Is Now the Time to Sell Your Real Estate?
Dear Rich Lifer,
Despite record-setting inflation and a nationwide lumber shortage, the U.S. housing market is still red hot.
According to the National Association of Realtors (NAR), the median price of a single-family home hit a record high at $335,000 this spring.
Guess how long a house is sitting on the market right now?
Just 18 days! Another record, says the NAR.
So is this market about to burn out? Or is there more fuel in the tank?
Let’s find out…
What’s Fueling Demand?
Mortgage rates are at historic lows thanks to below-average long-term Treasury bond yields and the Federal Reserve holding short-term rates near zero.
Even though housing starts fell by 9.5% to 1.57 million units (annualized) in April from a downwardly-revised 1.73 million units in the month prior, the pullback was expected given the outsized (20%) gain that happened in March.
The pandemic has put a premium on private indoor and outdoor space, some experts say. Like many things, this trend has been accelerated due to the pandemic. That’s thanks to several factors influencing demand like an aging millennial population and an influx of private equity.
Homebuilding should resume a more positive trend in the months ahead as more Americans get vaccinated, the reopening of the economy picks up steam, and the labor market resumes in full force.
Lumber Prices Remain High
Another reason housing starts slowed in April was due to record-high lumber prices. Even though homebuyers were buying pre-construction homes at breakneck speed, developers are holding off on construction until lumber prices fall.
In April, the price of lumber surged to $1,200 per 1,000 board feet, up significantly from $350 per 1,000 board feet one year earlier.
According to the National Association of Home Builders (NAHB), building costs for the average single-family home have gone up $36,000 due to the ongoing lumber shortage.
Is Now a Good Time to Sell?
As lumber prices continue to fall, new builds will start to ramp up to meet the demand and low inventory in the resale market.
If you’re thinking now might be a good time to sell, we agree. With inflation set to skyrocket and all the signs of a looming recession, this might be the peak for housing.
Plus, if you’re not in a hurry to buy, you might even be able to score a better deal on a house in the not-too-distant future.
But let’s not get ahead of ourselves. First, let’s consider how much it will actually cost to sell your home.
The True Cost of Selling Your Home
The pandemic is causing many Americans to reevaluate their living situation. Whether that be looking for more space, looking to escape to a new location, or simply wanting to downsize in retirement.
Whatever your reason for selling is, there are some important costs you need to factor in before putting up a for-sale sign on your lawn.
If this is your first time selling a home or the first time in a long time, here are all the expenses you should prepare for.
Real Estate Commission
The real estate commission is typically the biggest fee you will have to pay. Most commission fees are between 5% and 6% of the sale price.
If you sell your house for $335,000, expect to pay upwards of $20,100 in commission fees. The commission is split between your real estate agent and the buyer’s agent. According to the NAR, 77% of the time, sellers bear this cost.
One way to negotiate a lower commission fee is to convince your listing agent to find you a buyer. If they find you a buyer, ask for the commission to be halved since the buyer’s agent is cut out.
Another way homeowners try to avoid paying commission is by listing their home for-sale-by-owner (FSBO). The NAR says only 11% of home sales were FSBO last year – which tells us it’s not popular for a reason.
Pre-Sale Home Inspection
A presale home inspection is optional and might cost around $400 or more, but sometimes it’s worth the investment because you’ll find out any structural or mechanical problems with your house before a potential buyer does.
Getting a pre-sale inspection highlights what major repairs you need to tackle before listing your property. Obviously, you can choose to sell as-is but fixing a few issues can also help you maintain your price integrity. It’s worth noting that if you do find issues, depending on your state’s laws, you may have to disclose them to a buyer.
Whether you get a pre-sale inspection or not, there are likely some repairs you’ll have to account for when budgeting.
A recent NAR survey found kitchens are the most important space for buyers. But a minor kitchen remodel could cost you almost $21,200 on average. The upside is an 81.1% recoup of the cost at the time of sale, but you’re investing time and energy if you do it yourself.
Your time and dollars might be better spent on smaller renos like updating kitchen cabinet knobs and installing a new backsplash. Both cost significantly less but still catch a buyer’s eye and boost your home’s value.
Most buyers have no imagination so it’s best if you show instead of tell. Sure, you can stage the house yourself, but hiring a professional to stage can pay off.
Stagers know exactly how to highlight the best features in your home while minimizing its worst. They rearrange furniture and accessories and may even repurpose a room in a way you haven’t thought of.
The cost varies according to the size, extent of work, whether you need art and insurance, etc. But expect to spend at least a few hundred to a few thousand dollars, at minimum.
Although the average time a house is sitting on the market right now is only 18 days, some houses take longer to sell than others. If your home sits on the market vacant, be prepared to continue paying utilities.
Showing a house in the dark or without AC in the heat of the summer is never a good impression. Budget for whatever your typical monthly utility bill costs.
If you still have a mortgage on your home, then some of your proceeds will go toward paying off your mortgage. However, the payoff amount on your mortgage statement is likely going to be less than what you actually owe.
You’ll probably have to add prorated interest you’ve accrued to the balance. Also, you might have to pay a prepayment penalty fee. Review your loan documents or talk to your lender to find out how much extra you’ll owe.
For most real estate transactions, closing costs are covered by the buyer. But, there are some circumstances where closing costs fall on the seller, too.
For example, if you’re in a buyer’s market (one where there are a lot of homes for sale), you may be asked to cover costs like homeowner’s association fees, property taxes, attorney fees, transfer taxes, and title insurance.
Or, you may just have to pay an escrow fee or a brokerage fee. Most, if not all these fees are negotiable. Just be prepared if a buyer asks you to pay for some of them.
The final costs you have to consider are capital gains tax and property tax. When you sell your home for more than you paid for it, that counts as a capital gain and might need to be reported on your federal tax return.
The good news is, you’re probably eligible to exclude up to $250,000 of profit ($500,000 for married couples filing jointly) from your main home, as long as you haven’t used the tax break on another home sale within the past two years.
This tax break only applies if you can prove this was your primary home for at least two out of the last five years.
Also, don’t forget about property taxes, which are usually paid in advance. You should pay the prorated share of property tax up to the closing date, with the money placed in escrow. But, if you’re selling and have already paid taxes for the year, you may even get a rebate at closing.
In this case, the buyer will reimburse you the portion of taxes you already paid after the closing date.
There’s no doubt the housing market is ready for a correction. The only remaining question is when? If you’re considering selling your house soon, make sure you take all these expenses into account. On average, expect to pay around 16% of the sale price. Costs will vary, but we think 16% is a fair number to budget.
To a richer life,
The Rich Life Roadmap Team