© Shutterstock/Andy Dean PhotographyIf word gets out that you’re considering selling your house, real estate agents will be attracted to you like hungry mosquitoes are to the only person on a desert island. And when you sell a house, the IRS and state tax authorities may be waiting to attempt to take a chunk of your profits, especially if you don’t take the time to understand tax laws and how to make them work for you before you sell.
Here, you learn about some important issues that you should weigh and ponder before you sell your home.
Why are you selling your house?
Start with the basics. If you’re contemplating selling, consider whether your reasons for selling are good ones. For example, who wouldn’t like to live in a larger home with more amenities and creature comforts? But if you hastily put your home on the market in order to buy a bigger one, you may be making a major mistake. If your next, more expensive home stretches you too far financially, you may end up in ruin.When you need to relocate for your job, or when you have a major life change, moving may be a necessity. Even so, you should weigh the pros and cons of keeping your property versus selling.
Can you afford to buy the next home?
If you want to buy a more costly property, such a move is known in the real estate business as trading up. Doing an honest assessment of whether you can really afford to trade up is imperative. No mortgage lender or real estate agent can objectively answer that question for you.Based on your income and down payment, the lender and agent can tell you the most that you can spend. They can’t tell you what you can afford to spend and still accomplish your other financial and personal goals.
One of the biggest mistakes that trade-up home buyers make is overextending themselves with debt to get into a more expensive property. The resulting impact on their budgets can be severe — no money may be left over for retirement savings, for educational expenses, or simply for having fun. In the worst cases, people have ended up losing their homes to foreclosure and bankruptcy when they suffered unexpected events, such as job losses or the deaths of spouses who had inadequate insurance.
Before you buy your next home, get a handle on what you can really afford to spend on a home. Unless your income or assets have increased significantly since the time that you purchased your last home, you probably can’t afford a significantly more expensive property. The most important issue for people to consider is how spending more money each month on a home will affect their ability to save for retirement.What’s is your house worth?
When you’re ready to sell your house, you’d better have a good understanding of what it’s worth. You (and your agent, if you’re using one) should analyze what comparable properties are currently selling for in your neck of the woods.If you need to sell your house without wasting a ton of time and energy, do what smart retailers do: Price it to sell. It’s not a good idea to give your property away, so to speak, but you should avoid inflating your asking price to a point far above what the sales of comparable houses suggest that your house is worth.
You may be tempted, particularly when you’re in no great hurry to sell, to grossly overprice your house in the hope that an uneducated buyer may pay you more than the property is really worth. The danger in this strategy is that you won’t find a fool who will part with all that money for your overpriced property, and no one else will bid on it.Then, as you lower the price closer to what the house is really worth, prospective buyers may be wary of buying your property because of the extended length of time that it’s been on the market. In the end, you may have a hard time getting 100 percent of what your house is really worth.
Have you done your homework to find a good real estate agent?
When most people are ready to sell their houses, they enlist the services of a real estate agent. Good agents can be worth their commission if they know how to prepare the property for sale, market it, and get it sold for top dollar. Unlike when you’re a home buyer, your interests as a seller are aligned with a good agent’s interests — the more you sell the property for, the more you net from the sale, and the more the agent gets paid.Given how much homes actually cost (and how much they cost to sell and buy), you owe it to yourself to have a good agent representing you in the sale of your house. Be sure the agent you select isn’t currently listing so many other properties for sale that she lacks enough time to properly service your listing.
Also, the agent you worked with when you bought the home isn’t necessarily the best agent to hire when you sell it. Different steps and expertise are required to sell (rather than buy) a house.
Do you have the skills to sell the house yourself?
Although some property owners possess the skills and time needed to sell a house themselves, most don’t. The carrot that may entice you to sell a house yourself is the avoidance of the 5 to 7 percent sales commission that agents ask for before they attempt to sell your property.Don’t forget, however, that half of this commission goes to a buyer’s agent. Because most buyers work with agents (partly because the agents’ services appear to be at no cost to the buyers), you’ll potentially save yourself only 2.5 to 3.5 percent of your property’s final selling price by selling it without an agent on your side.
Whether or not you sell the house yourself, interview several agents who’ve demonstrated that they know your neighborhood as a result of listing and selling properties in the area, and ask them to prepare a comparable market analysis for your house. Base your asking price on what comparable properties have sold for in the past six months.
If you’re shopping for an agent, also ask each one for an activity list of all the houses he has sold over the past 12 months so you can obtain references from property sellers who’ve worked with each agent.
Have you properly prepared the house for sale?
The real work of selling a property begins before you ever formally place it on the market for sale or allow the first prospective buyer through the front door. Prepare your house for sale both inside and out. At a minimum, you should do the sort of cleanup work that you do before your parents (or perhaps the in-laws) visit — you know, scrambling around the house cleaning everything up (or at least tossing it under beds and into closets!).If you’d like to take preparation to a higher level, consider staging. Just as stagehands set the stage for Broadway productions, smart sellers have their house staged to create a production designed to wow prospective purchasers. Professional stagers know how to emphasize the best features of a house and minimize the worst. You may not have to spend a fortune to stage your property. Small bucks spent wisely on staging can pay rich rewards.
But you have more to do than just running a vacuum (after you pick up the laundry from the floors) and washing the dishes. Have some good but brutally honest friends and prospective agents walk through the house with you to point out defects and flaws that won’t cost you an arm and a leg to fix (for example, repairing leaky faucets or painting areas in need of new paint). Don’t be defensive — take good notes!
You should generally avoid major projects, such as kitchen renovations, room additions, and the like. Rarely will you get a high enough additional sales price to compensate you for the extra costs (and headaches) of these major projects (not to mention for the time that you spend coordinating or doing the work).Do you understand the house’s hot buttons?
People don’t buy homes — they buy a hot button, and the rest of the home goes with it. Hot buttons vary from home to home. Dynamite kitchens or baths, fireplaces, views, and gardens are often buyer turn-ons. Location is the hot button for people who must live in a certain neighborhood.How can you determine your house’s hot buttons? Think back to what appealed to you when you bought it. What you liked then will probably be the same hot buttons that will appeal to the next buyers. After you identify the hot buttons, emphasize them in your listing statement, multiple-listing description, and newspaper ads. Successful sellers know what the buyers will buy before they begin the marketing process.
What are the financial ramifications of selling?
Before you sell your house, you should understand the sale’s financial consequences. For example, how much money will you spend on fix-up work? How much should you be netting from the sale in order to afford your next home?Unless you want to and can afford to be the proud owner of two homes, always sell your current house before you commit to buying another. You can ask for a long close of escrow and a rent-back, if necessary, so you have time to close the sale of your next home without camping out on the street. Be sure about these things up-front so you won’t have nasty surprises along the way or after you sell.
Do you know the rules for capital gains taxes on the sale of a house?
Under current tax laws, most house sellers enjoy a significant tax break. Specifically, a large amount of capital gains, or profits, on the sale of a home are excluded from tax: up to $250,000 for single taxpayers and $500,000 for married couples filing jointly.To qualify for this capital gains exclusion, the seller must have used the house as her principal residence for at least two of the previous five years. This requirement is reduced to one year for a person who has become physically or mentally unable to care for themselves. Also, time spent living in a nursing home or other health care facility counts toward this one-year requirement. You can use the capital gains exclusion no more than once every two years.
For the vast majority of house sellers out there, the current laws are a boon. Most people’s house-sale profits don’t come anywhere near the law’s exclusion limits. However, there are a few homeowners out there — especially those who live in higher-cost areas and who’ve owned their homes for many years — whose gains exceed the $250,000 or $500,000 limits. If they sell, they’ll owe tax on whatever profits exceed their applicable exclusion limits.
Do you really need to sell your home? This guide can help you decide if it's right to sell.