It’s no secret that buying a home is expensive these days. What a lot of people might not realize is that selling one doesn’t come cheap either. No matter what a house is making on the market, the seller is unlikely to walk away from the closing table with anything near the full amount. This article gives an overview of the costs of selling a home and offers some suggestions to keep them from spiraling out of control.
Key points to remember
- There are many costs associated with selling a home, some of which are optional or negotiable.
- Realtor commissions are the biggest expense for most sellers, and they usually have to pay both their agent and the buyer’s agent.
- If the house sells for a large profit, the seller may also be subject to capital gains tax on a portion of that amount.
Refresh your home
Real estate agents often refer to the attractiveness of a home, the first impression it makes on potential buyers. As a potential seller, it’s important to take as unbiased a look as possible at the exterior of your home. Is the paint in good condition? Are the bushes pruned? Has the garden been weeded? If your home does not pass the test in any of these areas, you will want to invest time and possibly money to fix it.
Once you’ve made your home attractive enough for potential buyers to want to enter, it’s time to spruce up the interior. Are the paint and wallpaper presentable? Is there something that clearly needs to be fixed?
More and more, sellers are staging their homes to increase their appeal. It can mean anything from simple decluttering to buying (or renting) new furniture. If you have a real estate agent, they can give you advice on what to do, organize the house themselves, or hire a professional. According to a 2021 report from the National Association of Realtors (NAR), professional services could cost around $ 1,500, which in many cases will be more than worth it. In the NAR survey, 23% of sales agents said staging increased sales prices from 1% to 5%, while 29% reported increases ranging from 6% to over 20%. %.
The most frequently staged rooms, according to the NAR, are living rooms (90%), kitchens (80%), master bedrooms (78%) and dining rooms (69%).
While some relatively inexpensive little touches can go a long way, larger home improvement projects are a different matter. In the 2021 Cost vs. Value of Remodeling magazine, none of the 22 renovation projects studied would recover their full cost at the time of sale. For example, a minor kitchen renovation recovered about 72% on average, while a major renovation recovered about 54%. The most worthwhile project was the replacement of a garage door with a new one made of steel, which recovered 94%.
Incentives for buyers
In a dynamic real estate market, where a home may receive multiple offers, sellers do not have to offer additional incentives to compete with potential buyers. In a weaker market, however, incentives of one kind or another can make a difference. Common incentives include offering to pay points for the buyer’s mortgage (known as seller-paid points), covering some of the buyer’s closing costs, or giving up certain furniture and appliances. .
Pay off your mortgage
If you still owe money on your mortgage, you’ll need to use some of the proceeds to pay it off. In order for the transaction to go through, you will need a repayment letter or statement from your lender. It will show how much you owe the lender, including any prepayment charges or penalties associated with the transaction.
If you have an escrow account with your lender, they must either apply that amount to your outstanding debt or pay it back to you.
Real estate agent commissions
Often the biggest cost involved in selling a home is paying the commissions of the realtors. And it may surprise some first-time sellers that the seller is usually responsible for paying both their own agent and that of the buyer.
Traditionally, a 6% commission, split between the seller’s and buyer’s agents, has been the norm. But the commissions are negotiable and many agents are willing to go down a bit. According to RealTrends, which collects data on real estate transactions, the national average commission is now around 4.9%, down from 5.4% a decade ago.
There are also discount brokers that charge the seller either a lower percentage (often 1-2%) or a fixed fee. These include both local agents and online brokerage sites. There are of course trade-offs and you might not get all the service or attention that you would get paying a higher rate. Additionally, you may need to pay a standard commission to the buyer’s agent.
You can also save on commissions by selling your home without an agent. Again, you may still have to pay the buyer’s agent and you will be doing a lot of the work that your own agent would otherwise take care of for you. Still, it works for some sellers.
Real estate agent commission fees typically make up the bulk of the seller’s closing costs. Some choose to sell a home without an agent in order to save money, but you will have to do a lot of work and you may still have to pay the buyer’s agent.
Hire a lawyer
Whether you need to hire a lawyer to sell your home varies from state to state, but it’s often a good idea anyway. The seller’s lawyer can draft the sales contract and represent the seller’s interests at closing. What you will pay can vary widely from place to place, but it is likely to be several hundred to several thousand dollars.
Other closing costs
The majority of the closing costs for which the seller is responsible will be paying realtor commissions, but there may be others as well. For example, the seller is generally expected to pay transfer taxes, which some states impose when a property changes hands. If the property is part of an association of owners, the association may also charge a transfer fee.
These rules also vary from state to state, and who pays a particular closing cost can often be negotiated between buyer and seller as part of the contract.
If you make a big enough profit selling your home, you may be subject to federal income tax. Fortunately, you can exclude some of your profits if you meet these two criteria: You have owned the house for at least two years and you have lived in it for at least two years out of the last five.
Assuming you qualify, you can exclude up to $ 250,000 from profit as an individual or $ 500,000 as a married couple filing a joint tax return. Note that your profit is not based on what you paid for the house initially, but on your adjusted cost basis. This includes what you paid for the house plus the cost of any improvements you have made over the years. So, for example, if you add a new roof, central air conditioning, or carpet, those expenses will increase your base and reduce your profits. You can also add some of your closing costs from when you originally bought the house.
Also note that the length of time you’ve owned your home will impact the capital gains tax you will have to pay. if you have owned the home for at least a year, your profit (if any) will be taxed as long-term capital gain. If you’ve held it for less than a year, it will be taxed at the potentially much higher rate for short-term capital gains.
What closing costs does a buyer have to pay?
Homebuyers are responsible for a long list of fees, so plan to bring lots of checks to your closing. Typical closing costs include mortgage origination fees, property appraisal fees, title search fees, title insurance premium, and first year homeowners insurance premium. Note that some of these fees may be negotiable and the seller may agree to participate as part of your transaction. In total, a buyer’s closing costs often range from around 3% to 6% of the home’s selling price.
Are closing costs tax deductible?
Most closing costs are not tax deductible. The exceptions are mortgage interest (including points) and property taxes, and this only if the buyer or seller details the deductions when they file their tax return for the year. However, sellers are allowed to add a portion of their original closing costs to the adjusted cost base of their home, which may reduce their tax liability.
What is a mortgage with no closing costs?
A mortgage with no closing costs is a mortgage in which the lender will add the borrower’s closing costs to the loan amount or charge a higher interest rate to compensate for them. In other words, even if you don’t have to pay any closing costs upfront, you will still pay them over time.
The bottom line
Selling a house is not free. Probably the biggest expense is real estate agent commissions, but there are other costs and fees as well. If you sell your home for a large profit, you may also owe income tax on a portion of that amount.