The Risks Of Upgrading Homes Nobody Really Thinks About

I currently have an opportunity of upgrading homes but am unsure whether it’s the right move. Maybe you’re going through this dilemma as well and need to talk things through.

The house I wanted to buy a year ago failed to sell because it was listed too high. Then the S&P 500 corrected by 19.6% and mortgage rates shot up.

Now the owner wants to try again. But this time, he’s quietly shopping it as a “coming soon” private listing. This way, he won’t have to go through the hassle and public embarrassment if he fails at selling again.

Using various tactics as a veteran real estate investor, I should be able to get the house for at least 10 percent below last year’s price. 10 percent below would be about 3 – 4 percent below its estimated fair market price.

My “problem” is that I’ve pounced on every single deal I’ve ever seen in real estate. Largely due to FOMO, it’s hard to let go of a potentially highly profitable investment. If I don’t buy it, someone else will and I’ll likely regret that years from now.

However, just because a property is a great deal doesn’t mean you should always move forward. As I age, I also long to simplify life in order to be more present for my family.

I hope this article will not only help me find clarity in this home upgrade predicament but also help you. As you get wealthier, you will have more options, which may lead to more stress and uncertainty.

The Risks Of Upgrading Homes When Your Existing Home Is Fine

After a real estate market correction, you might find yourself wanting to upgrade homes. If your $500,000 home declines in value by 10 percent, you lose $50,000. However, if the nicer home you want that costs $1,000,000 also declines in value by 10 percent, you actually come out $50,000 ahead if you buy it!

This is a similar situation I find myself in. Buying a much nicer home after a real estate correction is one way to financially win. And during corrections, luxury homes tend to drop by a greater percentage than median-priced homes because nobody needs a Ferrari Enzo when a Toyota Corolla will do.

Let’s discuss some risks of upgrading homes we might not think about.

1) Unknown neighbors, unknown tensions

If you’re a regular person, you’ll get to know some of your immediate neighbors. Over time, you should be able to develop a baseline level of comfortability where you chit-chat about random things every time you see each other. If your relationship gets better, you might ask your neighbor to hold your packages or water your yard while you’re away.

If you upgrade homes, you lose your existing relationships. You must develop new harmonious relationships as the newcomer. Further, you might find yourself amidst unpleasant neighbors.

Given you’d be in a more expensive neighborhood, the old-timers might look down on you for being “new money.” You’ll have to earn their trust. In addition, if you’re a different race than the majority of your neighbors, maybe people will be more hesitant to talk to you.

Perhaps the neighbor immediately to your left has loud dogs that bark all night. You wouldn’t know until you move in. Or maybe the neighbor to your right will pester you for not cutting your tree to his liking. The wealthier the neighborhood, sometimes, the more demanding the residents.

I’ve seen plenty of lawsuits between neighbors due to trees, easements, and noise. Wealthier homeowners sometimes use their financial resources to go nuclear rather than take the human route of talking things out.

Example of unforeseen neighbor tension:

A year after I bought a single-family home in the Marina district in San Francisco, a 27-year-old man bought the single-family home across the street. He started throwing drunken house parties every month that oftentimes lasted until 3 am. Given our bedroom faced the street, we would get woken up during each rager.

After the second disruption, I talked to him and asked if they could keep it down after midnight, or at least keep his guests from smoking and talking loudly outside. He agreed and eventually quieted down over the years.

It turns out his bank of mom and dad bought him the house for $1.7 million while he was still in law school. He eventually found a job, got a girlfriend, and chilled out.

2) Potentially more noisy remodeling projects in upscale neighborhoods

One of the biggest downsides of living in a nicer neighborhood is constant remodeling. Wealthier homeowners usually have more liquid cash so they tend to spend more on home remodeling.

As a result, you will hear construction noise all throughout the day. If you work from home and don’t have great sound insulation, the sounds may drive you nuts. Thus, your upgrade home needs to have several rooms tucked away from the street that are sanctuaries.

In addition, the more remodeling there is, the more you’ll need to zig-zag like Pacman through the streets due to double-parked trucks. Your driveway will also likely be blocked more often if your immediate neighbors are doing huge remodels. The blockage is always temporary, but it’s annoying when you need to rush out for a meeting or are coming back after a long day.

Spend time driving around your potential new neighborhood during the weekdays and also at night. You may discover the atmosphere is very different than what you see during typical weekend open houses.

Example of noisy remodeling:

As I write this post, there are two homes currently being gut remodeled in my neighborhood. One is a block up the hill, where the contractors are ripping out the backside of the house that faces the ocean. The drilling and buzzsaws are operating nonstop. The other remodel is four homes away.

Drowning out the noise is easy to do with headphones. But occasionally, a truck will suddenly drop off heavy materials on the street, which sound like explosions. Luckily, the houses are far enough away that the trucks are not blocking the narrow roads in the hills.

Before buying your upgrade home, ask the listing agent about any planned remodels nearby. The last thing you want to do is move into your sanctuary only to discover your next-door neighbor plans to do a two-year remodel.

The only positive of neighborhood remodels is that they increase the value of your house. After going through a long remodel myself, I believe remodeled homes will sell for even bigger premiums going forward.

3) Unfamiliarity with the potential new home’s problems

Every home you will ever own will have some type of problem. Maybe the HVAC unit only blows hot air up to 72 degrees. Perhaps there will be a water hammer sound every time you flush a particular toilet. Or maybe the dryer will rattle loud enough to keep you awake at night.

Over time, despite your home’s issues, you learn to adapt. Due to the dryer rattle, you start to dry your clothes only before 9 pm. Before every winter, you learn to check the light well drain to ensure it’s not plugged with leaves and dirt.

If you upgrade homes, you will face unknown quirks for an unknown period of time. For example, you might only discover your roof leaks in the fourth winter because the previous three weren’t rainy enough.

You might even start hearing strange noises in the middle of the night as my tenant discovered. Nine months after moving in, they started hearing a fire alarm beep every 30 seconds. They couldn’t figure out where it was coming from until I determined the noise was coming from inside the walls.

You certainly hope the seller will provide a complete, detailed disclosure package. But even the seller won’t know all the problems of the house. Hence, make sure you conduct a thorough inspection before buying and leave a financial buffer for future problems.

Examples of unknown problems after we upgraded homes:

One of the reasons why I wanted to buy our home in 2020 was because it went through a ~$200,000 remodel in late 2019 and early 2020. Given I am a remodeling veteran, I probably appreciate a well-remodeled home more than the average person. Remodeling is a royal PITA.

Despite carefully inspecting the house over multiple hours, I was still unaware of some small issues until after I moved in. They included several rotten deck planks, a moldy washer that couldn’t be defunked, and an improperly sealed window that had a small leak.

I missed some of the rotten deck planks because there were so many and they were hidden under fresh paint. We didn’t open the moldy washer to check inside. And after we discovered the issue, we thought running the washer through multiple rinse cycles with bleach would fix the smell. It did not. Finally, it took a record-breaking storm with ~80 mpg winds to discover the window leak.

All these issues were fixed. However, they did require time and some money. At least the contractor who remodeled our home provided a one-year warranty.

Over my home buying years, I put together 10 warning signs to look out for before buying a home. Use it as a checklist so you aren’t blindsided by too many surprises.

4) Busier-than-expected road traffic or louder-than-expected general noise

You might want to upgrade homes because it’s in a quieter neighborhood. However, unless you live in the home or park outside the home for several days and nights, you might not get a good sense of the real traffic.

Maybe your street is used as a shortcut by motorists during traffic jams on the main street close by. Or maybe every Saturday morning a motorcycle crew likes to rumble through by the dozens.

Example of busier-than-expected road noise:

One person I know decided to buy a house across from a public park. He figured it was a good location because he could easily bring his kids to the playground. Unfortunately, it turns out that every Saturday and Sunday morning there were Zumba and Taichi classes with loud music! The classes would go from 8 am until 12 noon and then start again at 3 pm.

Another person I know decided to buy a fixer near a public park. He put in millions of dollars to build his dream home. Unfortunately, the city parks department decided to convert some of the tennis courts into pickleball courts. Now, he hears the “pop pops” of pickleballs from 8 am to 2 pm, and then again starting at 4:30 pm until sunset.

I love pickleball. However, the constant popping sound would drive me nuts if I was trying to write my next great personal finance book! Living two or three blocks away from a park is better.

5) Not as good of a layout as you originally thought

I’ve written about the ideal house layout to raise a family and/or work from home. Kids are noisy and if you work from home, it’s very difficult to concentrate if you don’t have your own quiet space. Thankfully, post-pandemic, more of us are getting out of the house more often. However, a great layout is important for comfortable living.

One of the fears my wife brings up if we upgrade homes is that the new home is two levels without any stairwell doors to block sound. Given our children are louder than hungry hyenas, she fears I won’t be able to write or record my podcasts in peace. Although the upgrade home is 50 percent larger, it doesn’t have a buffer floor level like our current home has.

We tried a “scream test” where my wife told the kids to shout and play as loud as possible downstairs while I was in the upstairs bedroom. I could barely hear them, but she said the test was too short. Ultimately, I won’t really know if sound will be an issue until we move in.

Example of a suboptimal layout:

I bought a fixer in 2019 because it had expansion potential. We were expecting our third child and our existing home at the time only had two bedrooms on the main floor. We wanted three bedrooms on one floor to make childcare more convenient.

However, as it turns out, having three bedrooms on the top floor was not ideal. We didn’t want my wife going up and down the stairs to the kitchen in the middle of the night as she could trip. And we also didn’t want to constantly carry our baby up and down a large flight of stairs either.

As a result, she slept with our baby daughter on the first floor, which had two bedrooms. Our son slept in the next room and I slept upstairs, where I turned one room into an office.

I still tripped twice coming downstairs because I missed a step during my night shifts. If I was holding my daughter, she would have been flung to the wall! I’m also glad I didn’t tear an ACL during one of the mishaps.

6) Your financials could take a turn for the worse

Everybody thinks about this risk, but do they do so with enough intention?

Upgrading homes means you’re confident in your financial future. You’ve followed my 30/30/3 home buying guide or my net worth primary residence guide. By following these two guides, you have a high probability of not losing your home during an economic downturn.

However, unexpected events can still hurt you financially. Here are some potential negatives: job loss, theft, bear market, forced business shutdown, non-paying client, natural disasters destroying your home, accidents.

One of the reasons why I’m more excited about upgrading homes is because our investments have rebounded. Taking some profits to live in a nicer home always feels good to me. However, the economy could easily go back into a recession due to aggressive Fed rate hikes.

Given my concern about a potential recession, I’m trying to negotiate as big of a discount as possible. This way, I’ll be better protected in case of a decline in passive investment income.

Example of finances turning for the worst post upgrade:

In high school, my buddy’s parents built a mega-mansion in Langley, Virginia. It was just a half mile away from the CIA. The house was over 8,500 square feet and had a separate house for an indoor pool.

Unfortunately, his father’s architecture business suffered as his government clients, who promised a big contract, failed to come through. The cost of owning and maintaining the house because too much for his family to bear. As a result, they sold the house for a big loss and had to start their financial journey over.

It Can Be Hard To Be Happy With The Home That You Have

Imagine leaving your perfectly comfortable home, spending a lot more money on a nicer home, only to find out you don’t like living in your new upgrade home! What a disaster.

One solution would be to offer to rent the upgrade home with the option to buy after a certain date. However, what a pain to move. And if you discover you enjoy the new home, you will feel bad paying rent for all those months instead of buying it from the very beginning.

We all like to fantasize about what life could be like in a new home. However, sometimes, our dreams don’t come true. Plus, if we spend too much, our upgrade home might turn into a nightmare home instead.

Comparison Is A Thief Of Gratitude

When I see my friends buy nicer homes, I can’t help but want to buy a nicer home as well. For example, one friend is building a home that costs $1.1 million more than my home, and he’s nine years younger. Yet, my net worth is at least four times greater.

Why shouldn’t I deserve to live in a nicer home too? I think to myself. Further, the best time to own the nicest house you can afford is when you have kids. I don’t think I’ll regret giving my family the nicest and most stable living environment before the kids leave us.

That said, I’m also happy living in our current home we bought in 2020. It has everything we need, nothing we don’t. It is an affordable forever home, which may be the best type of home yet!

The lightness of owning a home well within my 30/30/3 home-buying rule also feels amazing, especially during downturns. I never want to feel the stress again of having a huge mortgage like I did during the 2008 financial crisis again.

If I didn’t know the housing situation of any of my friends and acquaintances, I’d be perfectly happy!

Going For The Upgrade Home!

After writing this post, I plan to pursue this upgrade home with a low-ball offer that’s not insulting.

My main strategy is to try and convince the listing agent to also represent me so the seller can save 2 – 2.5% on commission. In return, I’ll ask for a purchase price discount. With a lower purchase price, the seller will also get to pay less in capital gains tax as well.

Of course, I will write the most amazing real estate love letter to convince the seller that I’m the ideal buyer. My letter will alleviate all his worries. Ah, it’s nice to know my work of writing 2,500+ articles since 2009 can come in handy!

The worst-case scenario is the seller refuses my offer. In this case, we’ll just continue living our lives in a home we enjoy. We won’t have to sell any investments to raise funds. Nor will there be any tax liabilities. We’ll just keep trying to grow our investment portfolio to generate more passive income.

At the end of the day, I don’t want to regret not having tried to go for this nicer home. There is a price for everything. And at a low-enough price, I think the risk of upgrading homes will be worth it!

Reader Questions and Suggestions

Have you ever upgraded homes only to discover it wasn’t as great as you had imagined? If so, what were some disappointments you had in your new home? What are some other potential disappointments upgrade homebuyers should be aware of that are not mentioned in this article?

Invest in real estate passively and more strategically with Fundrise, my favorite private real estate investment platform. Fundrise offers multiple funds that primarily invest in the Sunbelt, where valuations are lower and net rental yields are higher.

For more nuanced personal finance content, join 60,000+ others and sign up for the free Financial Samurai newsletter and posts via e-mail. Financial Samurai is one of the largest independently-owned personal finance sites that started in 2009.


You may also like...

Leave a Reply

Your email address will not be published. Required fields are marked *