From Elizabeth Weintraub,
Your Guide to Home Buying / Selling.
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There are many reasons to buy a smaller home -- to downsize from your present home -- but sometimes a simple notion propels home owners to trade down: Smaller might be better.

The clarion call to consumers from boardrooms across the country is bigger is better. Supersize that lunch for $1 more. Sounds like a bargain. But do you really need those extra calories? Marketing urges us to buy a SUV, bring home a bigger paycheck, get a big screen TV. It's enough to make a person exhausted trying to keep up.

Advantages to Home Downsizing

• Increased Cash Flow. If you're spending less on your mortgage payment, you are likely to have money leftover every month to allocate for other needs or desires. Or perhaps you could pay cash for a smaller home from the proceeds of your existing home.

• More Time. Fewer rooms and smaller spaces cut down on the time expended to clean and maintain. Smaller homes can reduce the time spent on household tasks, leaving more hours in the day to do something else more enjoyable.

• Lower Utility Bills. It costs a lot less to heat / air condition a smaller home than larger. Typically, there is no wasted space such as vaults in a smaller home. Less square footage decreases the amount of energy expended. Reducing energy is better for the environment and helps to keep your home green.

• Reduced Consumption. If there is no place to put it, you're much less likely to buy it. That means less money is spent on clothing, food and consumer goods.

• Minimized Stress. Less responsibility, smaller workload, increased cash flow and greater flexibility -- added together, they all reduce stress. Home owners who have successfully downsized sometimes appear happier when they're no longer overwhelmed by the demands of a larger home.

Disadvantages to Home Downsizing

• Fewer Belongings. Moving to a smaller home would probably result in selling, giving away or throwing out furniture, books, kitchen supplies and emptying out the garage, basement and attic. Some people form emotional attachments to stuff and can't part with any of it. Home staging employs these techniques.

• No Room For Guests. Hosting a huge holiday dinner might be out of the question in a smaller home. Out-of-town guests might need to stay at a hotel when they come to visit.

• Space Restrictions. Some home owners report feeling cramped because there is less space in which to maneuver. It's hard to get away from other family members and enjoy private, quiet time, because there are fewer rooms to escape to when needed.

• Less Prestigious. Sometimes appearances are more important than comfort levels. For home owners who place a great deal of importance on how they are perceived by others, which is often exemplified by offering the appearance that one is maintaining a certain level of financial success, a smaller home might not project that image.

• Lifestyle Changes. Especially for long-term home owners, trading down means changing a lifestyle, and some people are resistant to change. There is a certain comfort level obtained by staying with what is familiar.

Market Timing

The financial edge to downsizing, whether it's a hot, cold or neutral market, makes little difference overall. But one could argue that downsizing in a seller's market would give the home owner more cash on hand after closing. However, the trade-off could be a higher sales price on the smaller home.

For example, say in a neutral market that an existing home is worth $500,000, encumbered by a $200,000 mortgage. Not counting closing costs, which may include commission and title fees, the net proceeds would be $300,000. Let's also assume that a seller could buy a smaller home for cash at $250,000, putting $50,000 in the pocket.

If it's a seller's market, however, and prices have jumped 10%, for example, the existing $500K home might be worth $555,000. Meaning the smaller $250K home could be purchased at $278,000 in cash, resulting in $77,000 cash remaining.

If it's a buyer's market, say, and prices have fallen 10%, then the existing home could be worth $450,000. The smaller $250K home would be priced at $225,000, resulting in $25,000 cash to put in the bank.

The best of both worlds would be to sell in a seller's market and buy elsewhere in a buyer's market. Either way, a seller could end up owning a free-and-clear smaller home, so take your pick of markets. Realize, though, that you can't really time the market.

Buy or Sell First?

Sellers often ask whether they need two agents to buy and sell. First, consider similar comparable sales and your home pricing. Is it easy to comp? Second, is it located in a neighborhood where out-of-area agents are shunned by local agents? It's not supposed to happen, yet it does. But if your home is easy to price, and the agent has contacts in that area, it doesn't really matter where the agent is located. Sometimes agents will negotiate the commission if they are handling two transactions.

Should you sell first and then buy, or buy first and then sell? Generally, it's better to sell your existing home before buying a new home. The reason is it keeps your emotions in check. But some markets will dictate that it's better to buy before you sell. Discuss this strategy with your real estate agent.