By Diane Saatchi
When a client comes to me to discuss downsizing in the same area, I always ask the same questions: What are you willing to give up and what do you want to gain?
Because the truth is, if you’re going to scale down to a smaller home and property, you’re going to have to give something up. In return for that decision, the net result should be financially positive.
If you find yourself wanting to scale down, here is what you can expect.
It’s going to be hard.
I don’t mean just logistically -- I mean emotionally and psychologically, too. Your baseline is the comfort of your current living situation, and that can be hard to leave. I find that many consider the potential gain but not the loss of space or the hard work and cost involved in the trade.
Like I said above: You’re going to have to give something up, and who likes to do that?
Your expectations and the reality probably won’t line up.
I tell clients who are scaling down that, because they’re in the unique position of being both a buyer and a seller in the same market, they could face two disappointments: They may sell their house for less than they hope, and may have to spend more than they’d like for what they’re going to buy.
Many people come to me wanting to buy very low and sell very high. Spoiler alert. If you want to stay in the same area and make the trade at the same time, unless you have ready access to a time machine, its not likely to happen.
Your physical house isn’t the only thing that will shrink.
You’ll need to reduce your lifestyle as well. Where will you put four cars when you have a two-car garage? How will you host a dozen weekend guests when you have four bedrooms instead of nine? Where will you put eight closets’ worth of clothes and linens when you have half the closet space?
People’s lives expand to fill their homes, and when your home shrinks, other aspects of your life will need to, as well.
You shouldn’t expect to eliminate expenses completely.
If you still have a home, you still have the costs of a home. I hear people say, “Well, I won’t have to pay for the landscaping or the pool,” in the smaller house, but if you have a yard and a pool, even if they’re half the size of the ones you have currently, you do have those costs. You’re still going to have to pay taxes and insurance, as well as the cost of staff, painting, entertaining, and furnishing. Those costs may be less, but they aren’t zero.
You’ll want to look at the property, not just the house.
Anyone who’s seen a small, vacant lot listed for $1,000,000 knows that land and location affect the cost of a home. In scaling down, you may be moving to a smaller lot and maybe in a less expensive location. Going from a 3.5-acre property to a .5-acre property, your neighbors will be much closer. That’s not necessarily a bad thing, but you’ll want to get a feel for it before committing to the space.
You’ll have to pay capital gains taxes on the house you’re selling and closing costs on both the sale and purchase.
When it comes to taxes, those who scale down take a bigger hit than those who trade up. As a seller, you’ll be expected to pay capital gains tax. If you’re selling a $10 million house, for example, chances are you paid way many millions less for it, minus costs of improvements you’ll owe gains tax on the difference. In New York State, the total capital gains tax is in excess of 30%. To estimate closing costs, figure 5% of the total of the two transactions. If you are selling for $6 million and buying for $2 million, budget about $400,000 for the two closings.
You might prefer to rent -- or to stay where you are.
Once you take the above factors into consideration, you might instead prefer to sell your current home and rent another. Or, you might realize that your scaled-down home isn’t as economical as anticipated, and that it’s more cost-effective to make a few needed changes so you can stay in your current house.
© 2016 Diane Saatchi