Time to cash out?
Aileen Jones purchased a 4,000-square-foot Tudor-style home in 1991 for $650,000. She sold the four-bedroom residence 10 years later for $865,000.
But with a rapidly appreciating housing market showing no signs of slowing and a sizable profit in hand, the West Hills resident and her husband decided not to purchase another residence right away. Instead, they banked their windfall and found a 3,000-square-foot property to rent in the same area.
Their thinking? What goes up must come down. “Since my next house is going to be my last house until my husband retires, I am willing to wait as long as it takes to find what I want,” said Jones, who sold her home in September 2001 and plans to purchase a foreclosure or “a deal” this year. “The higher-end houses in my area are already starting to come down in price.”
In the meantime, “I am in the driver’s seat,” she said. “And it is nice to sit back and know that when I find what I want, I am already pre-approved and have my money sitting and waiting. That is the best feeling -- to not have to be pressured into buying.”
Although she misses the security of homeownership, Jones said renting reduced her monthly housing costs -- which had included such expenses as a pool service, gardeners and association dues in addition to the mortgage -- by about $3,600, and it has improved her family’s quality of life. “Without all the added expenses and upkeep, we have traveled a lot more and enjoyed life,” said Jones, a mother of two.
Bob Taylor, owner of Bob Taylor Properties Inc. in Highland Park, said capital gains tax exclusions have made it easier for sellers such as Jones to take their profit, rent and wait for the market to cool.
Current law allows single homeowners who have lived in a primary residence for two of the last five years to receive the first $250,000 in profit tax-free. Married couples receive a $500,000 exclusion. These principal residence exclusions can be reapplied every two years.
Six of his 64 clients -- a 50% increase over 2001 -- opted to sell and rent last year, but Taylor said trying to time the real estate market is a tricky business.
“The current market took off in 1997,” said Taylor, who believes the real estate market follows a pattern of seven strong years followed by three down years. “So we have a few more strong years if we follow the normal trend.”
Taylor, an agent for 23 years who sells homes in the Eagle Rock, Highland Park, Mount Washington and Silver Lake areas, said housing prices in the Mount Washington area went up 45% in 2002. “So if the district goes up another 40% this year and then adjusts back down by only 10%, the people who step out of the market will have lost 30% appreciation,” he explained.
Yet lost appreciation is not the only thorny issue. If real estate sales remain strong, industry experts say, sellers who don’t purchase another home lose their tax shelter, could be priced out of the market or face increased mortgage rates when they reinvest.
Mortgage broker Stephen Finch, president of Susana Oaks Financial Inc. in Simi Valley, said, however, that buyers with patience can capitalize on the strong market.
“People who sold a home in, say, 1990 did very well,” Finch said. But Los Angeles “had an earthquake in 1994 that was unpredicted and really killed the housing market. So if you sold in 1990 and did not buy immediately, by 1994, in many cases, you could buy the house you sold for half of what you sold it for.”
Finch does not anticipate such dramatic market adjustments in 2003, however, and exactly when home prices might cool is anyone’s guess.
Eagle Rock renter Victor Migenes said he believes change is in the air. “Every bubble has to burst,” said Migenes, who bought a Mount Washington residence in 1999 for $260,000 and sold it last year for $440,000. “My house sold within 24 hours, but in recent months, I am not seeing properties sell so fast. I have seen several homes that should have sold in a two- or three-day period still on the market 30 days later.”
Migenes has sold and waited out the market several times in the last 15 years but doesn’t recommend it for everyone. “I am one person and very flexible. But families have a different situation,” he said. “I don’t think those people want to pick up and buy and sell every few years.”
Still, said seller-turned-renter Jones, families could mitigate the effects of moving by renting in the area where they plan to purchase before completing the initial sale.
“I am looking for a home in the general area ... so it won’t be a big move,” she said. “And my kids are in a school district where they want to be, so I don’t have to move them out of another school.”
In addition, she said it is important to find a real estate agent with a long-term vision to help find properties. “The key is getting a good Realtor, not somebody who gets bored with you if you are not buying right now,” she said.
Finch said the approach favors sellers with growing families who have equity in a home but not enough to buy a bigger house and keep the same mortgage payment.
“In essence,” Finch said, “what you are doing is selling your house, taking your profit and reinvesting the profit into a bigger home or a less expensive neighborhood when the prices drop.
“If they can handle the loss of the tax benefit, then renting is a practical way to go because they can rent a larger house often for less than they are paying now,” he said. “Meanwhile, the money they took out of their property is invested, theoretically, in something that is also producing an income.”
Even with money in the bank, Glen and Holly Avendano said the decision to sell and rent has been daunting. “Basically, we have just lost whatever we can deduct off our taxes next year. And that is kind of scary,” Holly Avendano said. “But in the long run, if we plan it right, we are still going to have the money to buy a house.”
The couple bought a Fullerton condominium for $95,500 in August 2000 and sold it for $163,500 in November 2002. The large bank account, they said, has been a distraction.
“Even though a new car might look good, you have to be disciplined and determined in your goals,” Glen Avendano said. “So if you’re using the money for a house, definitely use the money for a house.”
Yet for the Avendanos, the decision to sell their one-bedroom condominium and rent a three-bedroom home in Anaheim solved a serious space problem and reduced their monthly housing expenses by 45%. Their next step: Hold onto the equity from the sale and use accrued savings to make the down payment on another home within a year or two.
“There is no pressure for us to find a place immediately,” Glen Avendano said. “We have the luxury of time, and we can search and get closer to finding our dream home.”
When looking for that next best deal, Migenes said it’s important to avoid feeling frenzied.
“Don’t get trigger-happy. You’ve got the money sitting there, you made a good profit, you worked hard for it and now you want to do it again,” he explained. “So that means you have to watch the market and be careful what you buy.”
*
Michelle Hofmann is a Los Angeles freelancer. She can be reached at michellehofmann @earthlink.net.
