KIRO Radio's Tom Kelly digs deep into the Puget Sound real estate market
Real Estate

Show me the money: Not for everyone

Nearly everyone has become more aware of planning and providing for retirement. It's difficult to dodge the financial services notices from the lenders who facilitate our check and savings accounts. And, recruiters are more than happy to extol the performance of their 401k plans when luring top corporate prospects.

The "plan now" theory is a good one. It not only educates persons regarding the plethora of avenues available but it also tends to reduce anxiety on the day the stable, reliable, weekly paycheck no longer is around. Planning for retirement helps people understand the variety of substitutes needed to offset that paycheck.

But I don't think enough has been done for the folks who have "completed" the planning task. Some seniors who preceded the "plan now" blitz often find themselves too far down the normal planning road and are baffled by change.

For example, suppose a retired couple suddenly receives a chunk of money they did not expect. It happens all the time. Without any advance notice, the couple has been "cashed out" of the one rental home they had held for 10 years as a hedge against inflation.

Instead of receiving $1,500 of month in rent and enjoying the benefits of depreciation, $95,000 is suddenly dumped in their lap. The convenient monthly income no longer arrives in the mail. What appears to be a wonderful windfall instead brings a series of decisions the couple would rather not make.

And, when it comes to over-eager marketing pitches, seniors often are leery and confused about the intent of what strangers are telling them to do with their money. They become preoccupied with the amount of tax liability, when they might need such a large sum and the best places to stash the cash until they do.

I was acquainted with a similar experience not long ago. I had a friend who, in 2009, purchased a parcel of land in the San Juan Islands from a retired couple in Seattle. The friend, envisioning a future vacation retreat, bought the property with a significant down payment and the couple carried the financing for the remainder, agreeing to enter into a real-estate contract with the buyer.

The couple wanted reliable monthly payments to supplement their income from their daily operation of a small downtown tavern. They did not care about a possible balloon payment after three or five years and hoped the loan would go its 15-year term.

Although the rate on the loan was a bit lower in comparison to today's rates, my friend was tired of the drain the monthly payments made on his income. He had saved enough money to pay off the balance of the loan and contacted the couple to see if they would discount the loan amount for cash.

Generally, when a contract is paid off in full years before the loan is due, the contract holder will accept less than the face value of the loan. This gets the money into the seller's hands faster, in effect trading the opportunity for reinvestment for interest lost. The early payoff can benefit both parties, depending upon the initial rate of the loan.

Moreover, the seller, unless specifically stated in the agreement, cannot control a cash-out or the size of the monthly payment above the agreed amount. ("Buyer to pay $1,550 a month, or more . . ." is how real-estate deals generally are worded.)

When my friend finally located the contract holder, he learned the husband had died two years ago and the widow eagerly awaited the monthly contract payment. She wanted nothing to do with a cash-out, even at full value, despite the significantly higher earning potential of the lump sum. She pleaded with my friend to continue the monthly payments.

That philosophy is not uncommon among seniors. Many seek predictability and are uncomfortable with change.

It all depends with what they want to do with their lives," James Slaughter, tax attorney specializing in wills and estates. "Many of the older people facing the situation you describe remember big banks going under. Some would rather not have any money in the stock market.

"Some people would put that lump sum in a passbook account that would make them pennies as a return - that's just what they would want to do. Others would put it in the stock market and try to make a killing. But there's so many options in between those two."

Slaughter said a lot of retirees who seek advice are scared of annuities and prefer tax-free investments.

"It may or may not be good for their financial situation, but many of them just don't want to pay taxes. They feel they've done so long enough, no matter how you try to explain their situation."

So, if you are eager to cash out a deal early, don't be surprised if your dynamite - yet slightly discounted - offer is quickly rejected. Some people want nothing to do with change, despite the possibilities.

Tom Kelly's new novel "Cold Crossover" is now available in print at bookstores everywhere and in both print and Ebook form from a variety of digital outlets. Follow real estate agent and former basketball coach Ernie Creekmore as investigates the disappearance of his star player on a late-night boat. Check out the national reviews and put "Cold Crossover" on your list.

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