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Downsizing Followup

by Tim Isbell      (#downsizing, #realestate)
posted June 2014

On August 2, 2013 I posted Downsizing Basics. We had just sold our stand-alone house of 19 years, moved temporarily into an apartment, and were looking for a more suitable place suitable for our senior years. We also wanted to transfer some real estate equity into investments to generate income. 

On August 29, 2013 I posted Home Sale Math, which unpacked the financial dimensions of the process of selling a house with substantial long-term capital gains. But it did not address the impact of California Propositions 60 and 90 (the transfer of property taxes between houses) on the purchase of a replacement house. I have now added this into the Home Sale Math post, and also briefly described it below in this post.

Now it is June 2014 and our housing transition is complete. Start to finish it took 13 months. This web page wraps up the story. If you are thinking about downsizing or just thinking of buying a new house, you'll find lots of helpful information in this and the previous two web pages.

Starting with the timeline

  • 2013 May. Made the final decision to downsize.
  • 2013 June. Put our house up for sale, it sold the first week, and we moved into an apartment (plus a storage unit) while looking for a new home.
  • 2013 September. Made an offer and closed on a new townhouse and geared up for a major renovation.
  • 2014 February. Moved out of the apartment and into our half-renovated townhouse.
  • 2014 June. Got final city sign off for the last of 5 building permits. (repiped plumbing from galvanized to copper, changed windows to double-pane, master bedroom/bathroom remodel, kitchen remodel including opening walls, and minor remodeling of 2 smaller bathrooms.)

If I had known...

... the amount of work, expense, and the medical process we would endure at the same time, I might not have downsized. But now that it is done both of us are so glad we did.

What we discovered along the way

We downsized with no serious interruption of our kids' lives. If we had waited another 10 years to downsize the job may have been too big for us. And it would have greatly interrupted our kids lives. As it happened, Robin and I rather enjoyed much of the process and we were able to stay reasonably involved in our kids lives without interrupting them.

We wanted everything on one level, including access to a garage, but we ended up with a 3-story townhouse. Because of the high cost of land in the San Francisco Bay Area almost all condos are multiple story. Even so, we made one offer on a single floor condo, but were outbid. We floated a verbal offer on another one, but that was rejected. So we shifted to plan B and made an offer on a 3-story townhouse with its own elevator. The house had been previously listed but was pulled from the market to do more work on it before putting it back on the market. So we made a quick estimate of the cost and time to remodel and then made an unsolicited "as is" offer, which was accepted. Nine days after first walking in the door to see it, the deal was closed and we had the key.

We learned the importance of analyzing the financial health of the Homeowners Association. Our real estate agent helped us read the HOA disclosures, and especially the financial parts. We discovered that many HOAs only have about half the recommended reserves on hand! This is a serious problem. The two "losing offers" we made were for units where the HOA reserves were below half the recommended levels! With a little math we determined that it would take more than $10,000 per unit to fix. While this isn't too difficult for a buyer to factor into the purchase price, it is impossible to expect all the homeowners to write a check for their share. After all, the problem had accumulated for many years and they hadn't solved it. The danger was that we'd buy one of these condos and discover the same kinds of major maintenance projects that we were trying to get away from in our previous house. But this time we could not address them at all until the whole HOA agreed to do so. Fortunately, the townhouse we bought has virtually 100% of the reserves in place. That appears to be a rarity - and something we are very grateful for.

Remodeling takes a lot more money and time than TV shows suggest. Robin loves to watch HGTV, especially shows that flip a house, add a rental suite, love it or list it, etc. And I'm an engineer at heart, who sometimes watches these shows with her. So the idea of remodeling intrigued us, and we did quite a bit of it in our previous house. The TV shows did tip us off to expect surprises that would add cost and time. But the TV shows resolve these problems much faster and for much less money than we experienced. Two surprises for us were the need to repipe the whole house, and the need to strip asbestos from a large section of ceiling. Even so, we'd rate the whole remodeling a good experience. And in the process we made the townhouse "home".

We needed an abatement company to remove asbestos ceilings from the entire 3rd floor. We had to do a hazardous materials inspection for any projects where contractors would cut through paint and inside walls. While the inspection did not find lead, it found asbestos. So we had to use an abatement company - transforming what used to be a quick/cheap solution into something daunting! The stripped the entire 3rd floor ceiling, about 1/3 of which is 18' above the floor! This was a very messy job and left us with damaged sheet-rock ceilings needing substantial repair, complete re-texturing, and painting.

We had to repipe the whole townhouse with copper. About half of the house had been repiped years before, but the job was not up to par. The rest was ancient galvanized piping that was starting to leak. Again, there was no option: we had to do a complete repipe. Of course, many pipes are inside the walls so it left lots of holes in sheetrock in virtually every room. These all needed patched, re-textured, and painted. This was another job that we had not predicted.

The elevator works great. While it would have been nice to live on one level, the elevator is working just fine. We don't need it much now, but it was handy for moving things out/in, bringing in groceries, and providing access when older people visit us. It was very costly for a previous owner to install, but it was a key to meeting our requirements to find a place to live for the "duration."

We're glad we removed the main floor's fireplace. It took up space that we could better use for other things. In our other houses we had fireplaces with good gas inserts. But it dried out the air, was inherently inefficient compared to the furnace, and bad for the environment. So we rarely used it. The cost to remove the fireplace was modest, but it created a big mess. Fortunately we already planned for new carpet and paint.

Overall we met our financial goals.

We initially expected to spend a lot on remodeling. In the end we spent even more! This was mostly errors in our remodeling estimates plus the surprises of repiping and asbestos. Fortunately our previous house sold for more than we originally expected. so we had enough margin to absorb the higher renovation costs. 

We paid considerable capital gains taxes to the federal and state governments (see Home Sale Math for how this all works). But we mitigated this by keeping good records of improvements made in our previous house, and by donating a lot of furniture and fixtures that came out of the downsizing and renovation projects. And the items helped several charitable causes.

Regarding property taxes: we are taking advantage of Propositions 60/90. This means we are moving the tax basis from our previous house to the new one, and taking advantage of the "New Construction" exclusion for certain parts of the remodeling that qualify. For more on this, see Home Sale Math (look near the bottom of that webpage - the section "What about property taxes."

We met our geography goals. Our new address was not initially on our radar screen, but it turned out just fine:

  • We are within 20 minutes of all our California family members.
  • Our commute to medical care increased a little, but even in heavy commute traffic it's under 20 minutes.
  • We can walk to the center of the very quaint Saratoga Village in about 7 minutes, and to a nice little park in even less time.

We ended up with our own garage. It holds 2 cars and has enough room for a little storage and maybe even a small workbench area. This is a feature I wasn't expecting.

Unfortunately, Robin doesn't have ground-level dirt in which to plant flowers and bushes. But she does have some deck space for container gardening.

There is a difference between a townhouse and a condo. Regardless of which you buy, read the Architectural Requirements part of the CC&R's, which are available prior to making an offer to buy the unit. In our case, we bought a townhouse. Without HOA approval we could move electrical/plumbing/gas, repipe, strip asbestos, move electrical/gas services, and do anything a single-family homeowner can do to so long as it is totally inside of the unit. These did, however, require building permits from the local building department. But the CC&R's do require us to get HOA approval for everything that was visible from the outside, including paint colors, changing garage doors from flip-up to roll-up, and changing old-style single pane windows to new-style double pane. 

If one of us dies, the townhouse will work fine for the surviving spouse. And it provides enough room to take in a renter/roommate.

One last thing: downsizing provided the money we expected to add to our investments. For more on how we invest, click on Personal Finances > Investments.

That's pretty much it. Feel free to Contact Tim with questions.

All the best,