AssetBuilder Inc. Registered Investment Advisor - Simple Investing. Smart Future.

I have followed much of your practical advice over the past several years as I have approached retirement, and it has served me very well.  Thank you for sharing your knowledge and wisdom regularly in your columns.

I have a financial dilemma.  My wife and I moved from Dallas to Dover, DE, in large part to reduce housing, living and tax expenses, so that we would be financially comfortable on the approximately $90K annual retirement income (from all sources) we anticipate when I retire in a few months.

We have no debt whatsoever, and following your excellent advice, we paid cash ($270K) in 2005 for a brand new retirement home, in a development.  Since then, we have added about $80K in cash improvements to the home

We did not buy during the housing peak, which occurred here about a year after we purchased.  I follow sales in our community closely, and our house would probably sell at this moment for only $290-300K, mostly because of the nation wide housing market collapse, but also because of the following-

The elected homeowner association representatives do not enforce deed restrictions and there are many less than desirable decks, patios, fences, and porches that have been added that do not conform to the deed restriction requirements.  Further, about 1/3 of the 150 homes in the development have continuous flagrant deed restriction violations (like trash cans in view from the street, trailers, commercial vehicles, and even portable storage containers on properties- not to mention lawns with grass more than 12 inches).  My new and immediate neighbor has plans to add a 25x25 basketball court for his teenage son, with the associated noise and rain runoff into my property, even though all lots are a quarter acre or less.  I am very concerned all property values, including mine, are taking, and will continue to take a hit because the community is deteriorating due lack of enforcement.

Here's the dilemma.  We very much like our house, but not the neighborhood nor the threat of never fully getting our $350K investment back.  Our next and final move will probably be to a 55+ condominium- but we really don't want to give up living in a home with a yard until later in life, as we are both <60 years old now.  With realtor fees and transfer taxes added to a $50K loss on my current house, I don't believe we can afford to move two more times, once to a new house, and then to a condo, especially if we are to remain mortgage free.

Do you think we should just cut our losses here, now, and move directly to a condo?  Do you think we should take our chances that the community property values will rise soon, when the housing recovery occurs?  Can you recommend a third alternative?

I certainly can't be the only baby boomer to have, or will have, this or a similar problem related to moving to a development for the first time, so a response may be helpful to others, either as a warning or as a solution.

Hi Barney.

I am on a condo board, and at our last election, we had to plead with the members for a volunteer to fill a condo board seat.  All candidates ran unopposed. 

If you want changes in your management, run for office in your association.  It is a thankless, and uncompensated, job, but it may be necessary to preserve your investment.  Talk to some of your neighbors who share your views.  Homeowners association meetings, even for elections, tend to be sparsely populated, so even a few members should be enough to get you elected.

Bryan 

Hello Bryan-

 Thanks for taking the time to respond.  Your assessment is correct.  Apathy in the community for serving on the board, or committees, or to volunteer for anything reigns.  I personally attend every board meeting, am a past president of the Association, and currently serve as chair of the Audit Committee.

 Presently, we have people who are on the board by default- all they needed was one vote, because they ran unopposed.  Unfortunately, two of the board members got on the board after their building projects (garage and deck) were built before seeking Architectural Review Committee and Board approval, and subsequent approval for the projects was denied.  These individuals are explicitly on the board to protect their "illegally" built improvements/investments.

In any case, I could become a board member (again) as you suggested.  But it would likely complicate things for me if my only recourse turns out to be bringing legal action against the board for negligence in upholding the deed restrictions.  Thus, I think it is more prudent simply to remain a member of the Association rather than to serve on the board.

 How does this rationale sound to you?

Barney,

 I'm sorry you find yourself in this position. Others, of all ages, are in the same box, trapped in a loss by (a) the sagging real estate market and (b) peculiarities of the development in which they own a house. Many people are also suffering changes in build-out for developments, with new homes being built a much lower price-points, promised amenities that are never completed, etc.

If you consider your personal assessment carefully and still conclude that the bulk of your neighbors are basically a bunch of sloppy, thoughtless low-lifes, then I suggest you bite the bullet and sell. You'll get off a nag doomed to lose. And you pick what I hope will be a better "horse" in the appreciation/value race. Remember, the house or condo that you buy will likely also be depressed in value as well. (It's only at car dealerships that the car you want is always at a premium while the car you trade would be an embarassment to the dealership and is worthless.)

Rather than buying a condo with no ground space, why don't you consider a patio-home. It will be a down-sizing, probably to a lower price, but it will (1) insure attention to outside plantings and (2) provide you with some amount of outdoor space. You could either buy or rent.

Scott

Scott-

 Thank you for your sage advice.  With your response factored in, we plan to put our house on the market within 6 months, and get off of this nag we are convinced is "doomed to lose".  I've sold my own homes without a realtor in the past, and probably will go that route again to avoid the financial insult of realtor fees.

On that note, I realize the market is soft, in part because financing requirements are more stringent than in the recent past.  To move my property quickly in this market and this neighborhood, and to obtain a good price and produce investment return, I am thinking about offering to carry part of the note if necessary.  Suppose the bank offers a lowball appraisal of $280K for my $300K property because credit is tight, etc, and the buyer is required to put 20% down.  To get my full price, if the buyer doesn't have the cash to make up the difference, I could carry a $20K second note- perhaps 8-9% interest only for 3 years when it then becomes payable in full.  Maybe (and maybe not) I could use some of my traditional IRA funds to establish a self-directed IRA investment, so the interest I earn on the note is not immediately taxed.  Do you think OWC financing in this market is worth the downside risk to me, the seller, and a good idea if necessary to close the deal?

Thank you, Scott, for your many years of financial advice columns, that have educated thousands of us possessing limited financial training.

Barney,

I think you'll find that lending from your IRA is a non-starter among the vast majority of account custodians. Basically, you're required to have major, listed and liquid investments in retirement accounts.

You should also consider that offering such financing has the potential of turning the house into a tarbaby. If the borrower walks or otherwise defaults, you'll have to ask yourself whether it is worth the effort (not to mention risk and expense) to foreclose, assume payments for the first mortgage, taxes and insurance, etc. If you allow the first mortgage holder to foreclose it's a virtual certainty that your loan will be wiped out.

Remember, the only things seperating you from this experience are (1) the buyer's actual down payment, which isn't very large and (2) future appreciation of the house which the buyer would be giving up if he defaults.

Financial journalist Alan Sloan had a wonderful piece in Fortune magazine some months ago detailing the losses in a Goldman Sachs package of home equity loans. The most important observation was that the holders had no real recourse in defaults because they would have to assume the first mortgage to protect their much smaller second mortgages... As a consequence, virtually every dime of investment has disappeared.

Scott 

As the former president of a homeowner association, my advice is SUE THEM!

The board of directors must enforce the bylaws and CC&Rs.

I believe you can sue them as a board and possibly individually, as well.  (Ask your lawyer!)

Have fun.  The place should turn around REAL FAST.  Our's did.  I bought my California townhouse for $34000 and after the whole thing was over I sold it for $250,000.  

HAVE FUN.