People assume that seniors are largely immune to the downward spiral in home prices because so many own their houses outright. But when you factor in beaten-down investment portfolios, many older Americans are stuck. Those who want to sell their homes to buy into retirement communities or move closer to loved ones have seen their potential windfalls shrink. Others who planned to stay in their homes indefinitely now fear outliving their savings and/or being overwhelmed by medical costs. Smart solutions to the most common situations seniors face today…
You want to sell your home and purchase one that is closer to loved ones. Buying a home is much easier than selling one in this housing environment. However, it’s a real problem if you need the proceeds of your sale to purchase the new home, and your current home’s value has dropped by as much as 40%.
Strategy: Stop waiting for a big recovery. You may get less money for your house than you expected, but you can also buy for much less, especially if you’re moving from the Northeast or another very expensive area to a hard-hit Sunbelt state, such as Arizona or Florida. Focus on how the sale works for your life, not on getting what your house was worth on paper in 2005.
Example: I had clients who owned a three-bedroom house in California that would have sold at the height of the market for $435,000. Comparable homes are now going for just $340,000. The couple wanted to price their home high to start, figuring that they could always reduce their price.
But that was a foolish strategy. Reason: Buyers shop by price bracket. They may not view your home at all because it would be out of their buying range.
The couple realized that by taking less, they could come out ahead. They sold for $335,000 and bought a duplex in foreclosure on a golf course for just $230,000. It wasn’t their dream home — but it was close to their children and they got it at such a low price that they made it their dream, gutting the place, doing more than $100,000 of renovations and creating exactly what they wanted.
Helpful: You can find data on the sales price of comparable (“comp”) homes in your area at Zillow.com and Trulia (www.trulia.com). Local real estate agents can provide even more up-to-date information.
You want to downsize and use the proceeds for living expenses. As the stock market has slid, homes have become a more critical source of wealth for retirees. You need to get as much for your house as possible because you need to make up for your portfolio losses.
Strategy: Rent out your current house, and take out a mortgage for your new house while you wait for prices to recover. As long as you have decent credit and enough cash to tie up a down payment in your new house, this can work beautifully.
Example: My client, a college professor in his 60s, recently had lost his wife. He wanted to downsize from a 2,100-square-foot townhouse in Los Angeles to a small house that he fell in love with. The comps for the townhouse were $479,000, but within weeks, they had dropped to $429,000. The professor didn’t want to sell his townhouse for such a low price, but he didn’t want to delay buying his new house. So he rented out the townhouse for $2,200 a month. His mortgage on the new home is low enough that his rental income covers the payments, property taxes and insurance on both homes.
Drawbacks to renting out your home: You have all the hassles of being a landlord, including dealing with renters and maintaining the property. Long term, houses appreciate by 2.5% to 3% a year, so if your home dropped 15% in value from the market high, you would need to rent your first home for at least five years to get back up to the price you wanted.
You would like to remain in your current home, but you need money. Many seniors prefer to “age in place,” but can’t afford expensive modifications to accommodate physical limitations and they worry about outliving their savings and being forced to move.
Strategy: Consider a reverse mortgage. It enables home owners age 62 or older who own their homes outright or have a small mortgage balance to convert home equity into cash without selling the house.
How it works: A lender lends you money, up to a maximum of $417,000, in a lump sum or regular installments. Most reverse mortgages are sold through the US Department of Housing and Urban Development and are guaranteed by the federal government. The money you get is not taxable and does not affect your Social Security or Medicare benefits. You always retain the title to your home, and the payments keep coming until you die or move out.
Drawbacks: High closing costs. Loan-origination fees are double what they are for conventional mortgages. Also, your heirs receive little or no inheritance because they typically have to sell the house after your death to pay back the loan. However, if the house sells for an amount lower than the value of the loan, neither you nor your heirs are liable for the balance.
Important development: As of January 1, 2009, seniors can use a reverse mortgage to purchase a new home. You can sell your current residence and buy a new and cheaper one financed with a reverse mortgage. Not only do you get a cash profit to live on from the sale of the old house, but you have no monthly payments on the new one for the rest of your life.
You want your children to inherit your house. But federal estate taxes are currently 45%. While your heirs are currently taxed only on an estate valued at more than $3.5 million, Congress could allow the $1 million estate exemption to be effective after 2009 or 2010.
Strategy: Consider a qualified personal residence trust (QPRT).
How it works: You have your home professionally appraised and then transfer the title to a trust drawn up by your estate attorney. The trust allows you to remain in the home for an extended period of time, typically 10 or 20 years. At the end of the stipulated term, the trust terminates and the home passes legally to your beneficiaries, who may allow you to continue to stay in the home. When you die, your beneficiaries owe estate taxes only on the value of the house when it entered the trust. For example, with home values so low now, a house that was worth $500,000 may be worth only $350,000. Twenty years from now when you die, it could be worth more than $1 million, but it will still be valued at $350,000 for the purposes of estate taxes.
Drawbacks: QPRTs are tricky. For instance, you’re allowed to remain in the home following the termination of the trust, but only if you agree to pay your heirs fair-market rent. If you should die before the trust is terminated, the house would be included in your taxable estate, and regular estate taxes would apply.
