The cost of purchasing a home is no longer a secret. What many individuals may not realize is that selling one is also not inexpensive. Regardless of how much a home sells for on the market, it is unlikely that the seller will walk away from the closing table with the full amount. This article provides a summary of the costs associated with selling a home and offers advice for keeping them in check.
• The sale of a home involves numerous costs, some of which are optional or negotiable.
• Real estate agent commissions are typically the largest expense for sellers, as they must pay both their agent and the buyer's agent.
• If the home is sold for a substantial profit, the seller may be required to pay capital gains tax on a portion of the profit.
Improving Your Home
The curb appeal of a home refers to the initial impression it makes on potential buyers. As a potential seller, it is important to view the exterior of your home as objectively as possible. Is the paint in decent condition? Are the shrubs pruned? Has the garden been weeded? If your home fails the test in any of these areas, you will need to devote time and possibly money to addressing the issue.
When you've made your home so inviting that prospective buyers will want to enter, it's time to improve the interior. Are the paint and wallpaper in good condition? Is there anything obviously in need of repair?
Sellers are staging their homes to increase their desirability. This can range from decluttering to purchasing (or renting) new furniture. If you have a real estate agent, they can provide advice, stage the home themselves, or hire a professional stager. According to a report by the National Association of Realtors (NAR) for 2021, a professional's services could cost around $1,500, which in many cases will more than pay for themselves. In a survey conducted by the NAR, 23% of selling agents reported that staging increased sales prices by 1% to 5%, while 29% reported increases ranging from 6% to more than 20%.
According to the NAR, the most commonly staged rooms are living rooms (90%), kitchens (80%), master bedrooms (78%) and dining rooms (68%).
Larger remodeling projects are a different matter, despite the fact that a few small, relatively inexpensive improvements can go a long way. According to Remodeling's Cost vs. Value Report for 2021, none of the 22 remodeling projects evaluated would recoup their full cost at the time of sale. For instance, a minor kitchen remodel returned approximately 72% on average, while a major one returned approximately 55%. With a 94% return on investment, replacing a wooden garage door with a steel one was the project that came closest to being cost-effective.
Incentives for Buyers
A home may receive multiple bids in a robust housing market, and sellers may not need to offer additional incentives to attract buyers. However, in a weaker market, incentives of one sort or another can make a difference. Common incentives include seller-paid points, covering a portion of the buyer's closing costs, and leaving behind certain furnishings and appliances.
Paying Off Your Mortgage
If you still owe money on your mortgage, you must use a portion of the sale's proceeds to settle the debt. A payoff letter or statement from your lender is required for the transaction to close. It will display the amount you owe the lender, including any associated fees or prepayment penalties.
If you have an escrow account with your lender, the lender must either apply the funds to your outstanding balance or return them to you.
Real Estate Agent Commissions
Often, the largest expense associated with selling a home is paying the real estate agents' commissions. Some first-time sellers may be surprised to learn that they are typically responsible for paying both their own agent and the buyer's.
Historically, the standard commission split between the seller's and buyer's agents has been 6%. However, commissions are negotiable, and numerous agents are willing to reduce their fees. RealTrends, a data aggregator for real estate transactions, reports that the national average commission for real estate transactions is approximately 4.9%, down from 5.4% a decade ago.
There are also discount brokers who charge the seller a smaller percentage (frequently between 1% and 2%) or a flat fee. Local agents and online brokerage sites are included. Naturally, there are trade-offs, and you may not receive all the services or attention you would if you paid a higher price. In addition, you may still be required to pay a commission to the buyer's agent.
Additionally, you can save on commissions if you sell your home without an agent. Again, you may still be required to pay the buyer's agent, and you will be responsible for a substantial amount of work that your own agent would normally handle. However, it does work for some sellers.
Commissions paid to real estate agents are typically the largest portion of the seller's closing costs. Some choose to sell a home without an agent in order to save money; however, you will be responsible for a substantial amount of work and may still be required to pay the buyer's agent.
Hiring a Lawyer
It varies from state to state whether you're required to use a lawyer when selling your home, but it's usually a good idea regardless. The seller's attorney can draught the sales agreement and represent the seller at the closing. Costs can vary widely from location to location, but are typically between several hundred and several thousand dollars.
Other Settlement Fees
The majority of the seller's closing expenses will consist of paying the real estate agents' commissions, but there may be others as well. Generally, the seller is responsible for any transfer taxes imposed by some states when a property changes hands. If the property is governed by a homeowners association, the association may assess a transfer fee.
These rules also vary from state to state, and who pays a particular closing cost can frequently be negotiated as part of the contract between the buyer and seller.
Income Taxes
If you sell your home for a substantial profit, you may be subject to federal income taxes. You are eligible to exclude a portion of your profit if you meet both of the following conditions: You have owned the property for at least two years and resided in it for at least two of the past five years.
Assuming you qualify, you can exclude up to $250,000 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 initially paid for the home, but on the cost basis that has been adjusted. This includes the purchase price plus the cost of any home improvements made over the years. Thus, if you added a new roof, central air conditioning, or wall-to-wall carpeting, these expenses would increase your basis and decrease your profit. You can also include a portion of your closing costs from when you purchased the home.
Also note that the length of time you owned the property will impact the amount of capital gains tax you must pay. If you owned the property for at least a year before selling it, any profit will be taxed as a long-term capital gain. If you held the asset for less than a year, it will be taxed at the potentially much higher rate applicable to short-term capital gains.
What Closing Expenses Must a Homebuyer Pay?
Plan on bringing numerous checks to your closing, as buyers are responsible for a lengthy list of fees. Typical closing costs include the mortgage origination fee, the property appraisal fee, the title search fee, the title insurance premium, and the first-year premium for homeowners insurance. Keep in mind that some of these fees may be negotiable, and the seller may be willing to contribute as part of the transaction. Typical buyer closing costs range between 3 and 6 percent of the home's sale price.
Are Closing Costs Tax Deductible?
The majority of closing costs are not deductible. Mortgage interest (including points) and real estate taxes are the exceptions, but only if the buyer or seller itemises deductions on their tax return for the year. However, sellers are permitted to add a portion of their initial closing costs to the home's adjusted cost basis, thereby reducing their tax liability.
What Is a No-Closing-Cost Mortgage?
A no-closing-cost mortgage is one in which the lender adds the borrower's closing costs to the loan amount or charges a higher interest rate. In other words, even if you do not pay any closing costs initially, you will eventually pay them.
The Bottom Line
Selling a home is not without cost. Real estate agent commissions are likely to be the largest single expense, but there are additional costs and fees as well. If you sell your home for a substantial profit, you may be required to pay income taxes on a portion of that profit.
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