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SHOULD I DOWNSIZE MY HOME: HOW TO DECIDE

If you drive around the Fraser Valley, you’ll see new houses popping up everywhere. And they’re getting bigger all the time. It wasn’t that long ago, the average home was 1,600 -1800 square feet. Today, new homes run anywhere from 2,600 - 4500 square feet in size. That may feel huge to you, especially if your kids already left the nest!

So how do you know if you need to downsize? Could it help you prepare for retirement? And why do you feel so attached to your home?

If you’ve been asking questions like these, you’re not alone. The good news is that you get to decide whether or not your home sweet home is enough, or too much, for you and your family. Here are some questions to ask and things to consider before you make any big decisions about your house.

WHY SHOULD I DOWNSIZE MY HOME?

People decide to move for lots of reasons, and downsizing is no different. What’s right for you might not be right for your next-door neighbor, or vice versa. Here are a few examples of why you might decide to downsize:

1. TO SUPERCHARGE YOUR RETIREMENT FUND
Are you putting 15% of your gross income toward retirement? If not, lowering your mortgage payment by opting for a smaller home could move the needle significantly!

James and Christy are in their 50's with more house than they need and a retirement fund that’s hurting. Their kids have left the nest, and while the couple’s $1,900 monthly mortgage payment is feasible, it doesn’t leave much for investing. So, they have decided to downsize to a smaller home.

Their new 15-year fixed-rate mortgage has a monthly payment of $1,200. This downsize has allowed James and Christy to put that extra $700 a month toward their nest egg. After 25 years, that investing account could top $900,000. And if they wait until 70 to retire, they could end up with $1.5 million. Downsizing now sets them up to enjoy the retirement of their dreams later.

2. TO KICK DEBT TO THE CURB PERMANENTLY
Let’s say you’re among the millions of people who have lines of credit or even worse, credit card debt hanging in the balance. If you downsized your home, cut your monthly LOC mortgage or credit card payment by $300, $400 maybe even $500 or more, this burden can be eliminated enabling you to focus your investment on more productive investments geared to support your retirement years.

3. TO PAY OFF YOUR MORTGAGE
Nobody likes having a mortgage payment month after month. The good news is that you don’t have to stay a slave to your home loan. You could sell your current house and purchase a smaller one with cash. Imagine how much money you could be putting toward your retirement if you didn’t have a mortgage payment!

David is a single dad taking care of two kids. He’s a successful manager at his company, but money is tight. He’s worried he won’t have enough for retirement, even though he’s participating in his employer’s pension plan. So, he crunched the numbers and decided to sell his home.

With the equity from the sale, he paid cash for a smaller home. Now, he’s debt-free and putting about $800 a month away for retirement. In 15 years, he could have more than $450,000 in his nest egg and that doesn’t include the money that his employer’s pension match will earn!

4. TO MAKE LIVING MORE AFFORDABLE
Even if your mortgage is reasonable, you may still choose to downsize to decrease your monthly home bills and make overall expenses more bearable. Smaller homes equals smaller Hydro and Forits gas bills. Lower hydro and gas bills aren’t the only way you’d save. Smaller homes pay less property tax (generally speaking) and cost less overall to manage and maintain. Added up, you could save some serious cash that you could then put toward retirement.

Obviously, those aren’t the only reasons people downsize. Some want to move closer to family. Others experience divorce or job loss. And there are lots of people who want a more eco-friendly home. Whatever the reasons, make sure you recognize both the pros and cons of downsizing.

WHAT SHOULD I CONSIDER BEFORE DOWNSIZING MY HOME?

The cost isn’t the only factor that will determine whether or not you’ll say goodbye to your current house. Here are some other issues to think about:

LONG-TERM NEEDS
Will you need more or less space in the next 10–20 years? Will you be able to maintain the landscaping and yard? What if you or your spouse became unable to climb stairs? If you had to take care of an aging parent or another loved one, do you have a good space to do so? These questions might make you a little uncomfortable, but you need to think about what you’ll need in the future. It will help you determine whether you’ll need to downsize at some point, maybe even sooner than you’d planned.

HIDDEN COSTS
Downsizing your home may mean a smaller mortgage payment, but there are other costs you might not think about. For example, do you have to do home repairs before you sell? Will your furniture fit in a new place? Also think about property taxes, insurance and real estate related taxes (PPT). Those could cut into the cash you’re trying to make.

YOUR MOTIVES
If you’re not so keen on moving to a smaller space, you need to ask yourself why. Are you trying to keep up with the Joneses? Do you worry about what people might think if you bought a smaller home instead of a bigger one? In today’s culture, a bigger home is often seen as a status symbol. But don’t hang on to more house than you need just to impress people. That status won’t pay the bills in retirement.

YOUR EMOTIONS
Your head may be telling you downsizing is a smart idea, but your heart may be telling you not to do it. That’s probably because you’ve built countless memories within those four walls. You may feel sad at the thought of starting over somewhere new. But remember, your memories don’t disappear when you move to a different place. You get to build new memories with those you love, no matter where you live.

Once you’ve worked through the finances and emotions of downsizing, you can make a wise decision. If you decide to sell your home and move into a smaller place, I highly recommend talking with a real estate agent like myself who knows the ins and outs of the industry.

Not only can I help you get the most for your home, but I can also work with you to make sure the process is as smooth as possible. 
Principal Residence + Short-Term Rentals + Resale = Capital Gains Tax 
Kara Kuryllowicz, May 30, 2019

Vancouver empty nesters Steve and Barbara’s beloved 3,500 square foot heritage home with spectacular ocean views is now leased four to six months a year while they assess life in a 700 sq. ft. luxury downtown condo.

In Toronto, Jody rents her Cabbagetown house to neighbours tackling extensive renovations as well as professionals working short-term contracts. The two- to six-month rentals cover her mortgage and operating costs, such as insurance, property tax and utilities and she enjoys summers at the cottage.

Like so many homeowners that rent through AirBnB and comparable websites, Steve, Barbara and Jody consider them their principal residences because they live there more than they live in any other location.

Most Canadians know they’ll pay capital gains tax to the Canada Revenue Agency when they sell an asset, such as their home, or investment for more than they paid. They also know and appreciate the fact their principal residence is exempt.

However not every homeowner that rents part-time realizes their homes’ principal residence status could change because it’s being used differently and that 50% of the gain may be taxable as part of their regular income.

“My financially-savvy clients diligently report all rental income and related expenses to CRA and I’m surprised at how many don’t realize those rentals could result in a significant capital gains hit when they sell,” says Alex Leventis, a Toronto-based accountant. “Before you rent your principal residence talk to your accountant to find out if it will affect your principal residence and capital gains tax situation.”

If you paid $200,000 for your principal residence house in 1993 and sell it for $1.4 million in 2019, you won’t pay a penny in tax. However, if you rented it for six months in 2015 and 2016, 50% of the 2015 and 2016 gain may be taxable as part of your personal income in each calendar year.

“Understandably, my clients want to know what they might pay if they rent occasionally before they sell a principal residence, but I can’t accurately predict how much a home will appreciate, whether their personal income will stay the same and most importantly, how CRA will determine the effect on their principal residence status,” says Leventis.

Fortunately, accountants can tell homeowners that the CRA says a house, cottage, condominium, an apartment in an apartment building or duplex, a trailer, mobile home, or houseboat, must meet every one of these conditions to qualify as a principal residence:

• You bought the space to live in it
• You own the property alone or with another person
• You, your current or former spouse or common-law partner or children live in it at some point during the year
• You designate the property as your principal residence

Both Steve and Barbara, and Jody’s homes would still be considered their principal residences based on the criteria above. Yet CRA notes the principal residence status may change if all or part of the home is used for rental or business purposes.

“When you’re ready to sell your principal residence, the CRA’s perspective on its status is the only one that matters and they assess each situation individually – it’s incredibly complex and subject to interpretation,” says Leventis.

Even if homeowners rent their principal residences, the status will not change if they comply with these three points:

• Your rental or business use of the property is relatively small in relation to its use as your principal residence;
• You do not make any structural changes to the property to make it more suitable for rental or business purposes
• You do not deduct any capital cost allowance on the part used for rental or business purposes
“You can ask the CRA what would be considered ‘relatively small’ or what type of structural change would be an issue, but good luck getting a straight answer – believe me I tried,” said one homeowner. “My accountant tells me there are many many shades of grey.”

Fortunately, homeowners who rent their principal residences because they had to relocate for work can maintain their homes’ status under certain conditions. For example, if the new workplace is at least 40 km farther from your temporary home than your principal residence, the principal residence status shouldn’t be affected.

“It’s never black or white, but homeowners that rent their principal residences need to get as much clarity as possible from their accountants because the long-term financial impact could be significant,” says Leventis.

Let’s just say that Steve, Barbara and Jody are meeting with their respective accounts next month.

The Human Touch Means So Much
- Paul Cowhig, Fraser Valley Real Estate Board -

The tech world is talking more and more about artificial intelligence (AI) and other forms of technology that could supposedly emulate some of the things human beings can do. Does this mean that REALTORS® are replaceable by AI?

The logic goes that AI use will be able to anticipate our needs and wants more accurately and more quickly than we humans. And as we use AI and devices with AI, they ‘get to know us’ even better. The move to AI, through smart devices, smart searches and predictive thinking, is already underway. Some real estate brokerages even automate the online on-boarding of new clients through an AI ‘bot.’

On the flip side, real estate buyers and sellers have been harnessing the human intelligence of Realtors through agency relationships for decades, for good reason and with great success. They believe that putting the knowledge, abilities and experience you have accumulated to work on their behalf will get a better result than they could achieve on their own.

If there ever comes a time that consumers think they won’t get a better result by using you, they will simply stop calling. So, what exactly do our clients want from us that technology cannot deliver, at least not yet?

According to an Inman article I read recently, this is what home buyers and sellers said they valued most about their real estate agent (in descending order):
  • honesty and integrity
  • knowledge of the purchase process
  • responsiveness
  • knowledge of the real estate market
  • communication skills
  • negotiation skills
Honesty and integrity: One of the most critical things for a client is to be able to trust you. They need to have confidence that everything you do and say is the truth; the whole truth and nothing but the truth. An honest person is going to tell you the truth. A professional with integrity will never put their interests before the interests of their client. That means sharing everything you know, not just what you want your clients to know. If a consumer doesn’t think you are honest and have integrity, they will never become a client.

Knowledge of the purchase process: They are hiring you in part because you know things they don’t. If you can’t articulate and apply your practical knowledge of the buying or selling process, then what good are you? You need to be able to talk to your client about their goals, what steps are needed to achieve them, and how you’re going to help them navigate from start to finish. There are a lot of potholes on this road and you need to know what they are and how to avoid them.

Responsiveness: I don’t know about you, but when I reach out for help, I want the help to be there. I get irritated fast if I can’t contact someone and it prevents me from accomplishing what I’m doing. Talk to clients about communication and their expectations of you in that regard so they can find you when they need you.

Knowledge of the real estate market: Real estate is such a hot topic in our area that everyone seems to have thoughts and opinions, but they will rarely be as fully informed as you are. They will generally be informed only on what they are specifically looking for. With so much information available today, people are doing a lot of research, having constant conversations with friends and family and will have formed strong opinions before they even talk to you.

However, they need you to interpret all that data to ensure they’re considering all the relevant facts. For example, they may know a lot about two bedroom condos in White Rock between $350k and $425k, but they may not know about interest rates and financing options, current market incentives, strata documents and why they’re important, clauses to include in a contract, what’s negotiable and what’s not, external market forces that may be relevant, stigmas they may not be aware of, and other factors that could be key to whether they proceed with the transaction. There’s a lot more to consider than price and clients depend on you to fill in the whole picture so they can make an intelligent, fully informed decision.

Communication skills: Your client needs to feel you understand them. What they need, what they want, what they can afford and what they are afraid of. Not only that, they need to know you can get things done and communicate effectively not only with them, but also with the other parties in the transaction.

Negotiation skills: Some call it an art and most of us at least recognize that some people are better at it than others. At bare minimum, the public expects you to be a better negotiator than they are. That means you do more than hit ‘send’ to deliver your offer to the listing agent if you’re a buyer agent.

I love a Maya Angelou quote. She said, “Words mean more than what is written on paper. It takes the human voice to infuse them with deeper meaning.” I don’t think she was thinking about contracts when she wrote that, but I think it applies perfectly.

An offer to purchase, well-presented by an organized, prepared professional, is an utterly different document than one that is emailed, printed and dropped on a table. That means not advising a seller to dissuade buyer agents from presenting offers in-person just because it’s easier or more convenient. There will be times when the buyer agent can’t present an offer, but I believe in-person presentations are of paramount importance. You and your client will both be in a better position to determine the real value of an offer if it is properly presented and explained by the buyer’s agent.

We all need to be careful not to train the public to think that the click of a button is the same as a face-to-face meeting and discussion with a professional agent, otherwise we will be replaced by AI one day. If you are not personally impacting the outcome of a transaction, what are you being paid for?

Note that all the headings above are skills that can be learned and improved on. It is also worth noting that none specifically refer to technology and yet technology definitely has an important role to play in a real estate transaction from start to finish.

Your clients have access to all the technology they need to complete a real estate transaction on their own and a few will. However, I believe the vast majority want and need more. They want the human touch. They want the confidence that comes from having a deeper understanding of the whole process that they can only get through engaging a professional with the intelligence and experience required for the job. And there’s nothing artificial about that.

Should You Sell or Buy First?
If you already own a home, and are looking to move into a new one, the decision to sell your house before buying a new one is tough. In general, the best strategy will depend on your personal situation and the conditions of your local real estate market. We hear this question a lot, and since there is not a single strategy for all clients, we always end up answering it with our clients, not for our clients.

The first step to deciding whether to buy or sell your home first is to consider the reason(s) why you are moving.

Do you have a very specific type of home in mind? 
If you're looking for your "dream home" or need very specific features, and you won't move until you find the perfect home, it's likely that you'll have to buy before you sell. Obviously the risk here is owning two homes for an extended period of time. Another problem with buying first is that you quickly become very motivated to sell your old home, and you may feel pressure to accept offers you wouldn’t have considered otherwise. This is why we rarely recommend buying first.

Would showing your current home to potential buyers be a problem? 
When your home is listed for sale, people need to be able to view it, and it needs to look great whenever potential buyers come through. Showing requests are often made on short notice, and if you have a house full of kids, pets, or tenants, showings might not go very well. If it’s likely that we can sell your home for a higher value, if you’re not living in it, we may recommend that you move out before it’s listed.

Are you building a new home? 
The biggest risk and opportunity with building, is what happens to the real estate market between the time you decide to build, and the time your home is complete. If you keep your current home while your new home is being built, and the market drops in the meantime, you’ll have a much bigger gap to cover between the price of each than you may have planned for. On the other hand, if the market improves you may come out ahead.

So, What Is A Possible Solution?
We often find most clients are comfortable with the following solution. I start by evaluating your current home and provide recommendations on how you can improve your property’s value. This will give you a good idea of what you can afford, and what you need to do to get ready to sell.

Next we take a look at a number of homes on the market in the price range you’re considering. If you feel comfortable that you could find a home you’d like, we put your current home on the market with a full scale go to market plan and with the understanding a sale is quite likely.

What About A "Sale of Home" Condition?
When you make an offer on a home, you could indicate on your offer that it is conditional upon the sale of your current home. However, it can be difficult to get an offer with a "sale of home condition" accepted by the seller.

With your home is already on the market, it's priced correctly and is being actively marketed, it may be easier to get this type of offer accepted than it would be if your home is overpriced, or not even on the market yet. Keep in mind, if the "sale of home" condition is necessary, you may have to be more flexible in other areas during negotiations, such as price.

In the end, there is no "right solution" for every situation which is why it is important to sit down to discuss your situation anytime. 

Call me at 604.340.9407 or submit the contact form below and I'd be pleased to meet with you to discuss your ideas.

Get In Touch

Darren Opsahl

Macdonald Realty Ltd.

100-2429 152 Street  Surrey,  BC  V4P 1N4 

Mobile: 604-340-9407

darren@darrenopsahl.com