Consider the Reality Before You Get Too Far Along on the Fantasy
Updated: Oct 5, 2020
If you’ve recently been thinking about a change in lifestyle, you’re not alone. The daily news cycle of negative politics, climate change, social injustice, changing economy and lingering pandemic has pushed many of our fantasies about a fresh start to top of mind. Whether it is an escape from the confines of urban living to a home with a yard or a move out of the area altogether, it almost feels like a bell went off and everyone decided to make a move on the same day. Yet, at the risk of being the wet blanket on dreams of change, I think it is important to consider the significant consequences, mostly financial, of a move. Here are some of the big “gotchas” that without proper planning could derail your plans.
Homeowners Insurance – Forest fires have caused huge losses for California insurers, causing many of them to leave fire-prone areas. With a looming expiration of a ban on these companies from cancelling policies, the ability to obtain or renew coverage at affordable rates is uncertain. If you are considering a home purchase, make sure you check on the availability of property coverage on your targeted home and location. Without adequate homeowners insurance, there may be no transaction.
Property Taxes – If you are fortunate enough to own a California home that has appreciated in value over the years, be aware that your property taxes are artificially low. Proposition 13 has largely shielded you from rising property taxes in relation to rising values. It is highly likely that a move, even to a less valuable property in another state or jurisdiction, will result in an increase in your tax base. Under certain circumstances, you may be able to carry your property tax base with you; it is worth a call to your tax advisor during the planning stages to consider which locations may offer you some financial relief.
Capital Gains – When you sell your primary residence, you are subject to federal and state income tax on gains in excess of $250,000 or $500,000, depending on your situation. While that may seem like a lot of money, it is not unusual for homes in our area to have appreciated well beyond those limitations, reducing the amount of proceeds available for your next purchase. Make sure you understand how much of your expected home sale value will be siphoned off for taxes.
Property Transfer Costs – The transaction costs associated with the purchase and sale of real estate are substantial. As a seller, you can expect to pay between 5-6% for a sales commission, add on fix-up costs and staging (generally paid in cash before a home goes on the market) and the transfer taxes and title fees. As a buyer, expect to pay your share of transfer taxes, inspections, loan fees, etc. If you are buying and selling, you will bear all of these costs. It is for this reason that a short-term horizon for owning property almost never makes financial sense.
Maintenance and Upgrades – Weather extremes in California increase the cost of homeownership. I have lived in the Bay Area for most of my life and only recently have found it to be a near necessity for air conditioning. Extreme temperature changes cause your home to expand and contract, increasing wear and tear on painted surfaces, plumbing connections and appliances as well as raising your demand for water, electricity and gas. Layered on top is a scarcity of qualified tradesmen due to heightened demand from environmental disasters and home improvement projects. I can’t over-emphasize the extent to which building and repair costs have risen over the last few years.
Geographic Realities – Earthquakes, forest fires, flooding and hurricanes… make sure you understand which environmental factors will be posed by your intended location. If you will be working from home, do some research on the quality of internet coverage. Once the initial excitement fades, will you be able to find the services that satisfy your travel, cultural, medical and educational needs? After a bit of research, you may find that the grass isn’t always greener.
Leaving the United States – Last week, I was doing my own fantasizing with my husband about purchasing a part-time residence in Victoria, British Columbia. As I was sharing my thoughts with a neighbor, we were overhead by a couple walking by who told us coincidentally they had recently gone into escrow for a property in Victoria for a permanent move. It turns out that there is a 20% surtax imposed on non-residents for the purchase of real estate there. Make sure you do your homework before you decide to flee.
Despite what may seem as sobering financial consequences of buying or selling a home, there has never been a better time for a move in the Bay Area. For every household that leaves the area, there are five more that want in. Perhaps I’m biased, but I continue to believe that the East Bay is still one of the best kept secrets around. If I can be of any help in planning for your next move, please don’t hesitate to contact me.