The Costs of the Selling Process
If you’re thinking about selling your home, you’ve no doubt considered the price it could command. But an often overlooked aspect of the process is how much it will cost YOU to sell your home. This article will help you calculate and break down the not-so-subtle transaction costs.
Calculating Your Bottom Line
So you want to sell your house. You’ve begun scouring the real estate market for comparable properties that have sold recently. You’ve taken inventory on your own home, making any necessary repairs and inspections. You’ve been up late scrolling the internet using the latest real estate calculators to value your property. All the while your focus has been solely on how much money you can earn from your home sale. However, one exercise that may provide useful perspective is to consider how much it will COST to sell your home.
The quickest and easiest method is to start with the 7% rule. Historically, the average cost to sell a house ends up being approximately 7% of the property value (although many experts argue it could now be much closer to 10%). Simply multiply the value of the house to get your cost. For example, if you have a million-dollar home, $1,000,000 x 0.07 = $70,000 in home-selling costs.
Of course, this is not the only blow to your bottom line. When calculating your profit, you must also remember to deduct the loan payoff amount. If you have $700,000 of your loan principal remaining, the formula would look like this:
$1,000,000 - $70,000 - $700,000 = $230,000
All said and done, you would only receive $230,000 from the sale of your million-dollar home .
Suddenly, that $70,000 in costs looms much larger. It’s a tough pill to swallow that selling your house may cost an entire year's salary. (A local agent should be able to confirm your figures, including your estimated final sale price).
Opportunities to Save Money
There are some costs that you can’t avoid, like government fees, but before you surrender 7% (or more) of your property’s value there are a couple things savvy sellers do to help keep money in their pocket.
- Negotiate better terms with your real estate broker
- Make the buyer responsible for closing costs of escrow and title 2a) If the buyer won’t take on these costs, take some time to find the best prices for yourself
- Pay off your mortgage before the sale, to save a few hundred dollars in reports and fees (if this is an option for you)
Where to Attack
To ensure the largest savings, you must understand the four primary costs of selling a house.
- Agents’ commission: We recommend offering the traditional 2.5% to the buyer’s agent to attract more potential buyers and sell your home quickly. However, with your real estate agent there is room to negotiate. The standard commission is also 2.5% but it’s best not to neglect the circumstances of your specific situation. Are you willing to pay them more if they sell your house for a higher asking price? Would you consider a flat fee to sell the house? Who is paying for photos and staging, you or your listing agent? Discussing these details up front can create a better financial outcome for both you and your potential real estate agent.
- Unavoidable Deed Fees. Los Angeles County tax rate is 0.11% which means you pay $1.10 for each $1,000 of the consideration value of the property transferred. The Los Angeles City tax rate is 0.45%. You’ll pay both city and county transfer taxes when selling your property. There is not much room here to deviate from a realistic price.
- Title Insurance. Title insurance can protect you against losing your equity and right to live in the home should a claim arise after purchase. Title insurance can also cover the costs of paying off a previously undiscovered lien, or defend you against a lawsuit filed by someone claiming a right to the property. Like deed fees, title insurance is probably not the best area to attempt to cut costs.
- Escrow Costs. An escrow fee of $2 - $3 per every thousand dollars of the sale price is very common. You should absolutely negotiate or shop around! Ask for a $1 rate. Some escrow companies will charge a $1,000 flat rate for California property.
As you can see, the costs of selling a home can quickly add up. Some, like deed fees and title insurance, offer little-to-no room for savings. Others, like real estate agents and escrow terms, provide an excellent opportunity for a smart seller to maximize their savings.
If you’re curious how much you could save on the sale of your property, use our HOME SALE CALCULATOR and run the numbers yourself.
Summary
Next time you find yourself saying “I want to sell my house,” ask yourself how much it will really cost to close a sale. Start with 7% of your home’s sale price and work from there. Try to negotiate better terms with a great real estate agent, pass title and escrow costs to the buyer (or haggle the escrow rate), and pay off your mortgage balance. Putting a little thought and effort into the home selling process can ultimately make selling your house cost less, which helps every homeowner’s pocket in every real estate transaction.
Like this article? Check out some recently sold properties, run the calculations on your own home, and share it with someone who ought to do the same.
