SELLING YOUR HOUSE
Buying a home is a lot of work. Between loan applications, inspections, and the house hunt itself, you were probably feeling a bit overwhelmed!
Selling is typically much easier, especially if you have been keeping up with maintenance. And yet, it’s so much more stressful. Why?
For one, a buyer has an almost limitless supply of houses to look at, and he or she can always wait until the right one comes on the market. This is obviously not true when you’re selling – you only own one home! Add in the emotional attachments most sellers have to their homes it only makes sense that selling won’t be as fun as buying.
Agents feel this stress too. If I make a bad assumption and lose a bidding war on a house my buyers wanted, we can take our disappointment on the chin and move on — but when I represent a seller there may be no moving on if I screw up! I am always anxious when I bring a property to market because the last thing I want to do is make a mistake that could cost my clients money.
How do we manage the anxiety that comes with bringing such a large investment to market? By extensive preparation!
I’M A GREAT BELIEVER IN LUCK, & I FIND THE HARDER I WORK, THE MORE I HAVE OF IT.
– Thomas Jefferson
IS SELLING EVEN THE RIGHT MOVE?
The first thing you need to ask yourself when you’re a seller is this: “how much money will I make (or lose) if I sell now?”
I’m obviously going to recommend that you consult with a competent real estate agent, but you’re a motivated self-starter if you’re still reading so here’s the math you need to know.
The math below makes a few assumptions. In this case, I am assuming that you are a military veteran and thus were able to use a VA loan to finance the house. You paid $180k for the house, made no down payment, and in the time that you have owned the property have paid down the loan balance by $10k. Your current loan balance is $170k.
Next, we assume that you have met with a real estate agent who researched the house and determined that $210k is an appropriate listing price, and let’s assume that you hired a great agent who sold it for that price. The average agent commission is 6%, which is split by your agent and the seller’s agent. This comes out to to a total of $12,600. It is also typical for sellers to pay at least some of the buyers closing costs, so let’s assume you pay $3000 in closing costs and an additional $780 to provide the buyer a home warranty and termite bond. This leaves you with proceeds of $193,620.
To determine the check that you will leave closing with, you must subtract $193,620 by your current loan balance of $170k, which leaves you with a $23,620 check. Not bad!
A note on realtor commission: commissions are negotiable, though most agents in this area (Savannah, GA, for my out of town readers) are going to want 6%. Why is this?
1. A lot of research and experience goes into selecting an appropriate listing price. List too low and you’re leaving money on the table, list too high and your property will sit on the market so long that it becomes toxic. That is, buyers will assume there is something wrong with your property if it’s been on the market for six months. In that scenario, you will typically end up selling your house for less than it’s worth or not at all.
2. Good agents put a lot of money into listing preparation and marketing. This means hiring professional photographers, putting time into a great listing description, and when necessary targeted advertising of your property. When vetting prospective agents, ask to see a few of their old listings and make sure they didn’t take photos with their cell phone and write a garbage description.
3. Agents are experts in negotiation and guiding the deal to the closing table. We know the best closing attorneys and we know how to deal with lenders. Getting your house under contract is only half the battle, taking it to the finish line is where we really earn our money.
I’d also like to note the obvious — many agents are incompetent or worse. This is why so many sellers decide to list “for sale by owner”, or FSBO. In my admittedly biased opinion, a good realtor is like a good attorney or tax accountant – they’ll save you more money and aggravation than they cost.
IS IT BETTER TO RENT INSTEAD?
Now, in the example above we saw that you could expect to pocket a cool $23k at the closing table and that was all the motivation you needed to sell. When might you want to decide to live in your property a little longer, or rent out your property?
a) If you could expect to take a smaller gain (or a loss!) that you are not willing or able to take — chances are waiting to sell for another couple years will turn your loss into a gain.
b) If you could rent the property for more than your mortgage. Typically, a mortgage payment on a $180k loan will be around $1200 a month. If you could rent your property for $1800, you could expect to put about $200 into your pocket every month after maintenance expenses, vacancy, and property management (or about $350 if you self-manage).
c) If you’re moving away but expect to move back in a few years. Unless your rent coming in is less than your mortgage payment or you won’t qualify for a second loan, you’ll probably be better off holding on to the property. You can always try your hand at being a landlord and sell later if it’s too much hassle.
Ask your agent if it’ll make more sense to stay in your property a while longer or rent it out if you are forced to move. Chances are they’d prefer if you sell so they can make that commission, but a good agent will lay out the facts and let you decide for yourself. This is another way to know that you’ve found a good agent who will look out for your interests above his or her own!
THE SELLING PROCESS
Now that you’ve decided to sell, what are the steps you must take? Let’s take a look:
1. First, keep in touch with the agent who helped you buy the house (assuming they did a good job.)
Before you take on any renovations, bounce your idea off that agent to get a feel for whether you’ll actually be adding value to your home. For example, in some neighborhoods it just doesn’t pay to have hardwood floors or granite countertops. Who wants to pay $200k for a decked out house in a neighborhood full of starter homes that typically sell for $160k? Nobody, they’ll take their $200k and go buy some new construction, that’s what.
2. Agent interviews
Call up the agent who sold you the house, and it doesn’t hurt to get a second opinion. Don’t tell prospective agents what you think the house is worth – some unscrupulous agents will tell you what you want to hear just to get the listing and won’t have a problem letting your house sit on the market for six months after they list it too high. Agents should show up to a meeting with you with a brief explaining how your house compares to recent sales in the area and will be able to recommend a listing price after touring around the property.
3. Pre-listing preparation
This is when you really need to get around to all that maintenance that you’ve been putting off. Your agent may also recommend some cosmetic repairs. Don’t be offended – the moment you decide to sell it’s not really your house anymore. You want to make your house attractive to prospective buyers, and that may mean tearing down your floral wallpaper, painting walls neutral colors (grey is so hot right now), or doing a little landscaping. It’s a good idea to hire a professional cleaner. Your agent should pay for professional photos, and depending on the listing price may commission drone photos, a video walk-through, or professional home staging.
4. List the house
Your main job here is to get out of the house when buyers come to take a tour. Sellers will always talk folks out of buying more than they will talk them into buying. It’s even better if you can buy your new house before you list the old one for sale, vacant houses almost always sell faster.
5. Negotiation round one
You’ll receive an offer (or ideally multiple offers.) Your agent may negotiate a bit with the buyers agent a bit over the phone, but the real negotiation happens when you and the buyer trade offers and counteroffers. Your agent will recommend whether to accept a buyers offer or make a counteroffer, but you must ultimately decide what to do. When you accept an offer, you will take an earnest money deposit from the buyer, which should be about 1% of the purchase price. This is a good faith deposit that the buyers make and you can keep it if they default on the terms of the deal.
6. Due Diligence
When you accept an offer, you will usually agree to give the buyer a due diligence period. The buyer will usually pay for a professional home inspector to check out the property. These inspectors will always find something wrong with your house, and the buyers may ask for repairs or price concessions.
7. Negotiation round two
Do you agree to repairs or no? Discuss with your agent. Remember, the buyer can walk away from the deal at this point and keep their earnest money.
The buyer’s lender will require an appraisal. If the house doesn’t appraise for the agreed upon sales price…
9. Negotiation round three
If the house doesn’t appraise, you will have to agree to a lower price, get the buyer to agree to cover the difference between appraisal and sales price with their own cash, or let the deal die. This isn’t a great position to be in, but it does happen.
10. Clear to close
Once the buyer receives a clear to close from their lender, you can be reasonably certain that the deal will close. Now it is safe to move out of the house. I would not recommend moving until that time, it’s not uncommon for deals to fall through because of the buyer’s inability to obtain financing.
Congrats on that big paycheck! Remember that nothing’s official until the ink is dry. Deals have fallen apart at the closing table!
12. After the fact
You may be on the hook for capital gains tax, but if you lived in the home you shouldn’t have to pay those. Bring your closing documents to your tax person and they should take care of everything for you.
THINGS TO WATCH OUT FOR WHEN SELLING
1. Buyer’s financing
A lot of deals fall through because of financing issues. When you receive an offer from a potential buyer, you’ll want to make sure they buyer comes to the table with a pre-approval letter or a cash offer with proof of funds. Not all pre-approvals are equal, however. Your agent should have a feel for local lenders and probably maintains a list of garbage lenders who have caused trouble for him or her in the past. If you have received a lot of interest on your house, perhaps it’s better to pass up an offer from a lender on your agent’s naughty list.
2. Going back on the market
Sometimes a contract falls apart and there’s nothing you or your agent could have done to prevent it. This is why I always manage my seller’s expectations. We should be cautiously optimistic when we accept an offer and be ready in case it falls through. We saw a deal fall through three times earlier this year through no fault of the seller — one of the times the deal fall apart at the closing table when the buyer decided he just didn’t want the house anymore! Horrible luck, and ultimately the listing became “toxic” and the seller didn’t have much choice but to take a lower price for the house than he should have gotten. I would prefer to include only happy stories here, but occasionally things turn sour in this business.
3. Buyer contingencies
Be weary of a buyer bringing an offer contingent on the sale of a property that the buyer is currently selling. Demand at least 1% of the purchase price of the house as earnest money. Don’t let a buyer have a 20 day due diligence period, 10 days should be plenty.
4. Divorce/Title issues
If you were married when you bought and you aren’t now, and your spouse signed the deed to the house — you might have some issues when you try to sell. Make sure you discuss ownership of real estate with your divorce attorney before you decide to list your house for sale. Have you paid your taxes on time? Contractors who did work on your house? If not, you could have a lien on your house. If you’ve ever been sued and lost a deficiency judgement you could also have a lien.
Have you ever seen the signs that say “we’ll buy your house cash, fast” signs? Those are put up by wholesalers, and wholesalers will typically try to get a contract on a property on the cheap and sell that contract to someone who actually has money for a nice finders fee. Most agents don’t like wholesalers because we tend to view it as brokering real estate transactions without a license, but I will say this – sometimes a wholesale transaction is a seller’s only real option and not all wholesalers are bad. If your property is in terrible shape, a wholesaler will probably get you as good a deal as an agent with a lot less hassle. If you’re facing imminent foreclosure, then a wholesaler might be the only option because of how fast they can close deals. If your property is in good shape and you’re not facing foreclosure, then you’re almost always better off hiring a realtor to put your property on the open market. Like anything else, some wholesalers are good and some are bad.
READY TO SELL? JUST THINKING ABOUT IT?
Author: Pat Wilver