Since it’s such a big investment and nothing to sneeze at for most people, many homeowners stay put in their houses for a fairly long time. According to Zillow, the average home buyer stays in their house for 13 years. However there are always situations that might come up in the short term that could affect your long term needs.
What are reasons for selling your house sooner than expected?
There are a number of reasons why you might need or want to sell your house, relatively soon after you buy a house.
Job relocation: You might get a new job that makes it necessary for you to live somewhere else, whether it’s another city, state, or even country. If that’s the case, it might make sense for you to sell your home rather than carry another mortgage in the next place.
Health emergency: It’s possible you or somebody else in your family falls ill and that may require moving for better medical treatment, or you just don’t have the ability to take care of your house anymore.
Buyer’s remorse: After making your house purchase, you might decide after a little time of living in it that this house just isn’t the right house for you.
Family changes: Maybe you’re planning to have a new baby in the family, or maybe (heaven forbid) somebody has died, among other things. This might require a change in space, whether you’re adding more room or downsizing.
Financial crisis: What if your mortgage payments or your property taxes are more expensive than you thought, or what if you lose your job? And of course, there are other financial reasons for selling your house quickly.
Profit: Perhaps you’ve taken a look at the real estate market, and you’re already expecting to turn a profit with a good sale price from selling your house. Some folks understand this situation even before they buy. In this case, it might make good financial sense to sell your house and not work on building your equity. There are 3 reasons why this might work out.
- You made significant renovations in a short period of time to increase your home’s resale value. This is known as “house flipping.”
- Home values in your neighborhood shot up almost as if by magic, due to new development in your area or a big company moving in nearby.
- You somehow got a good deal initially. For example, if you originally bought your home as a foreclosure or a short sale and can sell it under normal circumstances, you might turn a profit.
How soon can you sell your house without losing money?
If you have the luxury to be able to consider this and don’t need to move involuntarily for one of the reasons above, it’s worthwhile to note that it might not always be a smart financial move to sell quickly. How long you stay in your house affects the point at which you are breaking even or moving beyond that with regard to paying rent.
There is a different breakeven point in every real estate market, but still, it will be there, no matter where you are. This breakeven point determines whether it would have made more sense to rent or to buy a house during a particular period of time. For example, if you purchased a house in the Raleigh area and paid $300k for it, assuming your down payment was 20%, you would need to live in that house for at least 3 years before breaking even, assuming your rent would have been $1,500 a month.
Additionally, the sooner you resell a house, the fewer financial benefits you’re going to see, and in some cases, you could actually lose money. Since you’ll need to pay capital gains taxes, those can punish your finances.
Capital gains taxes
One of the biggest pitfalls for buying a home and selling quickly is capital gains. If you own a house for longer than a year, and turn a profit on the sale, you’re looking at a capital gains tax rate of up to 20%, depending on your tax bracket.
If you sell your house in under a year, you’re looking at an even higher tax rate. Short-term gains are taxed at the same rate as your income, so you could be paying as much as 37% in capital gains, if you’re in the highest income bracket.
Once you hit the 2 year mark, however, you’re eligible to exclude $250,000 (or $500,000 as a couple) in capital gains, which will likely exempt your entire profits from capital gains taxes.
And of course there are many other expenses to be wary of when you’re selling a house, whether it’s quickly or later on down the road. If your house is valued at $300k, you’ll need to consider:
- Staging costs – $3,000: Staging a home can help your home sell faster, which you may need to do well, if you need to sell your house quickly.
- Home repairs/renovations – $15,000: You’ll want to paint, fix minor issues to upgrade your house and make it appealing to buyers.
- Real estate commissions – $18,000. Typically the seller needs to pay for both the seller’s real estate agent and the buyer’s which can be 6% of the value of the house.
- Seller concessions – $4,500: This could be any number of things, paying for the inspection etc. Fortunately, if you live in a seller’s market, this might not be as much of a concern.
- Closing costs – $3,000: Some closing costs are typically paid by the seller, even in a buyer’s market.
- Moving costs – $2,000: Cost to hire movers, trucks, buy boxes, and so on.
- Transition costs – $2,000: Maybe you need to rent an apartment for a month while your other home sells, in which case, you’re spending more money again on rent.
Mortgage prepayment penalty
Some mortgage lenders charge a prepayment penalty if you sell your home quickly after buying. It’s a way for lenders to get back some of the money they’ll lose on interest payments, since you’re paying your loan off so quickly. The amount you’ll have to pay depends on the terms of your loan, of course. It could be a percentage of your remaining loan balance (usually between 2% to 5%), a percentage of owed interest or a flat rate.
Most loans these days don’t have prepayment penalties however, and there are never prepayment penalties on FHA loans, for example.
Negative buyer perception
Since listing history is readily available on sites like Zillow and on local MLS websites, buyers and their real estate agents can see when you purchased your house and what you paid for it. If you’re selling less than a year after buying, buyers might wonder if there’s something wrong with the place or maybe the neighborhood. And that could lead to fewer or lower offers.
Unless you need to sell quickly for a specific reason or unless you see your way clear to turn a profit from the sale, it’s best to not sell your house too quickly and to stay in place for at least 2-3 years. You’ll start to accrue the benefits of owning versus buying, you’ll build equity, and if the real estate market rises in your area, your house value will also increase.