How to help mom buy a home without going broke?
July 21, 2022 6:53 PM   Subscribe

Mom wants to buy a home with only 650k in her nest egg, but homes she wants are 500k where she lives.

My mom wants to buy her forever home. Unfortunately housing prices have risen so much where we live in the northwest that to have all her wishes fulfilled, she'd have to spend about $500,000-$525,000 and she has a $650,000 nest egg from an inheritance. She's 65 and plans on working a service job for a few more years. She receives no benefits from her job, but she did just start Medicare with Part B. She has no other retirement, but will collect about $2,000/mo from social security (full retirement age) in 7 months.

In her view, living somewhere else is out of the question, and she doesn't want to compromise on things like a large garage and a small back yard that would otherwise vastly expand the home possibilities. The starting home prices where we live are about $425,000 now for a 2 bedroom condo. She only makes about $35,000/year right now.

Her current rental is expensive and is about 40% of her income.

Even if we have a housing crash in this micropolitan area, a 20% drop in home prices would only save her $80-100k on a purchase price.

I see these potential options for her to actually buy a home and not go broke in old age.

1. Buy a home in a much less expensive city + state (where she could get her dream home for $300-350k).
2. Make concessions in her city and buy a home that doesn't check all her boxes.
3. Increase her income significantly for the next several years to build her nest egg before and after reaching social security full retirement age in 7 months.
4. Buy her dream home and rent out a room until her remaining nest egg is a safer amount to live on.

Am I missing another possible scenario?
posted by mtphoto to Work & Money (29 answers total) 3 users marked this as a favorite
Best answer: Honestly, I would consult with a financial advisor, ideally one who will know all of the various government programs that your mom may qualify for in your state/city. A one-time consultation will be well worth the price.
posted by coffeecat at 7:00 PM on July 21, 2022 [15 favorites]

Have you done up a budget? $2k/mo until death plus >100k in savings/investments seems like enough to live for a single person who doesn't pay any rent or mortgage and is ok living thriftily, but I don't live there or know her spending.

If this is WA, property tax is high bc they are among the most regressive in the county. They literally use state taxes to redistribute wealth from the poor to the rich. Driving out home-owning retirees on fixed income is one of the many ways these tax structures are awful, sorry.

It does not seem wise to try to force her out of her desired city/state: what good could come of that?
posted by SaltySalticid at 7:01 PM on July 21, 2022 [7 favorites]

It doesn’t seem like an awful plan. She can buy the house outright, and have no housing payment outside of insurance and tax. With a $2,000/month Social Security coming in soon, that’s likely to cover expenses while she is well, and if things get worse, there are a lot of rules about how little assets you can keep, but most of them have exceptions for your home.

I’d run it by a real financial advisor familiar with the state she’s in.
posted by advicepig at 7:10 PM on July 21, 2022 [10 favorites]

Best answer: Are basement suites a common thing in her current city? This would seem like a consistent and long term form of secondary income to me.

Also if she buys sooner rather than later, it would free up 40% of her income, which she can use to add to her savings (minus the additional costs of owning a home of course - needless to say, get a house inspection before buying anything).
posted by piyushnz at 7:17 PM on July 21, 2022 [4 favorites]

Something that struck me is that none of these are mutually exclusive. So a fifth option could be a combination of say, smaller home in desired city, plus room-mate, plus slightly better-paying job. For example.

Sixth combo option. While you and your Mom are making this decision, make sure the nest egg is somewhere it’s working for you to add to your capital, even if only a little. If you need it to remain fairly liquid to be able to move quickly on a property, high interest savings accounts can be an OK option. (Obviously only if available in your market.) This could give you a little more security and flexibility while you search and navigate 1-4.

Seven. In some markets, homes sold by the public trustee can be relative bargains. Same for forced sales due to mortgage default. It’s not a sure thing by any means but you could try search terms like “mortgagee” and “trustee” or “under instruction” in whatever real estate search engine you use. If your real estate search will let you search for sold properties with these terms you can compare to other properties sold in your desired area and see if keeping a watch on this kind of sale might be worthwhile.

Eight. Altho this should really be number one! If you haven’t already, get really clear on how much her monthly living expenses after purchase will be. $150k plus $2k/month and no rent seems like it would not necessarily send someone broke. Once you have this figure, you can see how much expectations around house price need to be adjusted and move forward with clarity. On preview, suggestion above to consult financial planner familiar with retirement planning, as well as local assistance to purchase programs is a great one.
posted by t0astie at 7:19 PM on July 21, 2022 [2 favorites]

Best answer: Washington has no personal income tax. It is the Nevada of the Northwest. Watch out for her, attend all meetings with her.
posted by Oyéah at 7:19 PM on July 21, 2022 [2 favorites]

If she makes $35,000 a year now and 40% goes to rent, then going to $24,000 a year of social security income with no rent to pay is an increase in disposable income, or maybe flat give insurance and maintenance expenses? What am I missing?
posted by goingonit at 7:20 PM on July 21, 2022 [8 favorites]

Best answer: I'm living on a similar monthly social security + medicare + purchased home + some savings scenario on another state. I have a hefty Part B coinsurance and prescriptions because of my personal medical circumstances. My tastes are modest and I live pretty simply. Gets a little tight when there are big expenses (new tires, dental work, vet bills for beloved dog), so if she's open to continuing to work or having a roommate to get some wiggle room, I don't think it would be entirely out of reach.

Having a home has given me an enduring sense of security and joy. It's also an absolute ton of work, even with a tiny yard. If she's handy, all the better.

Absolutely worth it to see a financial planner to check her options.
posted by mochapickle at 8:03 PM on July 21, 2022 [10 favorites]

Response by poster: Definitely want her to have security, as her running out of money or having to borrow against the house would be awful.

Do you rent out a room in your home? Hearing your situation has been really helpful.

I'd estimate that she needs $2,200-2,400 per month after buying a home in cash. That does not include any unexpected expenses.

I've also heard multiple financial planners telling clients to keep 1-2 years of expenses in cash to weather out recessions in the market.

$100-150k in a nest egg just seems very risky to me.

All of her family lives about a thousand miles away, so I forgot that having a little money to travel could also be important.
posted by mtphoto at 8:32 PM on July 21, 2022

Yes, nthing "check with a financial planner."

But a home will also give her the reverse mortgage option and similar choices as she gets older, if necessary. Obviously there's some uncertainty--housing prices fluctuate--but spending most of her nest egg on a home isn't like burning it on a Lamborghini or something; the money isn't completely "gone" and the ability to get it out again can be a cushion against other bad luck.
posted by mark k at 8:32 PM on July 21, 2022 [3 favorites]

Best answer: Buying a home sounds like a great idea in this situation. Rent out an income suite and maybe that income suite becomes a place for a relative or caregiver to live as she ages. Also consider accessibility when buying - bedroom and full bathroom on the main floor, etc.
posted by nouvelle-personne at 8:34 PM on July 21, 2022 [4 favorites]

Best answer: Social Security isn't really enough to live on, even if you don't pay rent; real estate taxes alone can kill you. Reverse mortgages bite so many people in the butt. Speaking as someone who has ushered a parent through the end of life, having a house doesn't work if you develop a degenerative disease.

Speaking as someone who made these decisions for myself some years back, I bought a house in good shape in a cheaper area with good public transportation (so I can get rid of my car when I need to) and retired some years later after aggressively saving up a big chunk in my 401(k), and so far my bets are paying off. Having good Medicare supplemental health insurance also helps.
posted by Peach at 8:41 PM on July 21, 2022 [2 favorites]

What would taxes, maintenance & insurance cost? Tenants are work, and disasters happen. (I have been a small-time landlord.)

It sounds like she's looking at single-family suburban houses. But she may not really want a lawn to take care of. And as we age, being on bus lines and near people is a huge benefit. Go look at houses, but also look at condos and townhouses, esp. if the fees are not too bad. Aging can be very lonely, and neighbors can be a great benefit.
posted by theora55 at 8:57 PM on July 21, 2022 [11 favorites]

Best answer: Seconding everyone recommending that you two evaluate every possible purchase through the lens of how livable, and maintainable, it will be as she ages and becomes less mobile, potentially less able to drive, and possibly disabled in other ways. Given her insistence on a yard and garage it sounds like she might be resistant to thinking that way, but a selling point is being able to stay independent for longer. That seems at least as big a concern as her nest egg.
posted by trig at 9:15 PM on July 21, 2022 [8 favorites]

Do you rent out a room in your home? Hearing your situation has been really helpful.

My house is REALLY small! I value my privacy above just about everything else but I'd probably be more open to the idea of a roommate if there were more space and a second bathroom and if covid weren't an issue. If I could build a freestanding studio in the back yard, I probably would.

I'm disabled, btw, an end stage renal patient in my 40s. I have a relatively new kidney transplant but I know circumstances can change pretty quickly, so the looming uncertainty tends to make me ask questions like someone 20-30 years older than I currently am. How much will I need to live on every month? How long do I expect to stick around? Will my savings be enough? Should I buy a newer and more reliable car or will this one last? If my transplant fails and I return to hemodialysis, will I have the strength to maintain this house and the yard this time without additional assistance? If I can't, what would my options be?

And it's tough. It's really hard to plan for a life expectancy for some vague range between five and twenty-five more years. I take money out of savings every year, and it's a strange and disheartening feeling to see your bank balance shrink after a lifetime of doing everything you can to make that number grow. Takes some getting used to.

I'm usually pretty conservative and frugal, but I've landed pretty firmly on the side of following my heart about the house stuff. Risk profiles and personal preferences and... I guess kismet, really... should all weigh in heavily. I considered condos as well and while it may have been a wiser choice both practically and financially, it wouldn't have felt like home to me. It's definitely been a leap of faith but I think it's been a good and positive decision for me.
posted by mochapickle at 9:51 PM on July 21, 2022 [10 favorites]

Best answer: I have to go against the grain and agree with you this seems needlessly risky. First, at any income level, buying a house at age 65 thousands of miles away from family when only planning to work a couple more years doesn’t make sense - much less one with all the added maintenance and work that comes with a garage, yard, etc. I know you said she can’t imagine living anywhere else, but even if she stays in the same city her needs and preferences could change dramatically in the next few years. This is a textbook case where renting almost always makes more sense than buying.

Second, even if she could technically pay for the house and put food on the table, she’d be taking on a lot of risk and giving herself a lot less flexibility to do much with her retirement than is necessary. Apparently the average effective property tax rate in the U.S. is 1.1%, so that would put her at $460/month for a half million dollar house (this obviously depends on her exact location, but she should also keep in mind this can go up quickly in line with housing prices). Rule of thumb is 1% of purchase price per year on maintenance, so that would be another $415/month. Estimates of the average cost of homeowners insurance seem to range from $1,200/year to $1,800 year right now. Keeping in mind the average home price is $375,000, let’s be generous and say she’d pay $1,500/year or $125/month. And all of a sudden, even if things go according to plan, she’s paying 50% of her pre-tax SS income just on ongoing housing costs.

I’m not saying this can’t be done - my grandma owned her condo, paid half her $1,600 income from SS and a small pension on condo fees and the other half on her modest living expenses. She dipped into her $100,000-$200,000 savings occasionally to travel or buy gifts or what have you. The condo put her close to a lot of her friends and family and gave her access to an on-site restaurant, grocery store, pool, etc, which let her age in place for quite a while, and when the time came she had the foresight to sell. The income from the sale paid for her to move into one of those graduated assisted living communities (where you make one big down payment and then pay monthly rent that doesn’t change even if you eventually need more intensive assistance), and when she finally passed she didn’t leave behind an inheritance but she also had never had to experience real financial insecurity. I’d say she played it pretty well in retrospect, but a LOT of things also went right for her.

One more point - I rent out a basement suite and it’s a critically important part of my housing budget. I would absolutely not want to rely on this for my financial security/ability to remain in my house at age 65. It comes with its own set of added risks from vacancy, damage, non-paying tenants, general liability - this is something you undertake when you have a decent emergency fund and the ability to absorb all but the 99th percentile worst case scenarios.
posted by exutima at 11:19 PM on July 21, 2022 [10 favorites]

Best answer: I know you said she can’t imagine living anywhere else, but even if she stays in the same city her needs and preferences could change dramatically in the next few years.

This is what I keep coming back to. If she were ten years younger...but she's not. I don't know if you have access to the WSJ, but here's an article about how a lot of boomers aren't thinking the "forever home" thing through very carefully given life changes that are predictable in occurrence if not in exact timing.
posted by praemunire at 11:27 PM on July 21, 2022 [3 favorites]

It must be acknowledged that there are lots of uncertainties and few guarantees about this decision.Houses can require expensive purchases like new roofs. Or what happens if/when a natural disaster hits and causes severe damage to her home? That being said the rental housing market is also insane. But the great recession isn't that far in the rear view mirror.

In order to exhaust all possibilities I would check city/ state for any any home buying programs for low income or first time buyers. Is there someone in her life with whom she could pool funds to buy a duplex? Live in the ADU and rent out the full house? Maybe she would be interested in a tiny or modular home. RV living. Vanlife?

I agree with you that if home buying is going to happen in that city, that it is probably prudent to consider less expensive options (as long they enable 'aging in place').
posted by oceano at 12:34 AM on July 22, 2022

Best answer: I'll echo theora55 & exutima's comments about budgeting for the ongoing expenses of owning a home. Need to budget for property taxes, maintenance, insurance.

Another way to think about the value of $650k is investing it all into the stock market. In the long run, averaged over 20 years, we might expect to make a 4% / year return on investment from the stock market, after subtracting inflation. For example, if that $650k went into the stock market, we might expect to get a return of about $26k per year, before tax, on average. That'd give a retirement income with $24k / yr income from social security, plus $26k / yr income from investments, for a total income of $50k / yr. Assuming rent is currently $14k / year, if renting during retirement, that leaves $36k / yr for other expenses (including a bit of tax on investment returns, perhaps).

On the other hand, suppose the whole $650k is used to buy a house. Then we might expect annual expenses of maintenance budget (1% - 2%), say $6.5k to $13k, property tax (0.3% - 2.5% depending on state), say 1% so $6.5k, then insurance (say about $1.5k, as a guess). So that might give annual expense of $14.5k -- $21k. That'd give a retirement income of $24k / year from social security, after subtracting housing expenses, that leaves $9.5k -- $3k / year for all non-housing expenses.

I'd be concerned about "buying too much house", so that housing expenses consume a large portion of retirement income, making it difficult to live a comfortable life on the remaining social security income. There's the direct costs of insurance, property taxes and maintenance that you need to start playing, then there's also the cost of the lost investment income you could have generated if you had instead put the cash that is trapped in the house to work in the stock market.

The bogleheads forums can be a good sounding board for retirement related financial questions. There's a number of people there who can suggest helpful advice.

Getting a consultation or two from a financial planner about the situation could be a wise move -- a financial planner who offers a fixed-fee based service, will act as a fiduciary and offer advice in the best interest of the client - not themselves - and who will not attempt to start changing ongoing management fees as a percentage of assets.
posted by are-coral-made at 2:42 AM on July 22, 2022 [2 favorites]

Another way to think about the value of $650k is investing it all into the stock market. In the long run, averaged over 20 years, we might expect to make a 4% / year return on investment from the stock market, after subtracting inflation. For example, if that $650k went into the stock market, we might expect to get a return of about $26k per year, before tax, on average.

She's 65. If she invested nothing at all, she could pull out $32500 a year an be at $0 at 85 years old. Also, over a long period of time, the stock market returns more like 10%, or 8% with inflation. I swear it become a game of telephone. Pretty soon the stock market will return 4%, take out inflation 2%, then 2% take out inflation it returns 0%.

So at a 4% safe withdrawl rate, she'll be able to pull out your $26k and have $650k, or something close to that, at 85 years old.
posted by The_Vegetables at 7:35 AM on July 22, 2022 [1 favorite]

Nothing wrong with still having close to $650k at 85, but unless she really wants to leave it as inheritance, she has far more than $26k to live her own life with if she chose to invest it all, and take out however much she needs to live.
posted by The_Vegetables at 7:37 AM on July 22, 2022 [2 favorites]

Best answer: I don’t think the financials are unreasonable, but I would really encourage her to think through the maintenance needs (and related expenses) of a house and yard. I am 10 years younger and can already see that I’m going to need help with yard work and other maintenance sooner than I expected.

More importantly though, she should not only consult with a financial planner, but one who specifically has expertise in estate planning and especially Medicare eligibility. Disposition of assets, homeownership, equity - all have big implications for Medicare.
posted by tinymojo at 9:14 AM on July 22, 2022 [1 favorite]

Correcting myself- Medicaid, not Medicare.
posted by tinymojo at 9:17 AM on July 22, 2022

If she works until she's 70 she will get more social security.
posted by mareli at 1:56 PM on July 22, 2022

Best answer: Agreeing with the comments about yard and house maintenance. My cute little suburban cottage was a BEAR to maintain and my brick city townhouse is a dream. Still gonna probably move again to a smaller place when my spouse dies.
posted by Peach at 3:03 PM on July 22, 2022

Is she experienced with the work that comes with a house? The lawn mowing, the snow shoveling, the minor repairs and maintenance? Even if she is, she’s probably only got 5-10 more years before she’ll want to start hiring those out anyway and that’s a big chunk out of a small budget. I’m quite a bit younger with a very small and well-maintained house and even I look around in despair a bit more with every passing year. The weeds alone, my god.
posted by HotToddy at 3:26 PM on July 22, 2022 [2 favorites]

Response by poster: Single family homes are so expensive where we live that they are completely out of the question ($600-700k starter, median is ~$800k).

More than likely, she'll buy a 2 or 3 bedroom condo. Almost all the HOAs here do snow removal and lawn mowing, thankfully!

I'm hearing some new ideas and she'll definitely need to consult with a financial planner. Hopefully the planner will provide some options she's willing to consider and show numbers to outline what's actually possible.

She saved $0 for retirement, which is unfortunate, because it could have given her a lot more flexibility for home buying and general retirement stability.

There's certain creature comforts she's unwilling to compromise on, but maybe that could mean renting longer once she's collecting SS and could save more for the home purchase that meets her desires.

Her Mom lived to 95 or 96, so she may need sustainable finances for 30 years.

If she makes poor decisions now, it will affect all three of her kids as she ages, or if any medical emergencies come up. Thankfully she does not want to do a reverse mortgage!
posted by mtphoto at 10:30 PM on July 22, 2022

Are there 2 family houses in that area? Renting out 1 unut might help.
posted by at 7:13 AM on July 23, 2022

Response by poster: Two family houses would be more than her nest egg, and duplexes are really expensive here.

Condo prices are softening, but decent 2 bedroom condos are still hovering around $500,000.

With so much net worth arriving from the inheritance, she won't qualify for any home buying programs here. That's usually for low or median income people who don't have much money.

Also, there's such limited housing here that foreclosures are unlikely unless there's a large sell-off among the rich.

Thankfully the recent shift in the housing market means she's probably keep $20,000-30,000 in savings after buying a home.

I like the arguments for continuing to rent here and save money, but rents have risen 30-40% during Covid. She would pay a bare minimum of $2,000 for rent. For her standards, she'll probably pay more like $2,300-2,500.

Her rent just got raised in July to $2,200 or $2,300.
posted by mtphoto at 8:36 AM on August 10, 2022

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