Relevance of Closing Costs on Downsizing Decision

[Trooper]

DW and I are retired and contemplating whether to downsize soon. We are in an approximately 3,000 square foot home now and looking for places in the 2,200 square foot range. Primary objectives would be to reduce the maintenance burden.

Realtor commissions and various other selling costs will amount to ~$40K. Assuming we will eventually sell our house - if not now then at some point 5-10 years down the road - are these costs relevant in the decision? My first thought was: I could buy a lot of maintenance for $40K, so why not stay in our current home? But...if we need to pay it anyway it's not really a cost that goes away.

Any thoughts from those who have wrestled with this?

 

[jazz4cash]

I studied this and decided it's better to budget for the maintenance since we really like it where we are. I think the market has set a trap for downsizing baby boomers so the only way it works is if you move to lower COL area. Besides closing costs existing home has tax advantage over replacement home.

 

[braumeister]

DW and I are retired and contemplating whether to downsize soon. We are in an approximately 3,000 square foot home now and looking for places in the 2,200 square foot range. Primary objectives would be to reduce the maintenance burden.

I think some other objectives might come before that one.

Where do you see yourselves living in ten years? Is the current location a good one as you get older?

If your big concern is reducing the maintenance, maybe you don't really want to merely downsize, but switch from a SFH to a condo?

Looks to me as if you might be just nibbling away at the edges of the situation. Better to consider all aspects.

 

[W2R]

I think some other objectives might come before that one.

Where do you see yourselves living in ten years? Is the current location a good one as you get older?

If your big concern is reducing the maintenance, maybe you don't really want to merely downsize, but switch from a SFH to a condo?

Looks to me as if you might be just nibbling away at the edges of the situation. Better to consider all aspects.

+1

Where do you really want to live for the next decade or longer? Can you easily afford to live there? If so, that's where I'd choose to live. If not, I'd choose the place where you most want to live, among all of those places where you can easily afford to live.

To me, closing costs seem like a tiny drop in the bucket compared with recurring costs like property taxes and insurance. YMMV

As for the maintenance burden, perhaps you could afford to hire someone to do all that for you, or perhaps you can afford to modify your home so that it has lower maintenance requirements. Like for example, I spent an arm and a leg making my yard maintenance free except for paying someone to mow.

 

[NgineER]

Do you really need a realtor?
The one and only home I have sold, I did without a realtor. I did interview four different ones, but they did not add much value other than getting the property listed on the MLS.
I listed it by myself using a fee on the MLS listing service on the recommendation of a realtor friend. We used a real estate attorney for closing and paid all in all less than $1000 for the listing and real estate attorney. I did have to pay for the buyers realtor fees. It was a modest starter house, but it's still ended up being about $10,000 in savings.

 

[pb4uski]

$40k of closing costs sounds pretty high, but I don't think it is particularly relevant to the decision since those costs will likely happen sometime in the next 5-10 years.... what would be relevant is the earnings on not spending the $40k in 2017 less the increase in costs due to inflation.

 

[Midpack]

We’re going to downsize once despite the costs, we just need a change in homes if not location. But I’m not expecting $40K even with moving and real estate commissions, guess I need to research a little deeper?

 

[pb4uski]

Ours were much less than $40k... even if we had paid a full 6% commission on the sale of our home it would have been much less.... however we did a FSBO but in reality probably shared a portion of the cost with the buyer in the form of a lower sales price.

Ours were less than $1k... just the lawyer who handled the closing.

P.S. Ok.... you made me look... the lawyer was $400.

 

[daylatedollarshort]

We also live in a high transaction cost area and we don't save anything on property taxes by downsizing because of Prop 13, so we have come to the same conclusion - downsizing to a smaller home doesn't save us much, if anything. We'd have to move to a condo or lower cost of living area (or both) to really come out ahead financially.

I would be willing to do for sale by owner but I've never seen anyone else do that in our neighborhood so I'm not sure if it would work out. All the other sales I see seem to be the 6% realtor kind of sales.

 

[NgineER]

I would be willing to do for sale by owner but I've never seen anyone else do that in our neighborhood so I'm not sure if it would work out. All the other sales I see seem to be the 6% realtor kind of sales.

Change doesn't happen unless someone takes the first step.

 

[OldShooter]

A lot of good thoughts here. IMO an important one is the observation that closing costs may not be where you want to focus. One thing I have seen many times is that the way a question is phrased can preclude getting the really correct answer. Your question should probably be: "Should we move to a smaller, lower-maintenance home?" with a list of issues and constraints.

In particular, is your current house suitable for living with declining health? Doorways 36" to take a wheelchair? All on one level? Space for an access ramp outside? Doors open with handles not knobs? A spare bedroom to accommodate a live-in caregiver or 24x7 team? Lots of stuff to think about there.

Agree $40K seems ridiculous, FSBO is easier and easier these days, and that $40K will buy a lot of maintenance if that is the only issue. More stuff to think about.

 

[brett]

We decided to sell. Very large house that we had no attachment to. We could have spent $200k plus on renos and still not done everything. High taxes, high mtce, and too big. We bit the bullet and sold. Realized a significant gain. As luck we have it we sold near the top of the market just prior to a four year slump. Travelled, and then rented for four years. Recently purchased a new home that is less than half the size of the previous one.....perfect for us.

Never regretted our decision or the costs associated with selling. It allowed us to move forward to a new stage in our lives. Plus, we got rid of so much junk which has now cured us of holding on to unwanted/unneeded items.

 

[daylatedollarshort]

Change doesn't happen unless someone takes the first step.

True, but I can't control buyer's habits. Our area has gone up in price over the year's and my concern is the more recent buyers have more money than time and wouldn't want to bother with a FSBO. We might be able to get more in the end going through a realtor. I just never see any FSBOs and I've seen maybe one Help U Sell in the last decade. Most of the recent buyers look like two income tech yuppies with young kids who moved to the suburbs for the schools, and between working, commuting and raising kids I don't think saving money on realtor fees is a priority for them versus saving time of having a realtor handle everything for them.

We used a lawyer instead of a realtor on our end when we bought the house, and negotiated with the the seller's realtor to work with us on her 6% fees, but it is not something I've ever heard of anyone else doing in our area.

 

[walkinwood]

Are you moving or staying in the same area?
Do you plan to sell your downsized home at some time in the future? What you have to?
Are you happy in your current home (besides the maintenance cost)?

A complex decision. I've always felt that if I think about doing something for long enough, I should just go do it. Otherwise, I have regrets ... the ol' shoulda, coulda, woulda thing.

 

[Gotadimple]

Realtor commissions and various other selling costs will amount to ~$40K. Assuming we will eventually sell our house - if not now then at some point 5-10 years down the road - are these costs relevant in the decision? /QUOTE]
$40K is what part of the selling price? If your house is sold for $500k, than $40k (or 8%) is reasonable, even cheap. You have all the usual expenses in a sale: the commission and your share of the closing costs. I usually total all those up and take it as an estimate of the percentage of the sale proceeds I pay others.

If the commission is the issue, approach a Redfin agent for a quote to sell the property. For a detailed understanding of your closing expenses, ask at your bank's loan department.

You asked if closing costs are relevant to the decision. No they are not. If you need to downsize and now seems like a good time to do that, then what it costs can only be relevant if you don't have much equity in your home.

You have to pay to have the sale recorded, you may have certain expenses to make repairs before closing as a part of the sales contract, you may have to pay the buyers' portion of a sales commission plus any commission owed if you use a realtor to manage your sale, you will have to pay an escrow officer/attorney to complete the sale.

I generally use 15% as my guide for expenses, assuming I am using a full service realtor. I think they are worth every penny in a down market and a hot real estate market.

- Rita

 

[NgineER]

True, but I can't control buyer's habits. Our area has gone up in price over the year's and my concern is the more recent buyers have more money than time and wouldn't want to bother with a FSBO. We might be able to get more in the end going through a realtor. I just never see any FSBOs and I've seen maybe one Help U Sell in the last decade. Most of the recent buyers look like two income tech yuppies with young kids who moved to the suburbs for the schools, and between working, commuting and raising kids I don't think saving money on realtor fees is a priority for them versus saving time of having a realtor handle everything for them.

We used a lawyer instead of a realtor on our end when we bought the house, and negotiated with the the seller's realtor to work with us on her 6% fees, but it is not something I've ever heard of anyone else doing in our area.

What I was trying to suggest is using a flat fee service that would get you on the MLS. As long as you get on the MLS and can show your property with a lock box on the door, your property will not look any different to your buyer than any other listing. As long as you have a comparable buying realtor's fee as a regular listing, you should be as attractive to them as any other listing.

 

[Katsmeow]

This is an issue we are pondering, right down to the same house size.

FWIW, I think $40k is low. Around here, the only effective way to sell is with a 6% commission. There are some closing costs also. Those costs are under $40k for us. But, if we sell we have to spend money to get the house ready to sell (Some of that we would do if we stayed while other things we wouldn’t. Add in cost of moving. Add in closing posts on new home. Add in work you need/want to do to new home (most people change something when they get a new house from small to large things). I don’t usually replace all my furniture when I move but usually there are a few things that I need there that I didn’t have in my old home or a piece of furniture doesn’t fit so has to be replaced.

So, that is indeed a lot of money. But, you are right in that you will eventually incur it if you ever move. So, in a sense you can ignore it. On the other hand, you will have more information in 10 years. So maybe you will better spend that money then than you would spend it now.

As for saving costs by moving that is a factor for us. Our current house has rooms we no longer use. But, we pay taxes on them, we still heat and cool them. We still clean them (less often than the other rooms but dust does get in them). And, we live on an acre so yard maintenance is expensive if DH can’t do it himself (he can now but probably not in a few years).

And this is a high property tax state. So, theoretically if we moved to a smaller place the taxes would be less. And right now we are 20 minutes from stores so do a lot of driving. So would save on gas costs if moved closer to stores (although still suburb).

And, yet…. I’ve looked at smaller houses we could move to that would be closer to stores. To get a house of comparable quality (albeit smaller), but closer in would cost close to what we could net from selling this house. Yes, utility costs would be less. SO would driving related costs. On the other hand, I might have to be in a MUD which would drive costs back up again.
I already live in a low COL area so it isn’t like I can move somewhere were housing is hugely cheaper. That said, I think if I was careful we could probably save a few thousand dollars a year by moving (if I don’t consider the closing costs). Basically, I don’t consider the closing costs because I figure that in 10 years or so we would have to move anyway as the driving will get more difficult and this house would be hard to live in if we couldn’t both drive a lot.

 

[gretah]

... house suitable for living with declining health? Doorways 36" to take a wheelchair? All on one level? Space for an access ramp outside? Doors open with handles not knobs? A spare bedroom to accommodate a live-in caregiver or 24x7 team? Lots of stuff to think about there.

I see so many retirees downsize only to find 10 years later they can no longer live in their retirement home due to health concerns. So then they have the expense and bother of moving and downsizing twice: sale of family home then sale of retirement home.

I'm trying to get a friend of mine to consider moving directly into a CCRC condo so she will never have to move again. Or at least a condo which is impaired-mobility friendly so help can be brought in, as OldShooter suggests.

Another friend is 80 and her husband has Parkinson's. I'm helping her paint her house this weekend as part of prepping for putting it on the market in April. They should never have bought this big house with bigger garden 8 years ago. She is exhausted all the time.

 

[Teacher Terry]

We downsized to a one story 1400 sq ft home in town 5 years ago. All of our expenses are lower. It is much more convenient and we moved at 58 so had more energy to do it. We usually don't buy any furniture when moving so no costs there.

 

[foxfirev5]

After 22 years in DW's dream home we wrestled for a brief moment regarding downsizing. When we figured out what we wanted it cost every bit as much as we already had. So just sprung for the full premium roof job on our complex multigabled money pit. But DW is happy and life is good.

 

[RobbieB]

I don't think the upkeep costs on 2200 sq-ft will be much less than 3000.

There has to be a better reason to suffer than hassle of moving than that.

Location, weather, activities, transportation, single story vs stairs, family?

If you like your house and you like were it is why move?

 

[daylatedollarshort]

What I was trying to suggest is using a flat fee service that would get you on the MLS. As long as you get on the MLS and can show your property with a lock box on the door, your property will not look any different to your buyer than any other listing. As long as you have a comparable buying realtor's fee as a regular listing, you should be as attractive to them as any other listing.

I've noticed the ads for those kind of realtors and they certainly seem worth considering. But then that is only saving less than 3% after the flat fee and the other realtors may not want to promote a flat fee realtor home for sale. We'll probably just do like a lot of our neighbors and let the adult kids deal with the house after they've moved us into some kind of assisted living place.

 

[Trooper]

We’re going to downsize once despite the costs, we just need a change in homes if not location. But I’m not expecting $40K even with moving and real estate commissions, guess I need to research a little deeper?

I came up with $40K based on the following. I admit I have included fix-up costs in this, although fix-up costs are not typically called "closing costs"

Realtor commissions @ 6%........$27K
Seller paid closing costs* @1%.....$5K
Costs to ready home for sale.......$8K

We may be able to negotiate a little on the realtor commissions, but I do believe paying for a good realtor would get us top dollar and a quick sale.

*Escrow fees, recording fees, title insurance.

 

[Trooper]

I don't think the upkeep costs on 2200 sq-ft will be much less than 3000.

There has to be a better reason to suffer than hassle of moving than that.

Location, weather, activities, transportation, single story vs stairs, family?

If you like your house and you like were it is why move?

.

I'm starting to realize much of what you say, RobbieB. I don't think the operating costs will be that much lower, and we like where are now, (both the subdivision and the state) so we would only move a few miles away anyway. I'm thinking that we need more compelling reasons to move, and I believe DW is on board as well.

We've decided to re-assess in a few years when our feelings may be different. We are also trying to decide if we want to be in a retirement community as well (instead of our current typical SFH community).

 

[DireWolf]

I'm trying to get myself ready for ER in a few years and have been looking hard at downsizing to a house I could buy with our current equity and maybe some of our cash reserves. Our current home is a nice custom home in an upscale area and worth about $475k. We'd have a little less than 300k in equity after paying a realtor. We've been looking at some older, renovated split levels closer to town. Size-wise, looking at going from 2800sqft down to maybe as low as 1800.

We'd need the paid off house for me to retire, expenses-wise. Doing it now means I can invest the ~25k/yr that goes to P+I for the next few years. I figure lower taxes and no HOA dues will be offset by an older home being less energy efficient and requiring more maintenance.

The costs of waiting and doing this when I'm ready to retire aren't huge, but it does make a difference. Our equity will be higher. I am pretty comfortable with our market right now, and don't know what the future would hold (my house would sell in a week, and areas we are looking at are a little tamer right now but I expect them to be hot down the road).

We have a young son and he has a lot of friends here, and good schools, so that complicates. But that is going to be a concern whenever we do this. ER with kids is complicated. We also just got a fancy gym and Whole Foods/Paycheck around the corner and have a nice greenway opening next year. It would be nice to enjoy those things a bit before we downsize. And we very well might need/want to move again as we get older. I'm only 49 and we aren't sure we would stay in this area forever, much less a home. I've been trying to convince DW to also ER and us get adventurous and try somewhere like Mexico for awhile.

Not easy decisions, for sure