Wait a bit before buying retirement home

It's OK for property owners to consider their retirement-housing options, but they should also keep in mind that things could change drastically before they finally get their gold watch.

Q. My husband and I live in the Northeast and are both 58. We plan on retiring at 62 or 63 and then moving to a retirement community in Arizona or California. With home prices soft, we were thinking about buying the retirement home now and renting it out to tenants until we're ready to move into it ourselves in four or five years. What do you think of our plan?

A. Prices in some popular retirement markets out West now are down as much as 15 percent from a year ago, so I can see why you might be tempted to purchase a place now instead of waiting a few more years. But your plan also has a lot of drawbacks, so it probably would be best to wait until your retirement date draws closer before making a purchase.

Though prices in the West are soft now, there's no guarantee that they'll be any higher when you finally get your gold watch. The overall housing market likely will be better than it is today, but local prices can also be adversely affected by building trends and a variety of other factors. Simply assuming that the value of your retirement home will climb in the years ahead is a risky proposition.

Also remember that being a "long-distance landlord" can be a real pain. Trying to find a good tenant to occupy and maintain your home out West from your current residence in the Northeast could be difficult. You certainly could hire a property-management company to do the job, but then you'd likely be stuck paying 10 percent or even 20 percent of your annual rental income for the company's services.

Finally, a lot could happen in the next few years that you just can't foresee. For example, your plans could change if you decided to work until you're 65 instead of 62, or simply came to the realization that you just couldn't bear the thought of leaving your relatives or longtime friends in the Northeast behind. And, of course, your housing needs might change dramatically if one of you becomes seriously ill, incapacitated or even dies.

In short, the drawbacks to your plan outweigh the potential benefits. Play it safe by waiting at least a couple of more years before fully committing to a retirement-housing plan.

Q. What is a "general lien"?

A. Generally speaking, it's a lien that attaches to all of a person's property rather than to a single asset.

For example, if you have an automobile loan, the bank has a lien on the car that specifically allows the lender to repossess it and resell it if you don't pay the money back. However, the lien wouldn't allow the bank to force you to sell your house or other assets in order to cover any shortfall.

A general lien, like the type the Internal Revenue Service often uses, is far broader and more powerful. If you owe the IRS back taxes, it can get a general lien that attaches to virtually everything you own -- your home, your car, almost down to the shirt on your back -- and then have it all sold to satisfy the debt.

Q. How long does a foreclosure stay on a credit report? Does it hurt a credit score as much as a bankruptcy does?

A. A foreclosure stays on a credit report for seven years. It generally doesn't hurt a credit score as badly as a bankruptcy does -- but it's pretty close.

Most homeowners and other consumers who contemplate filing for bankruptcy choose to file under either Chapter 7 or Chapter 13 of the U.S. Bankruptcy Code. Regardless of which one you choose, there's no guarantee that you will get to keep your house.

A Chapter 7 bankruptcy, in which someone asks a judge to basically dissolve their debts, stays on a report for 10 years. In a typical Chapter 7 filing, the court may let you "walk away" from most credit-cards bills and other unsecured debt if certain conditions are met. But your secured debt, such as a mortgage you placed on your home, will still need to be repaid: If you can't make the house payments, the property will have to be sold.

A Chapter 13 bankruptcy is different. Under this chapter of the nation's bankruptcy law, you don't ask the court to repudiate your debt -- you simply ask for more time to pay it back. The mortgage company must still get paid, but so must your unsecured creditors. But because a Chapter 13 bankruptcy suggests that you're willing to repay at least some of the money that you owe, it only stays on your credit report for seven years instead of the 10 it takes to remove a Chapter 7 filing.

Of course, any type of bankruptcy or foreclosure will make it far more difficult (or maybe even impossible) to get a mortgage or other type of credit in the future. Even if you're able to obtain a loan eventually, the lender is likely to charge a higher interest rate to compensate for the black mark that the foreclosure or bankruptcy left on your credit history.

© 2007, Cowles Syndicate Inc.