Ready to trade up?
By Diane Saatchi
If your financial situation changed, or your family is growing, or you think its time to increase your investment in real estate for any reason, expect to find yourself in the surreal position of being both a buyer and a seller in the same market.
Please don’t be surprised to be disappointed with the options available for your new, more expensive home. Chances are, your beloved real estate broker will disappoint you.
Shopping for a house is, in a way, like shopping for clothes. Most of us experience a gap between our expectations and reality. When we see a dress, or coat, or (yikes) a bathing suit we love, we get excited and can’t wait to buy it ... until we try it on and it doesn’t look like it did on the model.
Similarly, we see glossy photos and gushing websites describing what seems like the home of our dreams -- but what we see in pictures and on websites and in the news is usually more exciting than the reality.
It doesn’t matter if your budget is $1 million or $30 million – Expect disappointment and the need for compromise at both sides of the trade.
You’ll be paying the costs of both a buyer and a seller.
For many people, closing costs are an afterthought, but they can add up. If you’re selling a house for $5 million and buying a house for $10 million, it’s a pretty safe estimate to add those two together to get $15 million, and figure your trade costs are about 5%, or $750,000.
It may not happen at the closing itself, but you’ll also be responsible for paying capital gains tax on the house you’re selling (although this tends to be more expensive if you’re scaling down than trading up). |What to Expect When You're Ready to Scale Down|
Click on image to enlarge
When you’re both buying and selling, you’ll be responsible for the unexpected costs that crop up in each role. For instance, buyers pay a 2% Peconic Tax and a 1% statewide New York mansion tax that kicks in when the sale price is $1 million or more. Buyers also have title, survey and inspections costs. Sellers will have to pay a real estate commission and both as a buyer and seller there will be legal costs. In the adjacent graphic, take a look at the costs that are assumed by the buyer and seller in a transaction:
Your trade will probably cost more than you expect.
On that same note, many people come to me who want to buy very low and sell very high. Spoiler Alert: You can’t. The only way you can do that is to get a time machine.
Paradoxically, it is human nature to overvalue the property we no longer want and undervalue the one we want. Unfortunately, buying dollars are no more powerful than are selling dollars.
It’s hard to predict the immediate and long term costs of the trade.
You can see why I recommend anyone who wants to trade up (or down) to a new home consult an accountant or other financial advisor. The ins and outs may seem overwhelming, but a professional can help you outline the costs of your trade before you get into the weeds. It is also wise when considering such a trade to project ahead to the long term upside and how it fits into your overall financial plan.
You might ultimately choose to “trade up” without leaving your current house.
That said, it’s not uncommon for people to take a look at the costs of trading up and decide they can get the same effect without leaving their current residence. Often, they decide to stay in place and renovate their house or add on to it to make space for the changes in their life that inspired them to trade up in the first place.
© Diane Saatchi