House conundrum

[Katsmeow]

I do agree that there is always uncertainty. Well, sometimes there is more uncertainty than other times and sometimes you can gauge the possible results to determine which one is more likely.

And weighing the risks of an outcome depends upon the benefits and disadvantages of each course of action.

For me, I find that discussing and talking about the options and risks and benefits is helpful to me in making a decision. That is the real value of a thread such as this. I totally get it that many people would not opt to retire with our current house unsold. I would prefer that it be sold as expeditiously as possible. But, weighing all the options and risks and rewards of each I am willing to take the risk of retiring even if this house has not sold yet.

One of the things that this discussion has helped me with is discussing with DH these issues and the factors. I spent a good part of today working with spreadsheets modeling different possibilities. What happens if we buy a new house now and still own this one? I tried to think of as many possibilities as I could even thinking about the fact that if we weren't living in this house our insurance would increase markedly. I modeled the tax implications of each choice. I looked at several options.

It turns out that what works best economically depends on how quickly this house sells. If it sells quickly economically we do better with a mortgage on a new house even if this one hasn't sold. If it takes longer than a year for this one to sell we do better selling this house first then taking the tax hit to pay cash for a new house.

It is, of course, uncertain how long it takes to sell this house and clearly buying the new house while still owning this one has risks that have to be considered.

I have not yet made a decision. I just say that DH was the one who wanted to buy the new house before selling this one. I was inclined to wait and if it cost us an extra $25,000 in taxes so be it.

At that point, there are 2 pieces of the puzzle which weigh on the decision. First, there is one particular property for sale that we have not seen in person (well we drove by it but haven't been inside). The location is ideal. I have followed this market for 5 years and this property has the best location for our needs that I have seen. Also, its price is very favorable, well under what we were prepared to spend. We may look at this house though and find that for other reasons it would not work. If it would work I really have to look at it seriously. And it might cause me to take more risk. However, we won't take that risk for any property that is not in an excellent location for us and is not at a price that we find favorable.

The other thing that is clear to us is that regardless of whether we buy that property or not, we will prioritize obtaining a quick sale when we list this house for sale and will list it as soon as we can get it ready for sale. While we won't sell it for a ridiculously low price we will price it on the low end of the appropriate range.

 

[traineeinvestor]

Personally, I would be willing to take the risk of buying now and having two mortgages if (and only if) I was also willing to defer retirement until the existing house had sold as a means of mitigating the risk of having to service two mortgages. I would prefer to delay retirement (however frustrating that may be) to make sure that I get the retirement I want rather than risking the security of my retirement and/or being forced to look for a job after I have retired.

You mention that you have reasons which determine the timing of your retirement - if defering retirement until you have sold the existing home is not an option, then I would wait until the current home is sold before buying. Incurring a hefty tax bill is a pretty steep price to pay for what sounds a bit like instant gratification (apologies if that comes accross a bit strong). Likewise, servicing two mortgages and relying on selling a house for a given amount of money within a given time frame in order to preserve the security of your retirement lifestyle is (IMHO) more risk than the typical retiree should take (especially since it appears that there is already a larger than usual element of uncertainty over your expenses once you stop working).

 

[nwsteve]

When it comes to understanding risks and tradeoffs, one approach I found very helpful comes from a book written by a famous neurologist/surgeon who performed a number of ground-breaking surgeries. The approach is remarkerly simple but it is effective to help capture a broader perspective and better understanding of risk and reward.
To use his approach , you creat a 2 x 2 matrix. On one axis you use two columns: Best Results and Worst Results. On the other axis, you label the rows as Do and Don't. It really does not matter which axis you put the two categories. In each cell, you define your sense of what you expect and know. For example in the cell combining Best and Do, you will write the very best outcomes of proceeding with an activity. The key is to understand for your personal situation and needs what really are the variables in the outcomes and what drives those variables. Whenever possible, identify those things you absolutely control and recognize those you are making assumptions (e.g. date of sale, values, etc). Be sure you appreciate the relative accuracy of your predictions/assumption. For example, a lot of people who are in foreclosure today NEVER thought they would not be able to make their mortgage payments.
The exercise is not intendent to give you a black and white answer but to help you clearly sort out which events may be key to your decision and desired outcomes.
IMHO, I see a lot of assumptions implicit in your "statement of problem", the above exercise should help you make these more visible .
Good Luck
Nwsteve

 

[Katsmeow]

You mention that you have reasons which determine the timing of your retirement - if defering retirement until you have sold the existing home is not an option, then I would wait until the current home is sold before buying. Incurring a hefty tax bill is a pretty steep price to pay for what sounds a bit like instant gratification (apologies if that comes accross a bit strong).

It doesn't come across strong but part of the problem is that the hefty tax bill doesn't result from the most instant gratification situation. That is, if we buy the replacement house now, we don't get the high tax bill.

If we buy the house later then we do get the high tax bill.

So the most instant gratification would result in the lower tax bill.

 

[Katsmeow]

To use his approach , you creat a 2 x 2 matrix.
Nwsteve

This is interesting. I'm going to try this. Thanks.

 

[clifp]

However, if we are going to get a mortgage on a replacement house while still working we effectively would need to apply to do that by, say, early February since we need my income to qualify for a mortgage.

So we won't have the results of listing this house when we apply for a mortgage (all of this presupposes we find a suitable downsize house within the next 30 days. We have a possibility of one now. But if that one doesn't work out it is possible we won't find one in the time window we have and so taking a mortgage now would be moot.

It seems to me that mortgage decision is already pretty much moot given your time tables for retirement.

Maybe its different in Texas. But generally at closing time, you have to certify UNDER PENALTY OF PERJURY (it was in bold and all CAPs on my Pen Fed loan in 2008), that there has been no materially adverse changes to your financial situation between when you made the loan application and closing. It seems that unless close on the new house by March, the fact that your planning on retiring the next few weeks is a pretty big deal, which directly effects the riskness of the loan. If I was your loan officer I'd say it bordered on fraud, (luckily I am not.)

Now with the caveat, that I am not lawyer, and know jack about Texas law. There is decent chance the bank would find out your and/or husband retirement because a number of banks have gotten smart and monitored the financial situation of lendees for a few months after the loans are approved to prevent mortgage fraud. In which case they maybe able to demand that you pay back the loan immediately which means you would be out all the fees, points etc and of course come up with the money somehow.

Now as I say I am speculating here as what may happen and there is decent chance I am dead wrong. However, I think consulting a real estate attorney or banker (obviously not one you are going to get a mortgage from) to find out the legal situation in Texas would be advisable before you get mortgage in this situation.

 

[Katsmeow]

Clifp

You are making some very unwarranted assumptions.

I am a Texas attorney. I assure you that I am not going to make any misprepresentations nor will I fail to make any required disclosures if we elected to seek a mortgage. We would close on any loan while still working and I would not be seeking to hide or misrepresent anything. I am not your attorney so I'm not going to get into legal opinions as to the law. However, rest assured, I have absolutely no intention of violating the law in any respect whatsoever.

FWIW, looking at the economics of it, I think we do not get sufficient benefit from taking a mortgage now to make that worthwhile from an economic standpoint. There are increased taxes from withdrawing a lump sum at a high marginal tax rate. However, looking at cash on hand that is not in retirement funds and expected cash not in retirement accounts in the next several months I realize that for the price of house we will likely buy we could pay for most of it without withdrawing anything from retirement funds.

In short, if we decided to buy our retirement home before completing the sale of our current house, we could pay for most of it from non-retirement funds. Some part would be from retirement funds but the additional taxes as a result of the higher marginal rate this year would probably not exceed $5,000.

Average days on market for similar house sales in our area is about 3.5 months with several having much shorter days on market and a minority with a much longer time.

Since I first posted this thread I have learned that a house that is now available with a perfect location does indeed meet several of our requirements that I was unsure about. The positive of that house is that it is at the low end of the expected price range and we could pay cash for it by using only approximately $50,000 of retirement funds.

Therefore one option would be to list our current house (hope to get that done in February). We could theoretically contract to buy the other house and try for as late a closing as possible. We could close on that house and not move into it until we sell our current house. There would be some maintenance costs for that house (insurance for a vacant house for example) but there would not be ongoing living costs for that house.

Not sure I want to do this but I think it might limit the risk of two houses much more than taking a mortgage for the new house.

 

[W2R]

Glad to hear that your situation is improving (or at least it seems more encouraging to me), Katsmeow!

One final thought - - have you considered a "bridge loan"? I don't know if these are even made any more, but it used to be that one could get a loan to bridge the gap between paying for the new house, and getting money from the sale of the old house. I never had one, so I don't know if that is the right idea but it just occurred to me, so I thought I'd mention it. Your equity, plus your taxable savings surely ought to be enough, as you mention.

OK, another thought - - maybe you could make your offer contingent on selling your present home.

You have probably already considered both of these (if so, sorry!). Anyway, good luck and I hope this move works out just as you had hoped, for you and your family.

 

[clifp]

Sorry about jumping to some unwarranted assumption, I keyed off that you needed your income to qualify and yet you were planning on retiring in April. As I said I know nothing about Texas law and obviously a lot less than you

In addition to the bridge loan the W2R suggested (which do seem to be a relative rare thing now days).

I would think borrowing from your husbands (or possibly your) 401K might be an ideal solution to the short term liquidity problem. Money withdrawn is not taxed and while you generally have to pay back the loan with in a few months of leaving the company. I would think that would give you until Aug. to get your old house sold.

Good to hear you found a suitable house, good luck.

 

[Katsmeow]

I would think borrowing from your husbands (or possibly your) 401K might be an ideal solution to the short term liquidity problem. Money withdrawn is not taxed and while you generally have to pay back the loan with in a few months of leaving the company. I would think that would give you until Aug. to get your old house sold.

Yes, this is a viable option. My 401k plan doesn't allow loans. However, DH's plan does and, even better, does not require payment when he leaves the company. He has the full 5 years to pay it. What that would effectively do is allow him to take a $50k loan and pay it back over 5 years which would have the effect of mitigating the taxes. Of course, we would have the option to pay sooner if we chose to do so. I'm not a big fan of 401k loans but this seems appropriate given that we would otherwise just withdraw the money outright.

 

[jerryo]

Hmmmmmmm.

Just dealt with a similar situation. I'm 6 - 18 months from retirement and DW may work a few more years. Decided to relocate to a smaller (but more expensive) house downtown (DC) from a larger house (with a very small mortgage) in the close in suburbs. With home prices starting to head up in DC (though you never know) and mortgage rates at historic lows (4 & 3/4 percent for a jumbo conforming) & any mortgage difficult to get post-retirement), we decided to take the plunge (and move in this weekend). Ran the #s & (at worst) can continue to afford both houses while working (or even with DW working). If necessary, we could also go ahead & rent the old house with a substantial positive cash flow. Harder decision will be whether to pay off all, some, or none of the new mortgage when we sell our old house!

There are risks either way, but if you're in a relatively stable housing market it may be just as risky to wiat. If you can afford it and find the right house, at the right price, with the right mortgage; I'd buy now (and did)!