Ask Brian is a weekly column by Real Estate Expert Brian Kline. If you have questions on real estate investing, DIY, home buying/selling, or other housing inquiries please email your questions to [email protected].
Question from Germaine in LA: Hey Brian, I’m ready to sell my first house. A neighbor down the street sold his for about $280,000 several months ago. I’m not under any pressure to sell mine but I could make a nice big profit at that price. If I do decide to sell, I’d like to make the most money reasonably possible. What should I be looking at doing?
Answer: Hello Germaine. Selling your most valuable asset is a big deal and you are wise researching how to get the most for the sale. I’m sure that you know the basic formula is Sales Price - Costs = Profit. Many people focus mostly on how to maximize the sales price without giving enough attention to the cost side of the equation. Clearly, if you want to reap the most money from the sale of your house, you need to maximize the sales price and minimize the costs. We’ll look at both sides of the equation.
To receive the highest sales price, you need to understand your local market and the best steps to take to meet your financial goal. Some of this is counterintuitive. For instance, you can increase the sales price by making major renovations but you won’t always recoup the costs of those renovations. So, Germaine, you can see how quickly costs and sales price become intertwined when calculating how much you’ll net at the closing table.
To start with, selling your house requires interested buyers with the financial ability to complete the transaction. The number one thing that attracts buyers is the listed sales price. Determining the highest possible sales price that will attract multiple buyers means you need to understand if your local market is a seller’s market or a buyer’s market. Your local market isn’t just the city or region the house is in. It can be the specific neighborhood. If you are working with a real estate agent, he or she will provide a market analysis as a guide towards determining the suggested list price. Key things to look at in your market are the number of days houses have been on the market before selling (DOM) and the rate of home value appreciation. In a seller’s market, DOM is low and the rate of appreciation is high.
In a seller’s market, you’ll almost certainly net the most money. You can list the house at the high end of the market analysis because values are going up quickly. You also won’t need to do much in the way of repairs and upgrades when you’ll be receiving multiple offers and there are not many other houses listed for sale.
A buyer’s market changes everything. DOM is high and the rate of appreciation is low, stagnant, or going down. If houses are actually decreasing in value, you may want to list at the low end and even below the market analysis range. You do that to sell the house before it becomes worth even less over the next several months. This is also when you might need to make more repairs and upgrades to attract buyers. Just be sure you do the math carefully before committing to upgrades. Painting the interior and replacing the carpet next week so that you can sell in a month can net you more money than a two-month kitchen remodel that costs $10,000.
Another big factor is the season of the year you put your house up for sale. Generally, spring is the most active market. This is when more buyers are looking, which means that they are competing with each other. This is when you’ll get the highest offers. Summer and fall can vary from region to region but are typically close to the same. During the summer, people are on vacation and enjoying the outdoors. They often put off house hunting. In the fall, people become busy getting kids back in school and sports. COVID-19 might make a difference this year but that is the historical trend. Winter is considered the worst season to sell a house because people are busy with Thanksgiving, Christmas, and tend to hunker down during bad weather months.
Germaine, with the price out of the way, let’s look at reducing your costs associated with selling. The cost that most sellers first think about is the selling agent’s commission. It usually stays close to the 6% range of the selling price and is typically the highest cost for the seller. You can try avoiding this cost if you’re knowledgeable enough about the process to sell it yourself. However, there are other things to consider. First, there have been many studies showing that the real estate acumen of a good agent and access to the MLS more than makes up for the cost of the commission (agents get you a higher price). Another is that most buyers don’t have a deep knowledge of the process and will insist on having their own agent. The buyer is also going to expect the seller to pay the buyer’s agent commission because that is customary. Still, I’ve known sellers that were in no hurry to sell. They simply hung out a for sale sign with a very high price and waited years hoping the right buyer would come along.
After the agent’s commission, sellers can expect to pay another 4% to 8% of the sales prices towards several other costs. The biggest of these costs is often a major remodel that can easily run as much as 5% of the purchase price. As already mentioned, do the math before remodeling because you may not fully recover the cost, which means not doing a remodel could net you more money in the end. The seller’s closing costs are the next highest on the list at about 3% of the sales price. These include things like the tax on the sale, title insurance, title transfer, and attorney fees. Although the cost won’t usually vary much, you can shop for lower costs on some of these, except for the sales tax and other government fees like recording fees. When it comes to closing costs, it’s common for the buyer to ask the seller to help pay costs that are typically paid by the buyer. If you’re in a seller’s market, you shouldn’t have to pay any of the buyer’s costs. If you’re in a buyer’s market, you may have to negotiate how much of the buyer’s fees you agree to pay.
After all of those costs, there are a few incidentals that still add up for the seller. You’re probably going to want to stage the house before inviting prospective buyers to view it. This shouldn’t cost much because it’s usually about decluttering to make the house look larger and to help buyers envision their own belongings in the house. You may decide to rent a storage space and it’s always a good idea to freshly paint whether this is a DIY project or a paid professional painter. The incidental cost that many sellers don’t include in the math is the cost to move out of the house. Again, this varies greatly depending on if you do it yourself with a pickup truck or hire professional movers and need to pay deposits for a rental home.
Germaine, I hope this helps you do the math to figure out how to maximize how much you can net on your sale. As with most real estate transactions, much of it depends on your location and personal circumstances.
What are your ideas to reduce costs to the seller? Please comment.
Our weekly Ask Brian column welcomes questions from readers of all experience levels with residential real estate. Please email your questions or inquiries to [email protected].