By Deborah Acosta
May 25, 2021
Luis Gazitua put his Florida home up for sale in April when he saw the influx of clients coming from out of state to buy homes at prices he had never dreamed of.
Within days of listing it, his three-bed, three-bath, 2,800-square-foot home on an acre lot received three all-cash offers of $1.7 million each. That is $700,000 more than he paid in 2018.
But before the bidding war began, the Miami insurance broker and father of 9-year-old twins, pulled his home off the market.
“We fell into the hype; it became enticing. You’re going to sell your house and make more money than you ever have, but then where are you gonna go?” says Mr. Gazitua, who couldn’t find anything he liked under $3 million.
After a long year spent cramped at home, many homeowners are eager to move into larger spaces. These sellers stand to benefit from the hot housing market, but trading up could be tricky.
Here’s how to look at the financials and logistics of sizing up this seller’s market.
Are you ready for higher costs of everything?
Some buyers overlook the fact that larger homes in nicer neighborhoods tend to come with a steep property tax on top of other expanded expenses.
“The first question I ask clients is: Can you afford the property taxes in that new place?” says Amir Noor, the director of financial planning at United Financial Group, based in Long Island, N.Y.
With a larger home, the costs of upkeep will rise substantially, too. Don’t forget to consider the upkeep of any new amenities as well, such as a pool or outdoor area. Any fixes you may need to make on a larger home will cost more as well.
Timing the sale of your home, and timing the buy
It is risky to sell your home before you know where you are going to land.
Some real-estate agents recommend that you include in your contract that the sale of your home is contingent on finding a new home to buy, and you can also stipulate that you would like to close escrows simultaneously.
“It used to be that people were wary about that,” says Jose Luis Mejia, a Realtor in the Los Angeles area. “But since it’s such a strong and competitive market, the more a buyer helps the seller make their move, the more likely they are to have their offer accepted.”
But while you may have this kind of flexibility as a seller, you suddenly have to deal with a competitive market as a buyer, and your seller may not want to wait for you when dozens of offers pour in at once.
“In this market, with a contingency you’re not going to get that new house, someone else is going to sweep it out from under you,” says Mr. Noor.
Ryan Firth, a certified public accountant and personal financial specialist based in Houston, recommends doing a sale-leaseback from the people who are buying your current home, so you can have the cash on hand to purchase the new property without any contingencies, while still having a place to lay your head.
Taxes, taxes, taxes
If you have lived in your home for more than two years, and you are married filing jointly, you can avoid paying taxes on as much as $500,000 of the profits made on the sale of your home. If you are single, you can avoid paying taxes on $250,000 worth of gains.
But if you have been in your home for less than two years, or it isn’t your primary home, you will likely have to pay capital-gains taxes on all of the profits of the sale.
You will have to fill out a 1099-S form to report the gains, which you can request to be included as part of your closing documents. For more information on the tax implications of buying and selling a home, take a look at Publication 530 from the IRS.
Consider looking in other housing markets
A housing market other than the one you are in may have options for you to consider.
Geoffrey Ley, who is relocating for a new job, just sold his 4,000-square-foot home in Dallas to buy a slightly less expensive one in Kansas City, sight unseen, with 7,500 square feet and a pool.
“The market in Kansas City is just as tight as it is in Dallas,” he said. “We found a house that was way bigger than what we wanted, but at least it had everything we wanted in it.”
However, if you leave an area that’s booming, keep in mind that you may not be able to afford to come back. Mr. Gazitua saw his neighbor caught in this situation when he sold his home for a million dollars before the pandemic to move to Chicago, but then changed his mind during quarantine. He tried to buy back in his old neighborhood, but found that in nine months, homes had doubled in price.
“I call it high-stakes real estate,” said Mr. Gazitua. “Any decision you make now will have life-altering consequences, either positive or negative.”
What should your new budget be?
As an upsizer, you have an advantage over first-time home buyers in that the sale of your home will usually leave you with a lot more liquidity, provided that you have accrued some equity. After your down payment, budget no more than 40% of your monthly gross income on your mortgage payment, including maintenance, taxes and insurance.
If you will have a decent amount of cash left over once you sell, consider where it will go.
While it might seem reasonable to lower your monthly costs by making a large down payment, Mr. Noor advises against putting down any more than 25%
“A lot of people think that by making the mortgage payments smaller, they’ll save more,” he says. Instead, he recommends keeping your down payment at or under 20% and investing the rest of your money.
“If you reduce your monthly mortgage payment by $500, you’ll likely spend it on going out to restaurants, getting another car, whatever. If you have $50,000, you almost feel like you have to do something responsible with it because it’s so much money,” he says.
Typically, the more money you put down on your mortgage, the better the interest rate you’ll get from the bank. However, with interest rates so low already, the incentive isn’t as strong right now.
Mr. Noor also warns that once you put money down toward your mortgage, you can’t take it back out as easily if you need it to improve the home and make repairs, or for some other emergency.
“Your house is only an asset insofar as it gives you housing security,” he said.
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