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The Economics of Selling a Home

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Selling a Home

Explore the costs, pricing strategies, and market factors that impact home sales. Maximize profits and make informed decisions when selling a home.

Common Selling Expenses

The seller bears the burden of most expenses required to facilitate home sales. The money you make from selling your home (if any) is the selling price minus: What you still owe on your mortgage (if any) The costs to sell the home Any taxes you need to pay for the sale

The Main Selling Expenses

The most common fees that people pay to sell their homes include:
Agent commissions: As the seller, you pay the commission for both your agent and the buyer’s agent, typically totaling 5–7% of the home’s selling price. For instance, if your house sells for $300,000, you might pay $18,000 in commissions.

Property inspections: Many sellers hire a home inspector before listing their property. An inspection costs about $325 on average, depending on the location and size of the home. A pest inspection may cost an extra $75–$150.

Repairs and improvements: Inspections often find problems the seller needs to fix, like old pipes, broken appliances, or faulty air-conditioning. Before selling, most sellers also make upgrades, like painting or replacing carpets. Plan to spend at least a few thousand dollars on these repairs and improvements

Closing costs. are the fees you pay to finish selling your home. The closing is the final meeting where you give the keys to the buyer and get paid. These costs cover the paperwork and other details needed to complete the sale. The seller and buyer agree on who will pay for these costs. Depending on the market, local practices, and other factors, these costs can be minimal or as much as 5% or more of the home’s sale price. That’s in addition to the real estate agent commissions you pay

  • Prepayment penalties: Some mortgages include prepayment penalties, fees lenders charge if you pay off a mortgage early (before the loan’s full term expires). Since most sellers pay off their existing mortgages early and in entire when selling, you should confirm whether your mortgage includes prepayment penalties. If so, ensure you’re prepared to pay these fees and the other costs of selling your home. Though prepayment penalties vary, they generally cost 1–2% of the outstanding loan balance or the next six months’ worth of interest on the loan.
  • Moving expenses: These costs include packing supplies and hiring a moving company. Even if you plan to move yourself, you’ll still incur expenses such as truck rental and fuel fees. Depending on the amount of stuff you have and the distance you’ll be traveling, moving can cost a few hundred or several thousand dollars

The Tax Implications of Selling a Home

Transfer taxes: Taxes your state or local municipality might charge for selling (or “transferring”) your property. These taxes usually equal 1–2% of the sale price, though they vary depending on your state’s or local municipality’s tax policies. Contact your local tax office to find out how much the transfer tax is in your area.

Prorated property taxes: Property taxes are usually due annually or semiannually. Depending on when you submit your most recent property tax payment, you’ll either owe your buyer a prorated share of property tax payments, or your buyer will owe you a credit for the property tax you’ve prepaid. Since it’s impossible to predict precisely when your sale will occur, plan to set aside 3–4 months’ worth of property tax payments once you decide to sell your home.

Capital gains taxes. are the taxes you pay on the money you earn from selling your home. However, not all the profit from the sale is taxed. Exclusions can range from $250,000 for single filers to $500,000 for married couples filing jointly. There are specific rules to decide if you qualify for a tax break. Before selling your home, talk to your accountant or tax advisor to understand the taxes and other effects of selling. If you don’t qualify for these exclusions, or if you have a profit on the sale of your home that exceeds the exclusion amounts, you’ll most likely be required to pay tax equal to 15–35% of your profits, or 15–35% of the amount of your earnings that exceeds the exclusion amounts.

You can subtract expenses incurred while selling your home from any otherwise taxable gains you receive from selling. Such expenses include: The fee you pay your agent. Fees for any attorneys you use Some closing costs, such as title-, escrow-, and deed-related fees Costs for ads you posted Loan fees you cover for the buyer

Can You Really Afford to Sell?

Now that you know the main costs and tax ramifications of selling your home, you must do some basic math to determine whether you can afford to sell. It’s important to figure this out before you decide to sell. . The first step is to project a total cost of selling based on these four expenses:

Selling your current home: Expect to spend about 10% of your home’s sale price on the costs required, including agents’ commissions. Schedule a meeting with a local real estate agent to get an estimate of your home’s sale price. Most agents will do a basic evaluation for free.

Paying off your mortgage principal

  • # Most homeowners pay off their mortgage principal (remaining balance) in full when they sell their current home. If your current loan has no prepayment penalties, you won’t have to pay additional fees to pay off your principal. If your loan does have prepayment penalties, confirm with your lender the specific amount you’ll be required to pay.
  • Moving: Contact movers or a rental truck company for an estimate.
  • Paying taxes: Calculate the total taxes you’ll need to pay when you sell. These include transfer taxes, property taxes, and capital gains taxes.

How to Calculate Your Expected Profits from Selling

To estimate how much money you might make from selling (after taxes and expenses), subtract the four costs above from your expected sale price. For instance, if your expenses total $150,000 (including paying off your existing mortgage) and you sell your home for $200,000, your profits will be $50,000.

  • If you get a positive number, you can likely sell your home as long as the profits cover the costs required to buy your new home and the ongoing costs of owning that home.
  • If you get a negative number, You most likely cannot afford to sell your home now. Consider waiting until your equity increases or until you have sufficient savings. If you already have significant savings, you can still sell unless you need those savings to cover monthly bills, medical bills, or other pressing expenses

The Cost of Buying Your Next Home

Selling your home can affect your overall finances based on the costs you’ll have in your new home and neighborhood. Before deciding to sell, think about:

Housing costs: Moving to a more expensive home or neighborhood usually means higher costs, like a bigger down payment, higher monthly mortgage payments, increased property taxes and utility bills, and more costly homeowner’s insurance.

Other living expenses: Your living costs, like groceries, transportation, and entertainment, depend a lot on where you live. Moving to a cheaper home doesn’t always mean your overall costs will go down, especially if the new city has a higher cost of living.

Tax changes: Moving to a less expensive home can lower your housing costs, but it may also reduce your annual tax deductions. Talk to your accountant or tax advisor to see how selling might affect your taxes.

If You Can’t Afford to Sell, Should You Sell and Rent?

Homeowners who don’t have enough money to finance both the sale of their current home and purchase a new one may decide to sell their home and rent a new one instead. Since renting doesn’t involve the various costs of buying a house (securing a mortgage, for example), it’s usually a more affordable short-term option. However, renters don’t build equity or receive the tax benefits that homeowners do, so renting is often much more costly than owning a home.
If you already own a home you can afford and don’t need to sell, you should probably not resort to renting. Think about renting only if you can’t afford your current one and need a cheaper place to live quickly

Should You Offer Seller Financing?

Seller financing is when you lend money to a buyer so they can purchase your home. The buyer pays you back with interest, usually in monthly payments. This option appeals to both buyers and sellers for different reasons:

For buyers: Seller financing lets them skip working with a bank or lender, which means lower closing costs and easier approval. Sellers are usually more flexible about financial issues, like low credit scores, because they want to sell quickly and start earning interest.

For sellers: You can earn extra money from the interest on the loan. Offering seller financing can also attract more buyers.

However, seller financing can be risky. Buyers who don’t qualify for regular loans might struggle to pay their bills. If the buyer doesn’t pay you back, you may have to take back the home through foreclosure. This process can be frustrating and stressful.

In most cases, especially for first-time sellers, it’s best to avoid seller financing.

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