Real Estate, NEW HOMES ONLY, Orange County, CA
New Homes vs Resale Homes
Don’t Shop Alone!
By Jack Siart
CEO, Strictly New Homes
Making New Home Buying Easy
As you begin to think about buying a home, you may wonder which is better for you, buying a newly built home or a used home. There are huge differences, and this e-book is intended to discuss them to make you better informed as you contemplate this huge purchase. Our goal at Strictly New Homes is to help you make the very best decision based on all the information that is available.
Speaking of available information, you probably already know that virtually all used homes show up in the local Multiple Listing Service, or MLS. From the MLS, the homes find their way onto Realtor.com, Zillow, etc.
Did you know that most newly constructed homes are not listed in the MLS? As a result, most real estate agents only know about a new development if they drive past it! The vast majority of real estate agents may have never helped a buyer purchase a new home, or ever purchased one themselves. As you consider having a real estate agent help you with the purchase of a new home, asking their experience level with new homes is an important question for you to ask.
Strictly New Homes has a team of licensed real estate experts dedicated to helping new buyers find their new dream home. We have a proprietary database of all major new developments in Orange County (over 150 communities), with literally hundreds of model homes to view!
With no cost and no pressure to our buyers, this is the way new home buying should be! Think of Strictly New Homes as your private “new home concierge” and let us guide you every step of the way.
Read through the e-book and contact us today if you choose to buy a newly built home. Let our experts make your home buying search easy! All you need to do is have us go with you on your first visit to a community.
Who doesn’t like a new home? A new car? – Buyers usually desire new homes rather than used, or resale. However, buying a new home in a new community involves much more work, investigation and imagination. The reasons most people prefer new homes include many of the reasons covered below…
- New and clean – It is human nature to want to live in a new clean environment. In today’s planned communities the entire community, restaurants, shops and parks are new and clean. The same forces that influence us to buy new cars instead of used are at work here.
- Location – Newer homes are built where land is plentiful, usually far from the city center, transportation and larger shopping centers or they are built in smaller Pocket or In-Fill developments. Used homes are usually close to the center of cities.
- Appreciation / Instant Equity – New home communities appreciate much faster than used home communities (this assumes roughly equivalent “location”). Builders usually price the homes low for the first one or two phases (a batch of homes – usually 4 to 8), with price increases for each new phase – frequently keeping the best locations or views for last to maximize the final selling price. Given that it takes 6 months or more to build a new home the buyers in the first few phases enjoy increased equity even before they close escrow and move in. Builders have also been known to increase prices after every X number of sales. A good rule of thumb is to buy in the early phases. In years past the difference between the price of the 1st phase homes and the sale of the final phase and model homes could be near 100% (i.e., DOUBLE!). Since the Great Recession this has been tempered by the restrictions on financing and appraisal, but an appreciable difference remains.
Social (a surprising benefit)– Buying a home in a new home community immediately gives you a huge common ground with your neighbors – rare in California
- Everyone usually spends as much as they can afford on their home so you are all in the same socio-economic range
- Window Coverings, “are you putting in Plantation shutters, drapes?”
- Can I come and see what you are doing in the ___room?
- Landscaping, HOA Property Improvement process. – Grass vs. artificial turf vs. native plants. – Concrete, stone, pavers. Covered patios.
- Where are the best Restaurants, Doctors, etc. in your new home community
New vs used home differences
Multiple Listing Service (MLS) – Used homes are listed in the local Multiple Listing Service. Newly built homes find there way into the MLS if a home is nearing completion and the builder wants to give the home more exposure, but otherwise they do not appear in the MLS. This is why most Real Estate Agents do not even know of the new communities.
Lot Sizes – Used homes are frequently on very large lots. Land is so expensive in Orange County that new home sites have gotten smaller and smaller – in “affordable communities” wide streets have given way to shared driveways without parking and separate guest parking areas. Builders create open spaces and parks and resort type amenities (more on this later) which also allow us to meet our neighbors. New homes may also be built with zero lot lines – when one home is built ON the property line and the home itself becomes the fence for the next-door neighbor.
Single Story, two story + In the 1950’s 60’s and 70’s most of the homes were single story on large lots. As the lots got smaller the builders first added second stories to give the buyer more living area. As this trend continued, 3 story homes appeared for both Single Family Homes and Condominiums. Roof top decks were added to capitalize on views and to offer outdoor living space as the usable yard space continued to shrink.
Why not buy a used home home and remodel? – Adventurous buyers may want to buy a used home to take advantage of the location and lot size and remodel to modernize the home. Selecting architects, contractors and interior designers is very challenging. You may have to make extensive foundation modifications to comply with new building codes, especially earthquake. This process can take months or years, and if you live in the home during the remodel, you will have constant construction dust and inconvenience. Otherwise you will have to live somewhere else while you work on the “project” house. This option is only practical if you have sufficient funds. Several cities are so desirable that virtually every home on some streets have either extensive remodels or complete tear downs. And once you have finished will you get a return on your investment? In many areas you will be lucky to get 50% of your investment back when you sell. We can show you dozens of listings where someone bought a house intending to do a major remodel or “scrape” it and build a new home. The new owner may have spent heavily on plans, permits and gotten numerous bids from contractors before deciding not to go through with the project.
Model Homes – What’s Included? Builders spend lavishly to build Model homes to be used to market their products. Professional designers select the interior finishes that may or may not be available for you to select from the design center – Each model home should have a sheet that states what is standard in each room and what has been added. Sometimes there is a sign that states a structural option has been selected – common for stacking doors, optional decks, bedrooms, California rooms, etc. A frequent question new home sales agents receive is, “how much does it cost to make my home look like the model?”. Unfortunately, the sales agents do not usually have the cost. If you are not confident to make all the choices you have to make, I highly recommend getting professional help. Strictly New Homes has designers that can advise you on interior upgrades to get from the builder and suggest construction projects for after the close of escrow in addition to landscape and hardscape.
Buy the Model home? – Another frequent question sales agents get is, “Can I buy the Model?”. The answer is usually, “Not yet”. Builders offer the model homes for sale as they are nearing the end of the project. The price of course includes all the home upgrades and yard landscaping and can set the price for the community comparable sales. The price may or may not include the furniture. If it does, the comparable price for future sales will be reduced as furniture is personal property, not real property. The purchase of the model home may mean the buyer will have to come up with the difference between the appraised price and the offered price if the home will be financed. Also, since the models are offered at the end of the sales cycle for a Neighborhood the home will have increased in price dramatically from the first few phases.
Warranties – New homes in California have a 10-year structural warranty and usually a one-year warranty for non-structural items and appliances. Used homes are usually offered with a one-year “Home Warranty” which covers only named appliances and some home systems (plumbing, electrical). The used home warranties are really insurance, with deductibles and a specific process using approved service companies for getting reimbursed. This process is very time consuming.
Contingency to sell your current home – Once you find the home you want to purchase, you will be asked if you need to sell your current home. Builders, IF they will accept a contingency, will have some very stringent requirements for you to sell your home within a short time frame. Oh, and the new home may not be completed for you to move in directly and the builder will not commit to a completion date until 30 days before it is scheduled to be ready. The lucky home seller will be able to rent their old home back from their new buyers and then move directly into the new home. Frequently, it is necessary to move to an interim home or apartment. If you cannot sell your home before the builders deadline, you may lose the home and risk your deposit. The safest way is to sell your existing home prior to purchasing a new home and plan on an interim move to a rental home or apartment.
Open Floor Plans – Used homes may be very compartmentalized as opposed to the Open Floor plan concept that is popular today. This was by design as homeowners wanted to shut doors and isolate rooms so they only heated or cooled the rooms they were using. New homes may have chefs kitchens with generous islands that flow into dining areas and living areas (aka Great Rooms) that may flow through stacking glass doors to covered outdoor “California Rooms” with TV’s, fireplace, Outdoor Kitchens etc. Separate living room, family room and dining rooms are very dated.
Ceiling heights – Older homes usually have 8-foot ceilings and 6’8” doors. – New homes with 9 foot or 10 foot ceilings, stacked windows and 8 foot doors give a very spacious feeling that is impossible to duplicate in an older home without very extensive remodeling. Some builders now feature 11 foot or higher ceilings.
2nd floor loft/living area – Modern home designs may have a 2nd floor loft that is great for entertaining away from the main living area. – Perfect for older children to entertain their friends away from the adults. Luxury Home Builders design covered outdoor rooms by the master bedroom and/or the MBR Retreat.
California Rooms – New homes may have a luxury covered outdoor space by the kitchen or great room that has televisions, fireplaces, and even complete outdoor kitchens. This is something you could add to a used home that won’t totally impact your life while the construction is completed. The exception is the very popular stacking sliding doors that connect the interior and exterior space which requires extensive modification to the homes foundation and Ceiling support.
Plumbing – Over the years plumbing systems have changed from Galvanized pipe to copper pipe to today’s PEX plastic piping. Galvanized pipe corrodes over time and reduces the pressure available at the faucet. Filters on the faucets can also be clogged and require frequent cleaning. Re-piping can reduce, but not eliminate these problems as it may be very difficult to replace sections of pipes in the concrete foundation, or in the walls. Copper pipe does not corrode, like Galvanized, but can leak where the segments are soldered together and can age via Pitting Corrosion. Copper pipe is expected to last 50-70 years but can be as short as 20 years. It is very difficult to get a return on your investment for repiping a used home. A new buyer will appreciate it, but it may not increase the appraisal amount.
Electrical – Far less electrical outlets were required in the 1960’s and 70’s. Yesterday’s main electrical panels with 100 Amps service are completely inadequate today. New homes have many, many more electrical outlets to minimize the need for dangerous extension cords (some with USB outlets for Phones and tablets in the Kitchen or bedrooms). Heating Ventilation Air Conditioning (HVAC) systems now come with heat pumps require much more electricity. Dual Power ranges feature gas for the burners and 220 Volt electrical for the oven. New homes may have conduit and outlets ready to accept both Solar Power and Electric Car outlets. Recently installation of solar is accompanied with stationary back up batteries to run the home when the sun is down.
En-suites – Used homes may have a Bathroom in the MBR and a bathroom in the hall for the children. They rarely include en-suite baths for secondary bedrooms – New homes have a Master Bath Suite that can rival a spa and many secondary bedrooms have en-suite baths.
MBR Retreats are frequently found in new homes with areas for reading, sitting by the fireplace, etc. Morning Kitchens which are built to include coffee makers, small refrigerators, and microwaves are also prevalent in higher end homes.
Closets – Used homes have very small closets. New homes have much larger walk in closets complete with closet systems, islands and shelf lighting. New home closets can be as big (or larger) as a bedroom in a used home.
Windows – Used homes will probably have single panes of glass in either high maintenance wood or aluminum frames. New homes will have two or three panes of glass to provide insulation and sound deadening in smooth sliding plastic frames.
Insulation/ Energy Efficiency – In the 1950’s Southern California homes were built with no insulation and a single wall heater. Insulation was added to the walls and ceilings as construction techniques and materials improved. Improvements in HVAC systems included ducted forced air. Today New home has generous amounts of Insulation in walls, ceilings and under the floor for raised floor foundations. Some homes now have 6” exterior walls to accommodate thicker insulation. As a result new homes use a fraction of the energy used homes require to maintain both heat and cool.
Roof Materials – Used homes may very well come with wooden shingles, which were replaced by tile and concrete tiles. New homes are being planned with Solar Tiles (see Tesla Energy).
Exterior materials for new homes require much less maintenance than used homes which frequently have wood that rots and attracts termites. Stucco, architectural additions, cement boards that look like wood siding and cultured stone are some of the low maintenance materials for new homes.
Home Owners Associations – Most new home communities come with Home Owners Associations (HOA) which is both a blessing and a curse. These non-profit organizations regulate the community via By-Laws and Covenants Conventions and Restrictions (CC&R’s). Home owners volunteer to serve on the Board of Directors and Committees. Cities encourage builders to make streets private so they don’t have to maintain them or pay for street lighting. HOA dues pay for these items, but are not tax deductible.
Amenities – In the 60’s and 70’s communities could be built with public parks maintained by the city and a Common Areas swimming pool, tennis courts, etc maintained by the HOA. Today’s upscale new home communities boast resort style pools, tennis courts, Pickle Ball courts, community centers with commercial kitchens and meeting rooms. Some communities even have an activities director to create and manage special activities.
Contracts, purchase process, etc. – Used home purchase involves offers, counter-offers and eventually acceptance starting with a 10 page form. Buyer and Buyers Agent negotiate with Seller and Sellers Agent over everything in the agreement. Since New Homes are usually so desirable, the builder/seller presents the buyer with a 200 page agreement and offers little or no negotiation of terms, dates, etc. Most of the agreement covers legal liability for the builder.
Contingencies, appraisal, etc. – Used home purchase agreements contain clauses for you to make the purchase contingent upon the home appraising for the purchase price, for you to qualify for a loan and for the home to pass inspection. – Most new home purchase agreements do not have buyer protections like this, so you must do some due diligence in advance as your earnest money deposit is in jeopardy.
Discounts for Cash/no Realtor, etc – Some buyers think they can get a discount on the price of a new house if they are paying cash or if they don’t use a realtor. New home builders pay a referral fee to the buyers realtor and do not discount the home to the buyer if there is no Agent helping you with the purchase. As noted earlier it is illegal for a Real Estate agent to pay a “kick- back referal fee ” to someone who is not licensed. A cash purchase can be an incentive to the seller of a used home as the purchase can proceed much faster by eliminating the finance company appraisal. New homes are sold months before the building is complete which negates the advantage of a quick close to the seller (builder).
Incentives –It is common for Builders to give a financial incentive to use their preferred lender. You can use any lender of your choosing, however. It is NOT common for builders to offer design center credits unless it is taking too long to sell a home, but you can always ask.
Property Taxes, Supplemental Property Tax – The escrow company will get your funds to pay your prorated property tax. For Used Homes this is fairly straight forward as the sales price becomes the assessed valuation. For new homes, the assessed value at the time of closing may be based on the value of the un-improved lot and must be adjusted to the sale price of the home – prorated for the builder prior to close of escrow and for the buyer after close. This results in a Supplemental Property Tax bill for the first year, months after you close escrow.
Proposition 13 work arounds – Many potential sellers hold off as they don’t want to get a huge property tax increase when they sell their old home. There are currently two Propositions, 60 and 90, that allow sellers 55 or older a one-time transfer of their property tax base if the new home meets certain criteria. There are a couple propositions for the 2018 election that could make changes to this – stay tuned.
Mello Roos bonds were developed to pay for the construction of roads, schools, etc. to support the new community. The monthly cost of the Mello Roos is usually based on the size of the home and will reduce the amount of home you can afford if financed. Mello Roos payments may not be tax-deductible and can double the amount of your standard property tax (Orange County’s standard rate is 1.06%). The builders Agent should have the specific numbers on Mello Roos.
Cut off dates – Builders of production homes establish dates in advance where they can no longer make changes to the plans for the home. The first cutoff date is for Structural options such as stacking sliders, California rooms, Lofts, bedrooms, French doors, plumbing and electrical (especially for lighting and ceiling fan outlets). The 2nd cut-off date covers cabinets and countertops. Flooring cut off is next. Buyers have to select tile, stone, wood and carpet area. The sales agents will work with you for the structural options and the design center handles the other items.
Design Center – The larger builders have in-house design centers to personalize the homes finishes for you. Other builders will use a contract design center that services several builders and communities. In general they will not help with window coverings or exterior hardscape or landscape. The builders agent may have a list of contractors for you to use, but will not be responsible. Strictly New Homes can help you with the many decisions you will have to make at the design center and has experience with dozens of new home purchases.
Builders Agents – Builders select their agents to represent their interests and to be both personable and customer oriented. Builders can either have teams where the bonus’ (not commission) are shared by the sales staff, or the sales staff can be competitive where there is more pressure for them to get you to sign the sales contract. Getting help in a competitive sales environment can be difficult if “your” agent has a day off. Virtually every builder also hires temporary agents to supplement their employees and to assist in the sales process. These temporary agents are not trained in what else is being built in the area so you may want to wait to talk to one of the builder’s agents. Strictly New Homes Agents make a point of learning as much as possible about the area.
Why use a Real Estate Agent? It is becoming increasingly common for Agents to help buyers of new homes with the process. And why not? The agents are paid by the home builder and the buyer can utilize their expertise. People frequently ask if the price can be reduced if an agent is not used – The answer is No. In fact, as noted earlier it is not legal in California for licensed agents to pay a portion of their commission to non-licensed people (i.e., no commission kick backs). Most “Retail agents” specialize in used homes and have very little experience with new homes and may not even have bought one themselves. So, when interviewing agents it is a great idea to ask about their experience with new homes. [Strictly New Homes is expert in the 150+ new home communities in Orange County and with the new home purchase process.]
How do you select an agent? – Referrals may be the best source if you know someone that has had a recent good experience providing the transaction and location is similar. Experienced agents will tell you buying a home is like walking through a mine field. Discount Brokers like Rex or Purple Bricks advertise on radio and television ads that greatly over simplify the expertise required of local agents. You might be able to get through without help, but agents know where most of the land mines are and can minimize any problems you may encounter.
Another good question to ask a prospective Real Estate Agent is “How large an area to you work in”. Too many agents try to work where ever they get a lead and waste a lot of time running back and forth and trying to learn a community. A smart agent that does not know the area or is remote from your local community will help you get a local agent through a referral. They will interview agents with you and help you make a selection. Of course, there is no charge to you for this service and the receiving agent will be thrilled to get a qualified referral. Strictly New Homes has a policy of selecting qualified referral recommendations for buying or selling clients that are “outside our wheelhouse”.
Essential New Home Buyer Skills
Imagination and visualization – We have learned how rare it is for a new home buyer to visualize an entire rooms floor when looking at a small sample of the flooring – same for cabinets, etc. This gets even more difficult as you have to layer all of the home design options together, add window coverings and then add your furniture. The builders design center will help, of course, but they also want to increase your spend with them.
Brochures – Since many builders don’t build a model for each of their plans, the ability to read floor plans is essential. The builders sales office staff can help a great deal and may be able to accompany you to a production home on a weekend so you can see the home in 3 dimensions. When looking at the names of the models, the letter “R” means the floor plan is reversed, or a mirror image. The reverse floorplans can frequently be shown on the monitor in the sales office. The builders website may also have the ability to show and/or print a reverse floor plan if that is the home you are purchasing. Other letters may indicate “X”tra rooms or square footage, or the exterior elevation (A, B, C) of the home which is usually shown in the brochure, on the sales office monitor and on the builders website.
Where to start?
As discussed earlier, you will save both time and money by using Strictly New Homes Agents so you only see homes and Neighborhoods that could work for you. Shopping alone (Don’t do it!) will result in you spending all your spare time trying to select from the HUNDREDS of model homes in Orange County alone. You will be an extremely rare person if you find the perfect home and homesite before someone else buys it. Everyone wants the large lot in an interior location with the best orientation to the East or West.
After an in depth interview and discussion of your needs and wants your Strictly New Homes Agent will search our proprietary new home database and help you select the Neighborhoods to view and go with you (we must accompany you on your first visit to the community or the builder will not pay us). We will stay with you as you personalize the home for you and your family.
eBook Bonus: Life Cycle Real Estate Planning
Financial Planning Aspects of Real Estate for your changing needs
By Jack B. Siart
Real Estate Broker, Strictly New Homes
When picking out your “Dream Home” you really should acknowledge that you may not keep it forever as your needs will change over time. You may move from a “starter home” to a move-up family home to a luxury home to a vacation home and then downsize to a smaller home or condominium.
There are three main issues to address when contemplating the plans for your financial future like three legs of a stool. If one is neglected, the stool is unstable. The three legs are:
- Financial Planning
- Estate Planning
- Real Estate Planning
Unfortunately, advice is usually compartmentalized to either Financial Planning or Estate Planning with only brief coverage of the Real Estate aspects. This booklet is not intended to give you The Plan or answer your questions – only you can do that. It is intended to bring to the surface the most Frequently Asked Questions you should answer to ensure you get the results you want with changing life cycle requirements causing the buying and selling of Real Estate. At Strictly New Homes in our Real Estate Practice, we try to act as a trustworthy concierge – guiding our clients to identify the advantages and disadvantages of the various choices and through the emotional process of buying and selling real estate. We strongly recommend you select a similar professional to guide you in both Financial and Estate Planning. The above areas are really interdependent and only you can evaluate the many trade-offs. Although our Real Estate practice is based in Orange County, California, our referral network allows us to assist anywhere in the United States, or Internationally.
Residential Real Estate Planning
Why is it that most people, when asked what their largest financial asset is, quickly answer their home – yet, Real Estate is rarely covered in depth in Estate, Retirement or Financial Planning? Yes, it could be that the subject can be very subjective and complicated. Like so many topics in Financial Planning, the earlier in life that you plan, the more options you have. We have seen many people buy a home for their immediate needs without consideration for their longer term needs requiring another sale and purchase within a short period of time costing them a great deal of wasted expense.
Residential Real Estate Planning covers two broad subject areas:
- Real Estate to live in
- Real Estate as an investment
Residential Real Estate is unique in that it can be purchased to be lived in; converted to an investment; and converted back to be lived in. Or you can purchase residential real estate as an investment and convert it to your primary residence. For the sake of simplicity I will address the purchase intentions separately.
Real Estate to live in
This section includes both Primary Residences and second (or Vacation homes). Questions that have long term implications and should be addressed include:
- Home Type – What type of home do we want to be living in when we buy it (Single Family, Condo, two-plus-story, single story)? What size do you need (bedrooms/office/gym/media room/Man-cave)? The starter home is usually smaller so as to be affordable, as the family grows, a larger and larger home is desirable. Since most people work for about 40 years and the average mortgage is for 30 years, the ideal situation in retirement is to live in your own home that is paid off – however, it may no longer meet your needs. Many of my clients say they want a smaller house as they face an empty nest. They want a home they can lock up and travel for long periods. I have owned large homes with rooms we never really used. One client with a large home and the Master Bedroom on the first floor told me he hadn’t been upstairs in over a year! Having a single story home, or a bedroom downstairs is desirable for people that want or need to avoid stairs which is a primary reason for changing homes. Some say that we don’t own our homes – they own us – keeping us working longer and harder than we might want as we struggle to pay for them.
- How long do you plan to live in the home you just bought? Thinking about this in advance may cause you to choose a different home or location.
- Home Costs– Common wisdom has been to buy the most home you can afford banking on increases in your earning power and rising home prices. The great recession blew a couple holes in that thinking. Income stagnation coupled with falling real estate prices made many more buyers very cautious. The recovery allowed the prices to regain their lost ground and then some.
- Income – How much income do you need to live the life you want to live? What about in retirement? If you haven’t done the math yet, please do. You will probably realize how very much money you will need to supplement Social Security and any Pension you may be lucky enough to have. The strategy of investing in Certificates of Deposits (CD’s) worked years ago; yet is ludicrous today when the return is so much less than the rate of inflation. The old expectation that the stock market goes up 8% or so over time rang hollow after our latest real-world experience in the Great Recession. The recovery took years but now the stock market is higher than before. Another historic recommendation is to move more of your investable assets to bonds as you near retirement. This also seems not to work as bond yields fluctuate based on market conditions and your principle is at risk. A professional fee only financial planner can help you align your assets with your goals.
- Does a Reverse Mortgage make sense for your current plans? You must stay in the home and meet several other requirements. This gets complicated quickly and requires great care to evaluate. A reverse mortgage can protect your real estate but can affect your financial and estate planning significantly.
Retirement Home Location – Where do we want to live in retirement?
- Stay in the same home and area?
- Move to another area?
- Warm states – Florida, Arizona or another State? – One client in San Diego wanted to move to Arizona to be closer to parents and to save money on housing. This worked great until late Spring and Summer when the heat returned. She is back in San Diego.
- Tropical – Hawaii, Mexico, Costa Rica etc. It is exciting to buy a vacation home but it is a very different matter to sell one. It takes much longer than expected to sell vacation houses.
- Move closer to children and/or grand-children – A colleague of mine from San Francisco spent every vacation in Maui, Hawaii visiting his brother and dreamed of moving there. He finally did move to Maui, but continued to work to pay for the higher cost of living – So why is he now living in Arizona? He moved to be near his children and grand children. Frequently our children can’t find high paying jobs in the exotic locations we aspire to live and retire in and we get too lonely seeing them only infrequently.
- Multi-generational – New home builders have recognized a recent trend of multiple generations living in the same home and are now building suites on the first floor for Grandma and Grandpa. Also many adult children today have had to move back in with their parents due to the Great Recession. This is called the boomerang kids and the sandwich generation for parents as they house both their parents and their children.
Downsize to a smaller home?
- Condominium – Facing retirement with a big house and yard causes many single family home owners to consider a condominium or townhome. The advantages include grounds that you don’t have to maintain as well as features such as pools, tennis courts, clubhouses, etc. The disadvantages include Home Owner Association Dues and oversight and having neighbors on the other side of the wall making noise or, as in our case – flooding our condo with a water leak in theirs. We owned both a new condo and a previously owned condo in California as well as a high-rise condo in Hawaii.
- A can be very challenging to find. Many of them were built around mid-century without the recent advances in Plumbing, Electrical, Insulation, earthquake bracing, etc. Eight-foot ceilings and the lack of an open-concept “Great Room” can lead to expensive remodeling to make one of these homes look modern. However, the lot sizes can be quite a bit larger.
- Apartment – selling a home and living off the equity and any pension and Social Security is attractive to a number of people facing retirement. The advantages include no maintenance. The disadvantages are exposure to increasing rents, reduction in privacy (people living on your sides, above and/or below you) and lack of tax advantages.
- Manufactured Home – Many people still think of Manufactured Homes as Mobile Homes, or trailers despite the fact that they have been built to Federal HUD standards since 1976. Approximately 8,000 Manufactured Home parks in California accommodate close to one million residents. Designs include 6” exterior walls for additional insulation, vaulted Ceilings, stacked dual glazed windows, dry wall interiors and Durable Concrete board simulated-wood exteriors. Sizes can range up to 5,000 square feet. Many of these newer homes are now replacing the old “double-wides” in parks. And many parks are age restricted (55+ for at least one of the residents).
- Move to an age-restricted Senior Housing? The options are:
- Age-Restricted Communities with no medical assistance.
- Assisted Living with some support services?
- Continuing Care Retirement Communities (CCRC)? – These facilities offer increasing levels of care at the same location based on the needs of the residents. The types of CCRC contracts are: Rental, Fee-for-services, Modified and Life Care.
- Nursing Homes? Short term and long term.
- One of these options may become necessary based on your ability to perform “Activities of Daily Living (ADL)”. Several sources have pamphlets that can guide you and your family through this challenging exercise. Learning what is available is increasingly important as over 1,000 people per day turn 65 in California and you may be put on a waiting list in your first choice community when you need it.
Activities – What do we want to do in Retirement?
- Do we fantasize about life on a tropical Island? – Medical care becomes very important as we age. I know of a retired man that was “trapped” in Maui because his wife became hospitalized and was too ill to travel back to the mainland. He didn’t want to leave her even to visit their children on the mainland.
- What about endless golf? I know people that bought a condo on a fairway and spent years golfing at their country club trying to improve their game. They did enjoy golf and their foursomes until it just became too difficult to make it around the course. The stairs in their tri-level condo eventually got the best of them so they had to sell and move on to a continuing care retirement community.
Selling costs – What are the financial aspects of selling your home and moving?
- Capital Gains tax from the sale of your home? Federal and California Tax codes currently provide for tax exemptions of $250,000 ($500,000 for a married couple) of the gain on your personal residence as long as you have lived in the home at least 2 of the last 5 years. Some in Congress would like to change or eliminate this provision so there is no guarantee it will be there when you want to use it.
- Increased Property Tax due to Prop 13? – Many counties in California allow you to keep your current low property tax when you downsize your personal residence as long as you meet the requirements. It is even possible to transfer this benefit from one county to another. Propositions 60 and 90 have the details. There are several propositions on the ballot in 2018 that could change this.
- Sales commissions and closing costs – Real Estate Sales Commissions (negotiable, but use 5 or 6% for planning purposes) are usually split between the listing agent and their broker and the selling agent and their broker – Closing costs are approximately 1.5% and cover title insurance, escrow fees, inspections, etc.
- Do you need a Realtor? The internet has certainly made more information available on Real Estate. Since we live in a very litigious state and time, it is more important than ever to have professional guidance. There are many, many potential problems in real estate transactions, not unlike buried land mines. A competent professional realtor can guide you through this mine field so you can enjoy the transition. In selling a home, you may want to interview a couple Real Estate Agents or get a recommendation from friends that recently bought or sold nearby. It is unfortunate that a profession that has had a code of ethics for over 100 years has a very poor reputation. Strictly New Homes would love to help you buy a new home or interview agents for you to use to buy a used home.
How to Hold Title – There are several ways to hold title to real estate with major implications on division of the property, transferability, Liens and the death of one of the co-owners and taxes. The ways to hold title in California are:
- Tenancy in Common
- Joint Tenancy
- Community Property
- Community Property with right of survivorship
- Do you have a will? A living Trust? Most people procrastinate when it comes to making decisions regarding their death. It is not the most pleasant topic to contemplate, but failing to address this topic can result in unnecessary expenses and a great deal of hassles, delay and emotional turmoil for your loved ones. Probate is required if all of the property owners die without a will. This is one of the key legs of the three-legged stool mentioned in the Preface. A knowledgeable, compassionate Estate Planning Attorney is essential in this process.
Real Estate as an Investment
Residential Real Estate is a rare asset that has the capability to be used to live in, converted to an investment and rented out and later re-converted to a primary residence. In this section I will limit the discussion to a maximum of 4 units as that fits the profile of the typical residential investor and is the limit for standard residential mortgages.
In fact, many owners of rental homes initially buy the home to live in and then decide to keep them (with or without refinancing) once they decide to move as their financial situation improves. The downsides to many people are the fact that you are now a landlord with increased responsibilities and the asset is not liquid and you may have negative cash flow. However, the upside can be tax benefits and (hopefully) positive cash flow in the longer term, coupled with the possibility of a paid-off mortgage (by your renters) and substantial income during retirement.
Residential Real Estate values took a huge hit during the Great Recession, but rental rates remained very steady. If you take the long view, home values have risen consistently as have rental rates. The best case scenario is to have a leveraged asset that appreciates, while you depreciate it for tax purposes, and is paid off by your renters at ever increasing rates. Of course there are huge differences between counties, cities and even neighborhoods due to the 3 L’s (location, location, location).
The following table shows the un-adjusted median home prices in California from 1970 to 2000 (from the census bureau). The figures for 2000-2014 showing the bubble and its burst are not shown, but the trend is clear. Also not shown is the 10% increase in rents while the home prices were decimated during the 2006-2011 period.
A home bought for the median price in 1970 and sold 30 years later in 2000 for the median price would enjoy an 816 % increase. During this time, you would have enjoyed important tax benefits coupled with the ability to raise rents to meet or exceed the rate of inflation. At a time when the maximum Social Security Benefit is below $3,000 per month, you could be receiving approximately that amount from your rental real estate. The annual Social Security Cost of Living Adjustment of 1-2% has been below the 2-3% rate of inflation.
Selling an investment property can trigger huge income taxes from both Federal and State Governments. Fortunately there is a method to defer (not eliminate) these taxes if you “roll” your profits over into another “like kind” investment. That doesn’t mean you have to buy a condo if you sell a condo – It just means both properties must be real estate. That means you could sell a multi-family residence and buy vacant land, etc. The rules for the exchange require that you strictly follow the notifications and time frames or the tax deferral would be disallowed.