The Challenge for Seniors in Making a Housing Transition
One of the increasing problems developing in our country is the need for appropriate housing for the rapidly increasing senior population. The questions dealing with senior housing involve many of us personally whether it is housing for our aging parents or planning for housing for ourselves. Many seniors, including “baby boomer downsize or make a housing transition for a number of reasons including a need for less square feet, no pool, less house and yard maintenance, reduced financial requirements, and the convenience of a one-story housing environment. In this context, downsizing also includes moving to an assisted or independent living community environment.
The purpose of this brief report is to explore alternatives for seniors or baby boomers, who desire to downsize or make a housing change, to effectively evaluate the options and develop a plan for a smooth transition process.
In this fast-moving Seller’s real estate market, it can be very difficult to find and downsize to a suitable new house especially one offering a one-story environment. Multiple bids scenarios, high demand, and limited inventory are greatly impacting the complexity of the process.
Accordingly, in this market it may be acceptable to Buy Now Sell Later Option (buy a house or move into a retirement community first, and then sell your existing house) to ensure you do find a suitable “downsized” housing environment after the sale and close of your existing house. The goal to move from one house directly into a more desired downsized house or community in a single move represents the ideal transition process for seniors. Alternatively, Sell Now Buy Later Option (selling existing house now and buying the new downsized house or move into a retirement community later) may be a less expensive option. The risk with this option is that you may not be able to find or move into your ideal downsized house of community in time before your existing house sells and closes (which can be in as little as 30 days in this market). Lastly, seniors may consider Modify Existing House Option to accommodate your needs as a senior. The three options are listed below and discussed in the following paragraphs:
- Buy Now Sell Later Option
- Sell Now Buy Later Option
- Modify Existing House Option
Buy Now Sell Later Option
From a financial perspective, selecting the Buy Now Sell Later Option can be a risky process. This is especially true for many retired seniors with reduced income who now cannot qualify to carry a new mortgage, let alone two mortgages during the interim transition period, or pay cash for the new house. Accordingly, many seniors believe they are trapped in a house inconsistent with their changing needs. There are a number of alternatives that have been promoted to finance a smooth transition process to Buy Now Sell Later especially for seniors. The risk is that it may take longer than anticipated to sell the existing home and / or not obtain the anticipated funds from the sale of the existing home (due to unanticipated required repairs, market dynamics, etc.) to pay for the new house. Given this scenario, the following alternatives are envisioned:
- Purchase the new home outright through available cash or loan: Best option if funds are available or finance through mortgage is obtainable.
- Finance through an interim loan using existing investment capital: Excluding funds from retirement savings accounts, investments such as stocks, bonds and other financial assets may be used as collateral for an interim loan without income verification.
- Finance the transition through available Retirement Savings Account (401K) Funds: Accessing funds from retirement accounts prior to, or exclusive of, the 5% Required Minimum Distribution(RMD) draw down period, while “free”, can be quite expensive, risky and complex. Typically, you have 60 days from withdraw (paid directly to the account holder) of funds (less taxes) to replacement of funds to avoid a significant penalty. However, IRS rules were changed in 2015, and can be very complicated. Therefore, it is recommended a Financial Planner or CPA be consulted for discussion of the viability of this option for your situation. See http://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/Retirement-Topics-Required-Minimum-Distributions for more information.
- Obtain a Reverse Mortgage for the New Home: Reverse mortgages are typically quite complex and expensive but can be advantageous for seniors. Reverse mortgages can be used to not only refinance an existing house but for purchase of a new house. While caution is recommended, it is worth considering under certain situations.
- Obtain short term financing through a Bridge Loan: A Bridge Loan allows a current home owner to borrow 100% of the cost of a new home and repay all or most of it back at the closing of the existing home. There are several willing independently-owned local banks (that are not held back by federal regulations) that do have an interest in serving customers with a Bridge Loan.
A typical list of Tasks and schedule for the Buy Now Sell Later Option is presented in Figure 1 on the next page. This example translates into a (6) six-week Bridge Loan duration. It is recommended that the listing of the existing House not start until completion of the new house Option Period (a period of time 7-10 days where the new house is inspected and any repairs have been negotiated and agreed upon).