Update on the house sale
2nd June 2007
The international buyer fell through…not entirely surprising.
We did end up with another offer on the house that we’ve accepted. They are using conventional financing and are pre-approved for the purchase amount. The inspection happens next week and the closing is set for June 15th.
To address Christopher Smith’s comments on my previous post… We’re freeing up about $115K in equity through the sale plus reducing our cash outflow by about $2,700 a month ($1,200 of which was adding to equity on the property.) Yes we’re raiding the piggy bank a bit. My wife purchased another mare at auction last week for $17K which can arguably be called an investment. We’ll be paying off the 0% credit card and horse purchase which will eat about $40K, leaving us with a bit over $100K in cash if you add the proceeds from the house and our current liquid savings. I’ll likely be buying my TV and we’ll be spending some cash on improvements to our property here (a pond, horse facilities etc…) The balance of the cash will be invested in short-term savings and migrated into tax managed funds over the course of the next three years using value averaging since I’m not all that excited about putting a big chunk of change into the market at these valuations. We’ll also leave a few month’s income set aside for emergencies.
We’re also going to bump my wife’s 401K contribution from 6% of her salary (capturing her employer’s 100% match up to that amount) to a level high enough to max her salary deferral at the $15,500 limit. I’ll also be maxing my solo 401K out this year, not sure what the total amount will be but if my earnings continue at their current rate, I’ll be able to defer a bit over $30K in income, maybe a bit more. So, we’ll have put away nearly $50K in pre-tax income this year if all goes well. I am also setting up an automatic withdrawl into an after-tax account earmarked for retirement of the money we have been spending to maintain the property in Michigan. This means we’ll be setting aside another $32K+ of after-tax income each year. Time to start thinking about how to structure those portfolios. This may end up being too aggressive but we’ll see.
If there is one thing we’ve learned from this transaction, the home you live in is not an investment. The appreciation on the house in Michigan was actually right around the inflation rate over the course of the ten years since my wife bought it. When you factor in the interest paid on the purchase and the money spent on taxes and maintenance it produced a significant negative return. Of course we’re selling into the worst market in those 10 years but we’re not able to pick the time we need to sell. We’re not expecting our home here in Illinois to appreciate while we’re here either. It’s where we live, and we’ll spend money to make it nicer, but we’re not looking to make a killing on it when we sell either. This is one of the reasons we purchased a lot less house than we could afford according to conventional wisdom (about half). It’s beautiful and we love it here, but it was relatively cheap.
Sorry (again) about the lack of posts… My business has really taken off and I’ve been swamped with work these past few months. While this is a good thing, it has taken time away from other aspects of my life, this site included.
June 2nd, 2007 at 9:43 pm
Glad to hear you sold the house. It’s like being forced to sell a stock at a particular time. If it low, you take a hit. Sounds like you made the best of it.
June 3rd, 2007 at 9:13 am
Oh I am absolutely sure this is the right thing to do. The market in Detroit isn’t going to get better for some time. It is very similar to the city in upstate New York I grew up in. As the larger employers cut jobs housing values stagnated and never recovered.
My mother’s house for instance was purchased 20+ years ago for $65K. It is now worth approximately $80K. A 23% increase, but this is only a 1.15% return on investment. Bear in mind that she has also spent well in excess of her $15,000 gain on maintenance, taxes, insurance and improvements. Considering that she paid cash for the house 20 years ago, this was actually a terrible investment. However, she did have a place to live that she likes. The economy where she lives will likely never recover to where it was. Similarly, I don’t see Detroit recovering any time soon and things will likely get worse before they get better.
June 4th, 2007 at 11:40 pm
I just found your blog. I was in a similar situation in Detroit. We owned a home in metor Detroit and had to move. My company that wanted me to relocate to Chicago wouldn’t buy my house in the event that we couldn’t sell it. So I found a new job that would. We moved to California and the company ended up having to buy the house. They ended up eating a 15K loss while we eeked out a small gain (5k). I can’t complain since we barely owned the house 2 years.
On a different topic, can I be a bit critical. Since you are willing to share some of your personal financial details, I couldn’thelp but cringe when you mentioned taking 25K each for you and your wife fro your home equity to spend as you wish. I can’t believe whaty I’m reading! Home equity is not mad money to be spent for indulgences. I don’t mean to sound like a chastening parent. I just hate to see people use their money foolishly.
In my experience, anytime someone says they feel ‘entitled to indulge’ or they ‘deserve to treat themselves’ or somehting to that effect (your words in describing your wife’s plan to buy horses) it usually means someone is being foolish with money. I have heard so many similar tales from friends. Things like, “we probably can’t afford it but we work ahrd and deserve to treat oursleves so we bought a 50 in plasma TV”. Another friend sid that they ‘deserved to have a nice house’. TV’s, and nice homes are great things. But they are not rights. They are not entitlements.
You are attempting to pay of debts and get your finances in good shape and I applaud you. But don’t make the foolish mistake of using a equity pay day as Christmas in June.
My wife and I have achieved a six-figure income the last few years. I just bought a car. It’s a 10 year-old Jeep with 150K miles on it that I got for 2,500. I’ve done the math and I figure when we start making closer to 300K and have 500K+ in net worth I think I can start to buy new cars. I’m just trying to stress that people at many income levels need to be careful with how they spend.
If you are wondering what you should do with the 25K, consider setting up a non-deductible IRA (or a Roth if you are below the income limits). Or even pay down your new mortgage. But trust me, anything would be better than a splurge.
You mentioend your current employment situation. Wouldn’t it be prudent to squirrel a little more away for a rainy day? I have a friend who is n excellent employee with good skills but a career that is not easiest to ind openings in. He seems to find himself, every few years, out of a job and manages to spend through his savings every time. It always takes him longer than he expects to find the next job. But at least he has some savings. It allows him to be more selective about hat job he takes and reduces the heartburn of looking for a job.
If you are wondering why I am so insistent, my wife and I were in a similar situation recently and chose to save the small windfall we had. As a result, I have few financial worries and I am further ahead of my peers in my retirement nest-egg.
Do the right thing!
June 8th, 2007 at 5:04 pm
Thanks for the comments!
Don’t have time to respond right now, heading out the door. Will write something later this weekend though.