John M. Lee: When is the Right Time to Sell?

As our real estate prices continue to go up and up, homeowners are asking themselves when is the right time to sell?

Aside from obvious situations where homeowners need to sell, such as a job transfer or divorce, how do you decide if it's the right time to sell? I have been observing how people usually make these decisions and have seen the following scenarios unfold on a regular basis.

The baby boomers are all grown up and, in many cases, their parents are passing on and leaving their real estate holdings to their children. Sometimes it's a family home, other times it is a substantial real estate portfolio. We are lucky that in this area our real estate prices are high and increase substantially, so many of these properties have plenty of equity and, often, no loans. 

Sometimes the properties go to the children who have not been very active managing the properties. On occasion, the siblings inheriting the properties have different ideas as to what to do with it. More often than not, the decision is made to sell and each sibling does with their portion of the estate as he or she wishes. Also, the properties get a step-up in basis upon death, so there is no capital gains tax due on the sale, adding more incentive for the children to dispose of the real estate.

Do you own more real estate than you can comfortably afford? With our high prices in the Bay Area, buyers tend to stretch themselves financially to purchase a home. Many have done so with adjustable rate mortgages in the past few years. This has worked out great for buyers as interest rates have been low. However, all good things must come to an end and most economists will tell you that we might never see these rates again in our lifetime.

If the rates were to go up one or two percent, would you be willing to sacrifice some lifestyle choices in exchange for paying the mortgage? If the answer is no, perhaps it's time to think about selling.

Are you planning to retire within the next five years? Will you be able to generate enough income from your assets to support your retirement? How much equity do you have in your home? Does it make sense to downsize and keep some of the sales proceeds to maintain a good, financial stress-free lifestyle during retirement? Many of my sellers are opting to go this route by either buying a smaller home or condominium or relocating to an area where home prices are lower.

Some of my clients sell because they think property values have gone up much too quickly and they are reminded of what happened to the stock market a few years ago during the dot-com bust. They are selling at today's prices, with today's rents, and hope for real estate prices to drop before coming back into the market.

Has your property appreciated more than $500,000 for married couples or $250,000 for singles? It's a great time to take advantage of this tax-free profit and to purchase another property and do it again. This is the largest tax-free gain we can take in real estate and we never know when tax changes will take effect.  So it is wise to take full advantage while it is still available.

Real estate is not only a home you live in, but also a large financial asset and, for many people, the largest financial asset they will ever have.

For an average American, 60 percent of their net worth is invested in their home. As such, property is part of their financial situation - something to consider when thinking about moving.

John Lee is a top-selling broker at Pacific Union specializing in the Richmond and Sunset districts. For questions about real estate, call (415) 447-6231 or e-mail johnlee@isellsf.com.