Money Makeover: Retired teacher wants to buy her childhood home

Because of her elderly mother’s health issues, schoolteacher Kathy Naylor in 2007 reduced her schedule to part-time work, vacated her condominium in West Hills and moved back into her childhood home in Santa Monica to take care of her mom.

But as Naylor’s weekly routine seesawed between teaching second-graders how to read and taking her mom to doctor’s appointments, her finances languished.

“I’ve been very busy with this double life,” said Naylor, 62. “I just haven’t been able to figure anything out.”

Naylor retired in July, and her mother’s health has improved. So, now that her life is less frantic, she has set a major financial goal: buying her mother’s house.

“It’s become a home again to me later in life,” Naylor said, sitting on a shady backyard porch where happy shrieks from children in a nearby playground can be heard.

When her mother dies, Kathy and two of her brothers will inherit the quaint, two-bedroom home valued at an estimated $900,000. Naylor said her mother and brothers have agreed that she will inherit a 50% stake in the home. Naylor plans to buy the remainder from her brothers for about $450,000.

Naylor, who worked 25 years for the Los Angeles Unified School District, receives a pension of nearly $69,000 annually. She still owns her condominium, valued at roughly $190,000, and has paid off the mortgage.

She has $20,000 in retirement accounts and $20,000 in other savings and checking accounts.

As for debt, she owes about $8,000 on a home-equity line and about $7,900 on her car.

Currently, Naylor lives rent-free with her mother, who also covers utilities and groceries.

To come up with the money for the house, Naylor plans to sell her condo and use money she accrues from her pension.

But months of number crunching and a nagging feeling that she can’t afford the house have left her in limbo. Meanwhile, her West Hills condo costs her nearly $16,000 annually in fees, taxes and loan payments.

Lara Lamb, a certified financial planner in Encino who reviewed Naylor’s finances, said the concerns were justified. “Right now, it’s not possible for her to buy the house,” Lamb said. “She doesn’t have enough liquid assets, and there’s no way she could meet that number.”

Assuming that proceeds from her condo net her $180,000 after Realtor commissions, Naylor would still need to come up with $270,000, Lamb said.

If Naylor gets a 30-year fixed mortgage at recent rates, which hover around 4.375%, her monthly payments for the home would be about $1,350, according to Lamb.

But the real budget killer is property taxes. Taxes on the portion of the house Naylor inherits will remain at existing levels, but if she buys her brothers’ stakes, taxes on those parts would be stepped up, adding nearly $350 in monthly costs, Lamb said.

The combined mortgage, insurance, property tax and utility cost would come to about $2,350 a month — nearly $1,000 more than Naylor pays on her condo.

She would have little left over for vacations, eating out or other activities. She’d also be hard pressed to pay for maintenance on the 61-year-old home or save for emergency expenses.

Naylor has been careful with her money, but if she takes on the purchase of the house, she’ll have to be extra careful.

“She’s very minimalistic and doesn’t live an extravagant lifestyle,” Lamb said. “But I want her to be able to live it up a little bit in retirement.”

Naylor lived in her condominium for 20 years. Much of her individual savings are invested in annuities.

“I want to feel a sense of security,” Naylor said. “I don’t want to live right up to the limit.”

Lamb wants her to reorder her financial life. The first thing she should do is sell her condo, which is empty. Renting it out would not be a good idea, Lamb said, because that would incur costs and Naylor would barely break even. Also, she doesn’t need the headaches of being a landlord while she cares for her mother.

Lamb recommended that proceeds from the condo sale be used to pay off Naylor’s car loan and home equity line, and that the rest be conservatively invested in a money market account or short-term bond fund. Anything she saves from her pension should be invested in the same fund.

Eventually, Naylor could cash out and use the money to help buy her mother’s home or another property.

She should also consolidate her existing retirement savings by rolling over her annuities into an Individual Retirement Account. The IRA funds should be placed in a low-cost mutual fund, with an allocation of 50% in stocks and 50% in bonds, Lamb said.

Meanwhile, Lamb recommended that Naylor keep the $20,000 she currently has in savings and checking accounts as an emergency expense reserve.

To possibly increase her cash flow, Naylor should check with her accountant about changing her tax withholdings. Doing so could give her an extra $180 a month, Lamb said. However, it would result in a smaller refund from her annual tax filing.

Another crucial step: Naylor should consult with her estate attorney about formalizing any agreements she has with her mother and brothers in regard to the Santa Monica house.

“It’s getting a bit messy,” Lamb said. “The important thing is for them all to sit down and talk about it and legalize their plans.”

Lamb’s advice was extremely helpful, Naylor said. She nonetheless remains undaunted in her desire to buy her mother’s house, even though it goes against her conservative nature and Lamb’s recommendations.

“I want to go for it,” she said. “I want to honor my mom’s legacy. She wants the house to remain in the family and for all of us to gather here and stay connected.”

But at least Naylor has a better idea of what financial pitfalls could be in store. And by reordering her finances, she would be better prepared for whatever she does in the future.

“I can see much more of the whole picture now,” Naylor said.

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