quite doing that yet. That is, I would ask her if she has thought about renting out the garage apartment. Bear in mind in some areas there may be restrictions which prohibit this. For example, I have a guest house on my property but I am allowed to use it for the homeowners, for guests or as quarters for employees. I can't rent it out.

FWIW, a 15% real estate commission seems unusually high. Around here, typical commission is 6%. I've heard of places with 7% but 15% just seems very unusual.

Anyway, I would ask her if she had thought about renting it out and if she has any interest in it does the pros and cons (including the numbers). Bear in mind some people would not want to do it simply because they don't want to be a landlord, especially of someone living on their property.

 

[W2R]

Her realtor will make 15% on the sale.

How odd!! I never heard of a realtor getting that much.

I'd try to discuss "around the edges", not necessarily related to her particular situation, and see if she voluntarily brings any of this up with you and welcomes any advice. Otherwise, I'd leave it alone. She is going through so much right now, that she may be pretty emotionally fragile.

 

[Keim]

15% seemed high to me, too. It is what she said.

 

[MasterBlaster]

regarding the 15%. If you take the selling commision and then add in the selling expenses like escrow fees and title insurance. And then you add in the fees to buy a home like escrow fees and loan points etc....

You get a number that's around 10 -12 %.

so a ballpark number to trade a home is perhaps 10% of your homes value.

 

[Moemg]

I would encourage her to wait awhile to make any decisions . She is in the middle of a divorce and probably not thinking clearly . If she is really cash strapped I would encourage that she rent the apartment but hold off on any decisions until her emotions have settled down usually at least a year .

 

[Keim]

Maybe thats where she is getting the number from, MasterBlaster.

Probably good advice, Moemg.

 

[Aiming_4_55]

6% for realtor is norm in my area.

I voted for #2 and add the stress of moving/getting setup again.

I normally won't provide the numbers, I generally ask them what is running thru their head first. Having them do the numbers exercise first and add suggestions for additional cost. This process could take longer, but for me it's letting them learn from it vs. me telling. It also helps in the understand process.

 

[Tigger]

Maybe not very likely. But could it be that a very expensive realtor an other intermediary who wants to make a quick buck is pushing her to sell?

 

[KM]

As a single female living alone, she might not want to take on being a landlord and/or having a "stranger" living in her house. Not sure what type of area you are talking about, but we live in a small city and I still don't think that is something I would want to do.

But, regardless, I dont think it would be wrong or bad to ask her if she has ever considered the option. She might just need someone to help show her how the numbers would work for her.

 

[Nords]

15% seemed high to me, too. It is what she said.

If she brings up the subject again I'd suggest that she obtain a realtor's license.

Seriously, though, if she does raise the subject then you could ask her the questions from this post and see if she's inclined to consider any of those options. Avoid giving advice by just asking the questions.

 

[sheehs1]

Don't know exactly what cash strapped means. Is it a temporary or possibly permanent situation?
If the divorce is not yet final...I'm assuming the property settlement also may not be final. How is the house titled? Even if the house was in just her name, he may be entitled to some of the equity that was built up during the marriage...unless they had an agreement of some sort. This ties back into whether or not the property settlement is final.
Quite honestly, unless all the details of their financial settlement are known in reference to the house..it would be difficult to advise her.
Like others stated and the usual advice is "not to make any drastic decisions while going thru emotional turmoil"...waiting until things settle down.

 

[Martha]

The amount of downsizing she proposes does not make up for the loss she takes by selling and buying, especially as there is value in the apartment greater than the price differential. Since she shared these figures with you, I see no real reason not to share your thoughts.

 

[chris2008]

In her shoes, I would probably test the waters by renting the apartment out for limited time to some temporary staff at a university close by, international company or the like. "Airbnb" could be usefull, too.
Moving with all its sidework will kill a lot of money, so I would try to be creative to find other options.

If I have to sell, I would look for even cheaper ones than 175-200K, focus on those with low taxes and little other running cost attached and not buy before I have sold and seen the money, even if these means to rent in between.

 

[Nords]

In her shoes, I would probably test the waters by renting the apartment out for limited time to some temporary staff at a university close by, international company or the like. "Airbnb" could be usefull, too.

Depending on her plans she'd have to check with local/state ordinances.

In Hawaii, a short-term rental (less than 30 days) is subject to a permit (otherwise it's considered an illegal vacation rental) and an additional short-term rental tax of at least 7% above the usual excise tax.