Chapter 1

Deciding to Sell

IN THIS CHAPTER

Making the choice: To sell or not to sell

Selling in weak and strong housing markets

Selling your house and moving can be an enjoyable (not to mention profitable) experience. Unfortunately, for most people, it isn't. Selling a house not only introduces financial turmoil into most people's lives but also causes them stress.

One goal of this book is to help you make the right decision about whether to sell your house. If you do decide to sell, we want to make sure you get as many dollars and as few upset stomachs from the sale as possible.

The reasons people want to sell their houses are almost as varied as the houses themselves. Here are some of the common, not-so-common, and downright bizarre reasons:

• Additional debt burden because of layoff, medical expenses, disability, or overspending
• Bad vibes or bad luck associated with the house
• Better job opportunities elsewhere
• Diminished space requirements now that children are grown
• House located in a flood, earthquake, or other disaster zone
• Increased space requirements for expanding family
• Lack of garage
• Neighborhood conditions incompatible with socioeconomic status
• Noisy neighborhood
• Noisy/messy/obnoxious family or business moved next door
• Recent death of spouse
• Recent marriage or divorce
• Serious house defects (such as radon or termites) that owners don't want to or can't afford to fix
• Unfriendly neighbors
• Unsafe neighborhood
• Unsatisfactory neighborhood shopping
• Unsatisfactory school district
• Unsuitable climate

As you can see from this partial list, most of the reasons why people have a desire to sell their houses are based on wants, not needs. In the United States, we sometimes take for granted how economically fortunate we are.

You don't need to move because your neighborhood is too noisy or because your house seems too small. You don't need to move because the weather in your area isn't nice enough. You don't need to live on quieter, tree-lined streets.

All these features are things people desire or want, not things they need. And people who think they can afford to pay for such things usually get more of what they want. Sometimes, however, people spend money moving and, ironically, still don't get what they want. The weather in the new locale may not be terrific, the neighbors may not be friendly and quiet, and the schools may not turn children into stellar students. You may move to get away from particular problems and then find yourself facing a new set of problems.

We're certainly not going to tell you how and where to spend your money - that's your choice. However, we definitely want you to make the most of your money. Unless you're one of the few who has far more money than you can ever possibly spend, we suggest that you prioritize the demands on your money to accomplish your most important financial goals.

Nothing's wrong with spending money to trade in one house for another, but before you set those wheels in motion, think about the impact of that kind of spending on other aspects of your life. The more you spend on housing, the less you'll have for your other goals, such as saving for retirement or taking annual vacations, and the more time you may be forced to spend working.

Figuring Out If You Really Need to Sell

Although spending your entire life in the first home you buy is an unlikely prospect, some people do end up living in the same home for 10, 20, even 30 or more years. Ray (humble coauthor of this book), for example, lived in his home nearly 30 years. Ray's no fool; staying put must have its advantages.

If, like most prospective house sellers, you have a choice between staying put and selling, not selling has clear advantages. Selling your house and then buying another one takes a great deal of legwork and research time on your part. Whether you sell your house yourself or hire an agent, you're going to be heavily involved in getting your house ready for sale and keeping it pristine while it's on the market.

In addition to time, selling your house and buying another one can cost serious money. Between real estate commissions, loan fees, title insurance, transfer tax, and myriad other costs of selling your house and then buying another one, you can easily spend 15 percent or more of the value of the property that you're selling (see the bar on the left in Figure 1-1).

Source: © John Wiley & Sons, Inc.

FIGURE 1-1: Trading homes can cost you big bucks.

Fifteen percent sounds like a lot, doesn't it? Well, consider this: Unless you own your house free and clear of any mortgage debt, your transaction costs are going to gobble up an even larger percentage of the money you've invested in your home.

Check out this scenario: You're thinking about selling your $240,000 house. If selling your house and buying another one costs you about 15 percent of the first house's value, then you're taking $36,000 out of your sale proceeds. However, if you happen to owe $180,000 on your mortgage, your equity in the home - the difference between the amount the house is worth ($240,000) and the amount you owe ($180,000) - is $60,000. Therefore, the $36,000 in transaction costs devours a huge 60 percent of your equity (see the bar on the right in Figure 1-1). Ouch!

Before spending that much of your hard-earned money, make sure you give careful thought and consideration to why you want to sell, the financial consequences of selling, and the alternatives to selling. In Chapters 2 and 3, we walk you through the personal financial issues that you need to weigh when contemplating the sale of your current house. But before we get to the numbers, consider the qualitative issues.

Good reasons to stay

Whereas some people have clear and compelling reasons for selling their homes, others do so for the wrong reasons. You don't want to make the financially painful mistake of selling if you don't have to or can't afford to.

The following sections offer reasons why you may be better off staying right where you are.

You're already having trouble living within your means

If you're having difficulty making ends meet and you use high-interest consumer credit, such as credit cards or auto loans, to maintain your desired standard of living, you shouldn't spend more money on housing. Even if you're planning to trade your current house for one of comparable value, you may not be able to afford all the transaction costs of selling and buying.

Even if you aren't a consumer-debt user and you're saving a comfortable portion (10 percent or more) of your current earnings, don't assume you can afford to trade up to a more expensive home. In addition to a higher mortgage payment, you may also face increased property taxes, insurance rates, and home maintenance costs.

A mortgage lender may be willing to finance a loan that enables you to trade up to a more expensive home, but qualifying for a loan doesn't mean you can afford that home. Mortgage lenders use simplistic formulas, based primarily on your income, to determine the amount they're willing to lend you. Mortgage lenders don't know (or care) how far behind you are in saving for your retirement or how many children you must help with college costs or how much assistance you want or need to give to elderly parents.

Mortgage lenders are concerned about protecting their interests in the event that you default on your mortgage. As long as you meet a few minimal financial requirements (you make a sufficient down payment, and your housing expenses are less than a certain percentage of your income), the mortgage lenders can sell your loan with the backing of a government mortgage agency, effectively wiping their hands clean of you and your problems.

If you're thinking about trading in your current house for another one, especially for a more expensive one, you absolutely, positively must consider the financial repercussions of changed housing expenses in addition to the costs of buying and selling. We cover these important issues in Chapters 2 and 3.

The problems are more in your perceptions

Everybody, at some point, leaps to conclusions based on faulty assumptions or incomplete research in virtually all aspects of his or her life. Peter, for example, was a single parent living with his son in a nice neighborhood in an urban environment. When his son started junior high school, Peter grew increasingly concerned with the possibility that his son would become involved with drugs, which seemed to be prevalent in their city.

Despite working in the city, Peter decided to move to an easygoing, suburban community about 45 minutes outside the city. Shortly after the move, Peter's son got mixed up with drugs anyway - perhaps, in part, because the long daily commute meant Peter was around even less.

In addition to ignoring lifestyle issues (such as the length of his commute), Peter made a common human mistake - he assumed things were a particular way without getting the facts....