Working In Uncertainty

Supporting a big family decision

In 2008 my father died, leaving my mother a widow living in a three bedroom detached house in Kingston Upon Thames, near London. Although aware that it would make sense to move out of the big house to something smaller she wasn't ready to consider that until 2011. During that year two things happened that put downsizing on the agenda. The first thing was a bad experience with a lodger. For many years my parents had accommodated students as paying lodgers, bringing in some much-needed cash. However, in 2011 a student moved in that my mother found very difficult to live with for reasons best not described. The second thing that happened was that I calculated that if she moved to somewhere smaller the interest on the cash left over would be about the same as the rent from lodgers with no hassle at all.

Time to downsize?

Over the next few months one thing led to another and soon my mother's house was on the market and she was looking at flats she might buy. What she wanted to understand was what sort of prices she should hope to get for her house and pay for a flat. To explore this I designed a spreadsheet that did the necessary calculations to work out how much her finances would be affected by various alternative prices and we did some work to firm up estimates for likely taxes, fees, and redecoration costs.

One of the most uncertain numbers in this calculation was the market value of her house. Today, an amazing amount of detail about house sales is available freely on the internet so I used this to study past transactions in her area and understand regional trends. This information didn't really narrow things down very much and the wide variation in prices for similar properties showed just what a fiction 'market prices' can be. However, this was better than nothing and better than imagining that the estate agent's valuation was an accurate prediction. We know we didn't know and neither did he.

Another important but uncertain number in the calculation was the interest rate her savings would earn in future. Thanks to the world economic situation interest rates were very low, which is bad news for older people living off their savings. We looked at current interest rates on her savings but could see that things could change for the better or for the worse in future.

To tackle the uncertainty around the sale price and interest rate we took the simplest approach, which is just to show what would happen under a number of different scenarios. We just sat together for a while and I typed alternative assumptions into the spreadsheet to see what would happen and to find out how bad things would have to be before my mother would be in financial difficulty.

The conclusion of all this was that her net income would be virtually unchanged under most pessimistic assumptions and in fact if things got a bit better she would earn back the transaction costs within a few years and be ahead after that. Add to this financial good news the opportunity to say goodbye to student lodgers and the pressures of looking after an aging building and the decision looked easy.

Tense negotiations

Not long after that my mother found a wonderful flat she loved and wanted to buy. Unfortunately, the people selling the flat had earlier received a very generous offer (far above any reasonable market price) from buyers who then found they could not afford the amount they had offered. Although their offer was withdrawn, it left the sellers with an inflated idea of what the flat was worth.

Negotiations over the price were tense, involving more study of our spreadsheet to work out what my mother could afford given the generous offer on her house she had received, calls to gather intelligence from the estate agent, and studies of past prices of flats similar to the one she wanted to buy. (In fact we even knew how much the current owners had paid and when.) A number of steps were taken to get the sellers to think more realistically about their flat and be more willing to compromise on the price and less willing to pull out in the hope of finding a buyer with more money.

Finally, a deal was agreed and eventually everything went through with just the usual mistakes and delays by estate agents, managing agents, banks, and removal companies. My mother is now happily settled in her flat with its fabulous view of the river Thames, near her friends.

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