Need advice on whether to sell house or stay put

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Topic Author
cdogg44
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Joined: Sat May 25, 2013 11:51 am

Need advice on whether to sell house or stay put

Post by cdogg44 »

We are looking for advice or personal experience on selling our house and moving. More specifically, I would love to hear from people who build their own house, live in it for 2-5 years, sell, capture the gains (hopefully), and build again.

I am a residential homebuilder and currently live in a house I built 7 years ago. The market in my area has rebounded enough that I could sell today and capture my equity. With rates still low, we are thinking of selling and building again.

We are trying to focus strictly on the numbers and not put any emotion into this decision while we weigh our options. We like our neighbors, location, and current home, but would just be moving a few miles away to a different subdivision I own lots in, so it's not like we are changing school districts or anything.

Current home:
7 yrs old
Refi'd 2 yrs ago, ~13yrs left @2.75% We knew refinancing was a gamble but jumped at the opportunity to drop from a 30yr to 15yr note at such a low rate. The payback for the closing costs was ~2.5yrs, so by the time we built and sold we would break even.
Approximately 53% loan to value ratio. In 2013 we were NOT able to deduct our mortgage interest due to it being so small and this will continue. We are not high earners so while this is unfortunate, it is not that big of a deal.

Pros for selling/building:
By my math at current rates, I can cash out our equity and build a slightly larger but brand new home and finance ~8-15% more than what we owe currently and lower my loan to value ratio to ~47% (I'd have more equity). All this assumes a 15yr note at current rates. Basically I would be able to build a slightly larger home, slightly nicer home and finance a little more and lower our LTV and it be worth ~20% more than our current home (and be brand new).

Current home is 7 yrs old. I have not had to spend any money on repairs or maintenance (I build good houses!) but at 7yrs old it's only a matter of time before the AC compressor is out, the water heater rusts out, or the oven dies. Those are obviously not reasons to build a new home, but they do factor into the cost of living in an older home.

In 5-7 years I have a home worth more and can either stay or sell in hopes of cashing out more equity.

Everyone likes a new home with new features and updated style. I know, I know....

Cons:
Our current home is fine and fits our current needs. We like our location and neighbors.

With 13yrs left @ 2.75% I'd be leaving a deal I'll probably never see again.

We feel both of our jobs are secure and other than the mortgage we have no other debt other than a little bit on a car loan (2.4%) and I feel we are both adequately saving for retirement and our daughter's college but we would be taking on a little more debt (although with a lower LTV ratio).


Our current house is fine but we will be looking to add some footage as we get older and our daughter grows up in the next several years. As a builder, I have land available and can build the house for cost and also avoid having to use a construction loan. In addition to all of this, the idea of rising interest rates makes me wonder if building this summer and locking in ~3.25-3.5% on a 15yr note will look like a great idea 10yrs down the road when rates could be higher. Market timing I know, but with all the other variables involved I'd appreciate any honest input.

Thank you
Quickfoot
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Joined: Fri Jan 11, 2013 12:03 pm

Re: Need advice on whether to sell house or stay put

Post by Quickfoot »

Your LTV doesn't really matter once you aren't paying PMI so a lower LTV is not a reason to move, remember house values can suddenly decrease just like equities can (2008-2009 reminded people of that). Would you invest 100% of the gains into your new house or invest some? How long would you stay at the new house?

People do worse things than move every 7-10 years, that's a long enough time to allow the house to increase in value but as you point out short enough it is still desirable and is before anything major breaks. Since you are the builder and can build at cost you have some additional incentives most people do not.

Don't worry too much about the interest rate, your monthly cash flow and the payment is what is important. How will the new house and loan affect your cash flow and ability to save for retirement / college? Is it 10% per month payment increase, 20%?

If you can afford to move without putting yourself in a bad situation and you want to move then move.
WhyNotUs
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Re: Need advice on whether to sell house or stay put

Post by WhyNotUs »

For tales of humility, talk to some of your homebuilding peers who lost everything from leveraging during the last go around. Many builders have been able to leverage the situation that you are describing and others have lost it all.

Another option based on your description that you own a lot in another subdivision, are a homebuilder, and are seeking to leverage and use cap gains exemption:

1.) Stay in current house
2.) Lay out the scheme below to bank and get pre-approved for construction loan, preferably convertible
3.) Create a single-member LLC and transfer lot ownership to it
4.) Get construction loan and build, design and build it for resale rather than your family
5.) live in it for two years while renting your existing home
6.) Sell new home and move back to your existing home
I own the next hot stock- VTSAX
Topic Author
cdogg44
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Joined: Sat May 25, 2013 11:51 am

Re: Need advice on whether to sell house or stay put

Post by cdogg44 »

Quickfoot wrote:Your LTV doesn't really matter once you aren't paying PMI so a lower LTV is not a reason to move, remember house values can suddenly decrease just like equities can (2008-2009 reminded people of that). Would you invest 100% of the gains into your new house or invest some? How long would you stay at the new house?

People do worse things than move every 7-10 years, that's a long enough time to allow the house to increase in value but as you point out short enough it is still desirable and is before anything major breaks. Since you are the builder and can build at cost you have some additional incentives most people do not.

Don't worry too much about the interest rate, your monthly cash flow and the payment is what is important. How will the new house and loan affect your cash flow and ability to save for retirement / college? Is it 10% per month payment increase, 20%?

If you can afford to move without putting yourself in a bad situation and you want to move then move.
I plan to invest 100% of the gains into the new mortgage. The only exception would be to use some of the funds (~15%) to pay our car off. It would put me financing a little more on the mortgage with a ~1% higher rate but the interest would be deductible.

By my rough calculations I see my base payment increasing 8%, not including taxes or insurance (I currently do not escrow). I currently pay 1/12 of my monthly payment extra to principal and with that included it skews it to 12%. I feel the 8-12% increase is financially sound for us. If I was to pay the car off I would actually come out ahead due to higher monthly cash flow and the ability to deduct the interest.
Quickfoot
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Re: Need advice on whether to sell house or stay put

Post by Quickfoot »

Sounds like financially it can work, I'd price the new house and make sure it will fall where you think it will. Next answer if you really want to move and if yes decide if you want to pay off the car.

I know several people that live in neighborhoods that would normally be well beyond their means because they sold every 4-5 years and invested the gains in the next house.
Topic Author
cdogg44
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Re: Need advice on whether to sell house or stay put

Post by cdogg44 »

WhyNotUs wrote:For tales of humility, talk to some of your homebuilding peers who lost everything from leveraging during the last go around. Many builders have been able to leverage the situation that you are describing and others have lost it all.

Another option based on your description that you own a lot in another subdivision, are a homebuilder, and are seeking to leverage and use cap gains exemption:

1.) Stay in current house
2.) Lay out the scheme below to bank and get pre-approved for construction loan, preferably convertible
3.) Create a single-member LLC and transfer lot ownership to it
4.) Get construction loan and build, design and build it for resale rather than your family
5.) live in it for two years while renting your existing home
6.) Sell new home and move back to your existing home
I appreciate the advice. I have seen many builders ride the wave to the top and then crash back down to reality, I think they got caught up in easy money and built up and up and up every couple of years without regard for paying any principle or taking into account permanent financing closing costs. When work dried up and they just couldn't go start another spec house to take draws and keep the boat afloat they sank like a rock. My driveway doesn't include a bass boat, shop building, or luxury SUV.

While many out there buy a house, spend 30 years paying for it, and growold in it, with my ability to build at cost and not have the added expense of a construction loan I do not feel that looking to upgrade after 7 years of amassing equity in my current home is irresponsible.

Your LLC idea is actually pretty good, but I only want to move once for several years and do not want the added headache of rental property not designed to be rental property. I have looked long and hard at doing something like that to build some duplexes in my name but cannot seem to make the math work for the risk involved.
Quickfoot
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Re: Need advice on whether to sell house or stay put

Post by Quickfoot »

Almost no one stays in a house 30 years anymore, most people sell every 5-7 years. Either because they need a bigger house or they need to downsize or they are just upgrading to a nicer house.
Twins Fan
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Re: Need advice on whether to sell house or stay put

Post by Twins Fan »

Numbers wise, sure it works. Although, the new mortgage would not be fully deductible. You may be able to deduct part of the interest on the new mortgage. But if you don't get over the standard deduction now, that is likely to be of very little bonus if any. I wouldn't even consider that in the numbers. Not that one should ever take on a higher mortgage payment just to get a deduction anyway, in my opinion.

I know you didn't ask for it or want it, but why is the emotional part not involved here. I read your post and all I could think was,.... A bird in the hand... You like your current home, like your neighbors, and would be barely moving any distance. Why not just stay put? What if you don't get so lucky moving and have bad neighbors?

A 7 year old home is still almost new, if you ask me. You're justifying what you want to do here by saying the place is going to turn into a money pit any day now. That's silly and you know it.

Stay put with the comfortable payment and save more for retirement. That's my vote. Let's look at those number maybe, how's your savings rate that way changed by taking on more mortgage?

IF you need more space as your daughter gets older, then look at moving. Doubtful that more space will be a NEED though.
Topic Author
cdogg44
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Re: Need advice on whether to sell house or stay put

Post by cdogg44 »

Twins Fan wrote:Numbers wise, sure it works. Although, the new mortgage would not be fully deductible. You may be able to deduct part of the interest on the new mortgage. But if you don't get over the standard deduction now, that is likely to be of very little bonus if any. I wouldn't even consider that in the numbers. Not that one should ever take on a higher mortgage payment just to get a deduction anyway, in my opinion.

I know you didn't ask for it or want it, but why is the emotional part not involved here. I read your post and all I could think was,.... A bird in the hand... You like your current home, like your neighbors, and would be barely moving any distance. Why not just stay put? What if you don't get so lucky moving and have bad neighbors?

A 7 year old home is still almost new, if you ask me. You're justifying what you want to do here by saying the place is going to turn into a money pit any day now. That's silly and you know it.

Stay put with the comfortable payment and save more for retirement. That's my vote. Let's look at those number maybe, how's your savings rate that way changed by taking on more mortgage?

IF you need more space as your daughter gets older, then look at moving. Doubtful that more space will be a NEED though.
I appreciate your reply. You make a good point on the interest not being to be able to be deducted for very long or if at all. It is by no means a primary factor in our decision but it does matter.

I wanted to leave the emotion out of it because it could never be described to an online forum and I'm only here looking at the financial aspects. The lot I am moving to has excellent people on both sides. I said we had good neighbors simply because I wanted it to be known that we were not looking to move for reasons like that.

I don't think I described our 7yr old house as a potential money pit. I've done this long enough to know that after 7 years of no major repair items on HVAC, plumbing, or appliances put you on borrowed time before something breaks. All the warranties have expired and the costs would be out of pocket. I don't think that is unreasonable to factor in.

I've done the math and if I used the proceeds from the house to pay off the car and finance that much more (it's only $14k, so not much) on the new mortgage I will actually have more income each month (~$140). Not a lot but that would easily cover the increase in taxes and insurance, so my monthly cash flow should remain the same. I just owe 15 years on a new mortgage vs the 13 I owe now.
epilnk
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Re: Need advice on whether to sell house or stay put

Post by epilnk »

cdogg44 wrote:I've done this long enough to know that after 7 years of no major repair items on HVAC, plumbing, or appliances put you on borrowed time before something breaks.
Then I don't agree that you build good houses. The house I live in is 20 years old, and while we replaced the kitchen appliances when we replaced the ugly tile countertop - the fridge and dishwasher for energy efficiency, the stove for cosmetic reasons - all original equipment is either still working or was when we replaced it. Except the garbage disposal - that died. And we're keeping an eye on the hot water heater. But this is/was all contractor grade stuff.
Quickfoot
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Re: Need advice on whether to sell house or stay put

Post by Quickfoot »

Once you know it's viable and you figure out what you want to do stop analyzing it. You don't have to justify your decisions to other people, there are people that would do it and people that would think you are dumb for wanting to do it on here. What matters is that it doesn't put you in a bad financial situation and what you want to do :).
Then I don't agree that you build good houses. The house I live in is 20 years old, and while we replaced the kitchen appliances when we replaced the ugly tile countertop - the fridge and dishwasher for energy efficiency, the stove for cosmetic reasons - all original equipment is either still working or was when we replaced it.
Wow how incredibly disrespectful, rude, and probably inaccurate. You have no idea what quality of house the OP builds. You have a sample of one, you have no idea how many other houses built by your builder have had problems at 7, 10, 15, 20 years. You could be the norm or you could be the exception. There are many factors that go into when problems start arising in a house, quality is one but so is amount of use, number of occupants, geographic location and numerous other factors.

It is not uncommon to have to start making repairs on things around 10 years into a house, you may not need to replace the furnace but replacing a circuit board, replacing a hot water heater, A/C work, garage door opener, etc is not at all uncommon. While they are not massive expenses they should be accounted for.

Like he said he didn't say his house was going to self destruct, just that at 7 years old it is closer to starting to have potential maintenance expenses than a brand new house which is an accurate statement whether that point is 10 or 25 years into the house. Buying a new house every 7-10 years yields much the same benefit leasing a vehicle gives you, you get a new vehicle, under warranty with no expected mechanical malfunctions.

Also most buyers consider 7-8 years at the upper end of "current" you are going to have a much harder time selling a 15 or 20 year house for the same money unless you've spent considerable money doing updates.
Topic Author
cdogg44
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Re: Need advice on whether to sell house or stay put

Post by cdogg44 »

epilnk wrote:
cdogg44 wrote:I've done this long enough to know that after 7 years of no major repair items on HVAC, plumbing, or appliances put you on borrowed time before something breaks.
Then I don't agree that you build good houses. The house I live in is 20 years old, and while we replaced the kitchen appliances when we replaced the ugly tile countertop - the fridge and dishwasher for energy efficiency, the stove for cosmetic reasons - all original equipment is either still working or was when we replaced it. Except the garbage disposal - that died. And we're keeping an eye on the hot water heater. But this is/was all contractor grade stuff.
I build good houses. I DON'T build dishwashers or AC compressors. They are luck of the draw. Twenty years ago they weren't all assembled in Mexico. Please build a few hundred houses and get back to me.

Let's please keep this discussion on topic. I am not here asking for the Bogleheads blessing in making my family decisions. I am looking for ideas and other input regarding my situation and I appreciate all of the helpful comments I've received so far.
nchunter
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Re: Need advice on whether to sell house or stay put

Post by nchunter »

OK,
Take this for what its worth. I am a licensed GC in NC and have done just as you proposed over the past few years. Lets face it. If you are fine moving this is one of the best tax free sources of money you can make. Especially if you have lots in which to build again. If you market has rebounded move, pay off the car, sink the money into the new one and plan on one more time to have a paid for house. That should be your goal. Think of the numbers this way. You can pocket $500k tax free. Totally tax free, not FICA, no SS, no addiotional Medicare taxes. This is a total give away. do it.
Globalviewer58
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Re: Need advice on whether to sell house or stay put

Post by Globalviewer58 »

Another perspective is that you begin building the new home with the design and upgrades you want for your family. When the house is ready for occupancy you have the option of offering the newly built home for sale or moving in and offering your existing home for sale. As a builder you are liable to the lender for the loan on your inventory.
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Watty
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Re: Need advice on whether to sell house or stay put

Post by Watty »

The age of the current house and any expected repairs is really a non-issue since the cost will either be paid to eventually do the repairs if the house is kept or the selling price will be reduced to reflect these if the house is sold.

All the side issues like being a builder, and the financial details are really pretty minor and the real question is “Should I spend $X to get a larger and nicer house.” This really isn’t any different than a first time home buyer trying to decide to buy a house in his current neighborhood or if they should have him build a house in the new neighborhood.

The transaction costs of buying and selling are pretty high so that may more than offset any tax advantages he has with having built the home himself so that would need to be looked at very carefully to see if there is really any net gain.

It sounds like he can afford it so there really isn’t one right or wrong answer so it is really more about if having the more expensive house is worth the tradeoffs to the original poster.
EnjoyIt
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Re: Need advice on whether to sell house or stay put

Post by EnjoyIt »

To me, its all about the math and your needs/desire.

Cons:
Moving costs money, selling a home costs money, and a home with a higher value costs more money in property tax. Plus you are also increasing your payments for 2 more years.

Pros:
You get to have a bigger home with newer items.

If you are comfortable with spending extra on the cons, while still saving and meeting your goals appropriately for retirement and college, then I see no reason why you can't do what you want.

Only thing I have to add is that your house is only worth what someone is willing to pay. Historically that value can change abruptly. Therefor I would not consider your LTV but instead the actual payments and for how long. Now, correct me if I am wrong, but since you can build at cost, don't you make a profit with every home you build and then sell? That would mean you are making a very big upgrade building a new home. With a bigger home comes more space, and more furniture to fill that space which is another expense worth recognizing.
A time to EVALUATE your jitters: | viewtopic.php?p=1139732#p1139732
Twins Fan
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Re: Need advice on whether to sell house or stay put

Post by Twins Fan »

cdogg44 wrote:I don't think I described our 7yr old house as a potential money pit. I've done this long enough to know that after 7 years of no major repair items on HVAC, plumbing, or appliances put you on borrowed time before something breaks. All the warranties have expired and the costs would be out of pocket. I don't think that is unreasonable to factor in.
Ok, I may have ran with the "money pit" thing. :)

But, there is some justification going on here. Appliances?? They are just that... appliances. You will need new ones at the new house, right? Are people suppose to move each time the appliances need to be replaced?!

I have a home in CO (now a rental) that is 15 years old. In CO the heater or the AC is running pretty much all year. Sometimes both run on the same day with the temp differences. :D ... No HVAC or plumbing repairs yet. Replaced the water heater once. That's about it, and I don't even consider that "major".

It seems you want to make the move, so do it. The numbers work. Why are you asking? What "cold feet" feeling are you having?
sls239
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Re: Need advice on whether to sell house or stay put

Post by sls239 »

Financially, I can't say I have enough information to go on.

You say you can build the house at cost - and that's fine - but what you don't say is if you built a house to sell to someone else, how much money could you make?

Since building is your profession, and building your own home would necessarily take away from the time and resources you could use for building homes for profit, I think you have to consider that as part of what you would be spending to accomplish this.

Also, you mentioned you have a great rate on your mortgage, but are paying extra on it while also carrying a car loan. Have you considered not paying extra on the mortgage and directing that money towards the car loan instead?

ETA - and quite frankly, I can't see how what you are saying is possible - using the equity to take out a larger loan on a more valuable house while lowering the loan to value - without adding extra money into the equation. Whatever you gain from the sale of the house is your equity now and will be the same as the equity you'll have in the new house, and if the new house is more valuable, you'll have a higher LTV unless you add extra money to your down payment. So is that what you are planing on doing? And what else could you be doing with that money? Paying off the car loan?
Topic Author
cdogg44
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Re: Need advice on whether to sell house or stay put

Post by cdogg44 »

sls239 wrote:Financially, I can't say I have enough information to go on.

You say you can build the house at cost - and that's fine - but what you don't say is if you built a house to sell to someone else, how much money could you make? I am confused on why this would matter?

Since building is your profession, and building your own home would necessarily take away from the time and resources you could use for building homes for profit, I think you have to consider that as part of what you would be spending to accomplish this. I get what you are saying but I don't see this as an issue. We build multiple houses at a time all over the region and are able to keep everything moving. It's kinda like an accountant who does his own personal taxes. Yes, he could be working on someone else's return but he's not going to hire his own out to another firm.

Also, you mentioned you have a great rate on your mortgage, but are paying extra on it while also carrying a car loan. Have you considered not paying extra on the mortgage and directing that money towards the car loan instead? I never really gave this a thought but you make a good point. However, with the mortgage being a slightly higher rate (2.75% vs. 2.4% and neither being deductible I kept paying 1/12th each month towards it. At the end of the day I'm not sure it matters too much.

ETA - and quite frankly, I can't see how what you are saying is possible - using the equity to take out a larger loan on a more valuable house while lowering the loan to value - without adding extra money into the equation. Whatever you gain from the sale of the house is your equity now and will be the same as the equity you'll have in the new house, and if the new house is more valuable, you'll have a higher LTV unless you add extra money to your down payment. So is that what you are planing on doing? And what else could you be doing with that money? Paying off the car loan? I am not talking about substantial differences in LTV ratio other than we would not be going into significantly more debt to finance our move. But it is possible based on the estimated selling price of our current house and the actual selling prices of new homes I am building in the neighborhood we would be moving to. Sell at ~$95/sqft (after fees) and build a house 200sqft larger in an area with recent sales comps of $106/sqft. Even if I built the exact same size house I'd be gaining $11/sqft in value just for it being new (although it obviously cost more to build today than it did in 2007). This accounts for the additional equity due to the value being higher (especially with added footage). Our only other debt is the car loan and we could pay it off, but other than that I have no intentions of spending the money on anything but the new house. With the car paid off and the new mortgage we would still be clearing $100/month.
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Crimsontide
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Re: Need advice on whether to sell house or stay put

Post by Crimsontide »

cdogg44 wrote: We like our location and neighbors.
This is worth more than any equity you might have built up currently...
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