I moved recently. But before I did, I contacted several realtors in my new town to interview them as a potential client. When I asked for advice, each realtor recited the same rehearsed lines as their competitors.
They told me that at my young age I should consider a “starter home” with minimal amenities. They said I should begin thinking about purchasing a “family home” when I reach my 30s. Next, I should consider upgrading to a “growing family home” when I’m in my late 30s. The realtors went on to explain that when I enter my mid 40s I should seek to move into my dream home. The final step would come during my late 60s when the nest is empty and it’s time to downsize home.
Of course, each of the realtors generously offered to be there with me every step of the way to help broker each of separate home sale and purchase during my lifelong journey.
What these realtors all failed to consider was that I had no interest in their self-serving “permanent upgrade” paradigm.
This experience ignited my interest in the topic of how Americans often move from one home to the next, as if the exact specifications of their home should mirror their current income and number of dependents. I began to wonder if I was right to be put off by their advice, or if maybe they were actually preaching the gospel.
To better understand the paradigm, I took a closer look at three questions I had about the topic:
1. How often are homeowners moving and why?
2. How does moving impact our finances?
3. Is the “permanent upgrade” mentality efficient or should we be looking for an alternative?
How Often Are We Moving?
The average American relocates approximately 11 times in their adult lifetime. After the sixth move or so, the rest of relocations are usually from one home to another. I also found it surprising that the average homeowner will sell their home just 5-7 years after they acquired it. Based on these statistics, I estimated that the average American will own five different homes during their lifetime. However, I was conservative in my estimate and five homes might be on the low end.
Next, I wanted to examine the reason for moving from one home to another. Through endless searching I found a 2014 report from the United States Census Bureau titled Reason for Moving: 2012 to 2013. The report took a closer look at why individuals chose to move from one residence to another.
According to the report, 14% of relocations occurred because the individual wanted to upgrade to “new or better” housing. Another 14.6% of the moves were for “other housing reasons.” That means more than a quarter of relocations (28.6% to be exact) took place for housing-related reasons. When we compare that number to the 8.4% who “wanted cheaper housing” and the 4% who were seeker a safer neighborhood with less crime, it becomes apparent that a significant portion of moves occur simply because we are always wanting something bigger and better.
The Impact on Your Finances
In The Millionaire Next Door, Thomas Stanley explains that half the millionaires in the United States have lived in their current home for over 20 years. The reason? If moves aren’t made strategically and infrequently, they’ll usually end up costing you money.
Let’s look at the numbers.
In 2016, the average U.S. home sold for $186k. In the typical home sale, the seller incurs costs for agent commissions, legal fees, and title work among other things. On average, those expenses end up around 10% of the total sale price.
If we use a $186k sale price as our starting point, then we can assume the average sale involves $18,600 in base fees. That number is just the start; it doesn’t include costs associated with staging the home, completing sale prep repairs, or costs associated with moving into a new residence. Once we account for pre-sale repairs which are roughly $5,000 on average, we’ve already lost $25k just to sell the property.
Some might downplay that number and focus on the equity they’ve gain as the home’s value increased during the time they owned it.
Let’s say we own the home for five years and we gained 3% equity each year. In that case, the house will (hopefully) be valued at $215k. (That assumes a consistent and non-volatile 3% gain in equity.) If we bought the home at $186k and sell it five years later, the sales fees will wipe out most of the $29k in equity we gained over those five years.
A Different Approach to the Homebuying Lifecycle
Let’s take the same home that is worth $186k. This time, instead of losing $25k during the sale process, let’s do something a little different. Instead of putting it up for sale, what if we took the $25k we would have lost in sales fees and related expenses and used some of it to add another bedroom? Maybe we can renovate a bathroom or complete a screened-in porch area.
Taking this approach allows us to stay in the home and continue building equity rather than depleting equity gains to move to something bigger and better. On top of that, if done wisely the money that put into expanding and renovating the home will further increase its value.
Experts say that homeowners can increase their home’s equity by 70-80% of their project costs by making the right improvements to their property.
Let’s go back to our example: if we put $25k into well-thought out and carefully executed projects around the house, then 75% of that $25k would turn into equity. That would raise the home’s value from $186k to $204,750! And that wouldn’t involve uprooting the family, incurring moving, staging, or inspection repair costs!
Under the right circumstances there are ways to turn a “family home” into a “growing family home” without losing money to commissions and other sale-related costs. The point is, when faced with shortcomings in your current home, it’s best to start by looking at the big picture and what your actual costs will look like before rushing into shopping for a new place to live.
Taking a Second Look at the Upgrade Paradigm
As I’ve taken a closer look at this topic, I have realized that the realtor’s upgrade paradigm isn’t entirely faulty. I just think it includes a few too many separate purchases.
By looking into the rates that you can generally expect homes to appreciate in value I feel that in stable market conditions 8-10 years is the magic interval I would tell home buyers to commit to before selling their property.
The widely accepted range of five to seven years is too risky in my view. Unless you are somehow continuously purchasing homes for prices that allow for instantaneous equity, you probably aren’t going to come out ahead often enough for that to be the right move. With that in mind, here’s my ideal home lifecycle:
- Starter home
- Family home
- Growing family home
- Dream home
You might be looking at my home lifecycle and thinking to yourself, “That’s no different than what those realtors suggested!”
Although I might agree with the realtors when it comes to the basic life stages, my opinion differs in one very important way:
I don’t think there should be a home sale or purchase that corresponds with each separate life stage.
I’d prefer to blend as many stages as possible to cut down on transaction costs that will chip away at your wealth.
I’d do that by asking whether you can transition from one life stage to the next without having to sell your house. For example, when shopping for a starter home, think about whether it will fulfill your housing needs over the next one to ten years. This depends on where you think your life will take you in terms of your family, career, and other potentially major life events. If you can’t imagine the starter home will be able to accommodate your future needs, ask yourself how what it would take for the home to fulfill those needs.
You can take a similar approach to the other life stages. Ask whether your family home can serve as a growing family home with the right adjustments. And can you transform that home into your dream house someday?
By purchasing a home that can work throughout multiple steps in the upgrade paradigm, we can limit the number of times we put our home up for sale and thereby reduce the amount those sales fees take from of our wallet.
Finally, before purchasing a home, look at your overall lifestyle. If you can’t commit to a job, hobby, diet, or relationship for an extended period of time then can you realistically expect to stay in the same house for 10 years? Make sure your lifestyle is stable enough to make the most out of home ownership so you don’t end up having to sell the biggest investment you’ve ever made before the time is right.