Monday, June 24, 2019

When Downsizing Makes No Sense

The point of downsizing your home is to save money, not to break-even or spend even more.

I made the mistake of clicking on "Sponsored Content" on a news site and went down the rabbit-hole to, which features articles about the "Property Twins" and their sage advice on how to hand over a substantial portion of your wealth to a Real Estate Agent.   I am not kidding about this last part - why do you think sponsors these articles?   The whole idea of getting people to obsess about their homes, home values, and to look at the home as some sort of personal goldmine, benefits real estate agents and Realtors(tm).

The article had some good advice on how to stage a home for resale - in terms of using muted colors that are not "dated".   As I noted before, this whole "grey" thing is trendy today, but I suspect in five years or less, it will be "Oh, so 2010's!" and people will turn up their noses at it.  It is hard to stay ahead of this curve.  White walls were popular for a bit, then yellow (the color featured in the article) then sort of an oatmeal color (which we are cursed with) and today grey (which we succumbed to).  Painting a room isn't hard - the hardest part is the prep work, moving furniture, covering up things, cleaning surfaces, cutting in, etc.

Dark red, particularly as a texture paint can be very attractive.  The same property gurus who talk about "angry red walls" no doubt were all ga-ga over "Chinese Red" (as it was called back then) in the late 1990's.   There are no bad colors, really, but styles change.  No doubt people will be painting their houses purple next year, and everyone will be saying, "You still have grey?"   And then purple will seem dated, and flat-black will become a thing.  You know how this game is played - and no doubt Benjamin Moore has their ugly hand in this.

But the practical advice about painting was about all they had.   They suggested an expensive ($85,000) kitchen and bath remodel, which they claimed would bring the sales price up from $600,000 to $800,000 and thus "pay back" the "investment".   But of course, these numbers come from the scientific bureau of pull-it-out-your-ass, not from any real science.  It is all-too-easy to say, in retrospect, that you got "$200,000 more" for the house than you would have, when the house wasn't sold for the lower amount as a real test data point.   The touted "profit" in remodeling was, for the most part, conjecture.

Again, and as I noted in my previous posting, in a rising housing market, it isn't rocket science to buy a house and flip it for more money without doing a damn thing to it.  So these shows that show people buying a house and doing a lot of cosmetic repairs and then making a lot of money in the deal are really kind of specious (and in many cases, the low-ball numbers they show for the remodeling costs seem suspicious to me).   Sure they made a "profit" on the house - but they likely would have made a similar profit simply by reselling it as-is, in markets like Toronto or Vancouver or San Francisco, where real estate prices have gone berserk.

A house in clean condition will sell faster than one that has issues and needs work.  But in spastic markets like the bay area or Vancouver, even a "tear-down" sells overnight for seven figures.  Many people make the mistake (in my opinion) of remodeling their home in order to sell it.  They live in a festering shithole for a decade or more, and then only when they decide to sell, do they improve the house and make it more livable.  They put in new appliances and paint the walls, not for their own enjoyment, but for the next owners.   And the next owners tear it all out and start over anyway.

Just a thought, but if you are going to remodel a house, perhaps you should remodel it during your tenure so you get some enjoyment out of your money.   This is why we are installing the new flooring and painting now, as opposed to later - why not enjoy these things that you paid for, instead of seeing - at the very last moment you live there - how nice your house could have been?  But I digress.

The whole point of these "flipping" and remodeling shows is to sell you on the idea that your house is made of gold, and that you can make money by spending money on your house.  The reality is, of course, that when you do a renovation, even a kitchen or bath, you might get back 50 cents on the dollar, in most cases.  The idea that you can profit from remodeling is basically a lie - and you know how I feel about liars.

A secondary message they are sending with these TeeVee shows is that owning a house is some big complicated deal, and you have to consult with "experts" to understand how to buy and sell a house.  Yet, most of their good advice is just good common sense - stage your house, get rid of half your stuff, get rid of junk and personal items, paint it neutral colors, fix broken things, etc.   The other half of their advice - the bad half - is just shilling for sponsors who sell high-end fixtures and whatnot.  But people like to watch that on TeeVee - the demolition, the e-z installation of new stuff (which is never as easy as the show it) and then finally the ooohs and aaaahs over the "reveal" - it is just click-bait television.

But that's not what really tripped my trigger about this article.  The poor lady who owned this house in Calgary (which is a city I would think hard about moving away from, quite frankly) wanted to downsize after her partner died.  The "Property Twins" helpfully suggested she move to a $600,000 condo which had a staggering $899 a month condo fee, which included two parking spaces and gym fees.   The "twins" helpfully suggested she rent out a parking space for $300 a month to offset the condo fee.

I am not sure this is "downsizing" so much as it is lateral-sizing.  The overall cost of the condo, when you factor in fees, is about the same as the house.  Oh, and yea, she had a mortgage to boot.  She even got into a bidding war over the condo and paid over asking price for it, using the logic that a few thousand dollars more in price meant only a few dollars extra a month in mortgage payments.  Which makes sense, if you use the monthly-payment mentality.  But in terms of net worth, it comes back to bite you on the ass, as if property values decline, you end up in a bit of a pickle.

And of course, property values in Calgary will never go down.  Everyone wants to move there for the balmy weather and the "Stampede" of course.  And I am being sarcastic.  The last time we were there, we got stuck in unfinished townhouse hell, trying to find a campground that used to be on the outskirts of town that had some sort of organic restaurant.  The restaurant was closed, the campground was run down, and the acres and acres of town homes surrounding the place were all empty - bought by speculators who never lived in them.

But fortunately, housing prices in Calgary will never go downNever, ever, ever.  Because it is such an attractive place to live.  Oh, wait.  Whoops.   Quite frankly, I thought Edmonton was nicer.

And the problem for this lady is that when the market contracts, condos decline more rapidly than townhouses, which in turn decline more than free-standing homes.   If you factor in all the transaction fees (Real estate agent fee, document fees, inspections, appraisals, loan origination fees, deed stamps, etc.) she spent at least 10% or more in the transaction - 6% in real estate agent fees alone, for the sale of her house.   So while they tout this as a "win" with the seller taking away over a hundred grand (after remodeling fees are deducted) if you deduct the transaction costs, which could have been as high as $80,000, well, there isn't much take-away from this "downsizing" exercise.   In fact, she may walk away with very little, and have the same or higher monthly cost to boot.

The prices quoted in the article seem somewhat obscene, until you realize they are in Canadian Rubles, and not good-old-USA bucks, which continue to the strongest currency in the world, despite our President's best efforts.  But even then, a median home price of over four-hundred-grand in the middle-of-nowhere Canada seems kind of ridiculous.

If you are going to downsize, that is a good idea - but just selling your house and buying just anything isn't really a smart move.  You have to figure out a move that results in you cashing out a significant sum (to make the transaction costs worthwhile) or, if you are in debt, get out from an onerous mortgage payment.    And hopefully, the monthly carrying costs will be less, not more than your previous house.

For example, where we live, houses sell for a little under a half-million dollars.  You can downsize to a half a duplex for maybe $300,000.   You could downsize further to a condo for under $200,000.   Or you could move off the island and live in a nicer and newer house with a pool, for about half what it costs to live here  And yes, some folks are doing just that.   You can buy a house with a deepwater dock for less than it costs to live on the island.

The point is, there is more to downsizing than having one less bedroom to vacuum.   The whole point should be not only to simplify your life as you get older (with less maintenance chores and expenses) but also to cash-out of this equity in a manner than doesn't waste most of it in interest payments (as a reverse mortgage would).  Finding a place that is smaller and cheaper and less maintenance can be done, but it may require that you move.

Just buying a different house that costs about as much as the one you left behind makes no sense to me.  But to the Real Estate agent collecting 6% on each end of the transaction, I am sure it sounds like a swell idea!

P.S. - After many decades, Real Estate Goddess Edith Lank is retiring.  We will all miss her sage advice and dry wit.   Her advice was common-sense - something that is lacking in this era of Real Estate Reality TeeVee nonsense!

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