This is a tough call cvmom. Personally the area you live in is one of my favorites. I really like the Heights alot and if you put your home for sale, assuming it shows well and is priced correctly you would no doubt sell it quickly. Suffice it to say demand for that neighborhood is strong. Many of my friends who are engineers have paid off their mortgages by making double payments and they enjoy a debt free life. Nothing wrong with that.
As far as buying the home you like from the acquaintance that is not hard as you implied. You can have an attorney draw up the purchase agreement and make sure that all the bases are covered and run it through escrow.
A family of 4 in 1300 sf seems a bit tough to me but is definitely doable. For my own family there is not a chance in hell to be in 1300 sf but that is personal choice. If you poll many FAMILIES rather then single people or couples with no kids, I believe you would get more that say 1300 is to small. Of course if you polled many FAMILIES back in the 60s with 2 kids, 1300 was probably just fine so yes it is more of a consumption based evolution that has driven us to be this way. So be it, I can deal with that.
Standard realtor fees vary. Your commissions are split in half, for most conventional brokerages your fees are 2.5-3% to have a listing agent represent you, and then you would offer a 2.5% coop commission (this is paid to the agent who represents the buyer). There are many other brokerages that have reduced commission structures as well. There are plenty of on line resources that can help you select a good agent. I doubt that selling the home is going to be challenging.
The living without debt question is a great opportunity. On the other hand having an asset that you have at a low rate, (assuming your rate is low) is nice as well. Possibly your current equity level may play into it as well. How far off are you from paying your current home off? At any rate you do have a challenging question and the advice from the other posters has been excellent. I do believe that in a few years, those who have large piles of cash will be presented with opportunities that will be staggering and not unlike those that were had in the early 80s.
