It's no secret that buying a home is expensive these days. What many people may not realize is that selling one isn't cheap, either. No matter what a home fetches on the market, it's unlikely that the seller will walk away from the closing table with anything close to the full amount. This article provides a rundown of the costs of selling a home and offers some suggestions for keeping them from getting out of hand.
- There are many costs associated with selling a home, some of which are optional or negotiable.
- The largest expense for most sellers is real estate agent commissions, and they must typically pay both their agent and the buyer's agent.
- If the home sells for a significant profit, the seller may also be subject to capital gains tax on a portion of that amount.
Sprucing Up Your Home
Real estate agents often refer to a home's curb appeal, which refers to the first impression it makes on potential buyers. As a would-be seller, it's important to take as dispassionate a look as possible at the outside of your home. Is the paint in good shape? Are the bushes trimmed? Has the garden been weeded? If your home fails to pass the test in any of these areas, you'll want to invest the time and maybe some money in remedying them.
When you've made your home inviting enough that potential buyers will want to step inside, it's time to spruce up the interior. Are the paint and wallpaper presentable? Is anything in obvious need of repair?
Increasingly, sellers are staging their homes to increase their appeal. That can mean everything from simply decluttering to buying (or renting) new furniture. If you have a real estate agent, they can offer tips on what to do, stage the home themselves, or bring in a professional stager. According to a 2021 National Association of Realtors (NAR) report, the services of a professional could run about $1,500, which in many cases, will more than pay for itself. In the NAR's survey, 23% of selling agents said staging increased sales prices by 1% to 5%, while another 29% reported increases of anywhere from 6% to more than 20%.
The most commonly staged rooms, according to the NAR, are living rooms (90%), kitchens (80%), master bedrooms (78%), and dining rooms (69%).
Though some small and relatively inexpensive touches can go a long way, larger remodeling projects are a different matter. In Remodeling’s 2021 Cost vs. Value Report, not one of the 22 remodeling projects studied would recoup its full cost at selling time. For example, a minor kitchen remodeling recouped about 72% on average, while a major one recouped about 54%. The project that came closest to being worth the cost was replacing a garage door with a new steel one, which recouped 94%.
Incentives for Buyers
In a strong housing market, a home might receive multiple bids, and sellers may not have to offer any additional incentives to compete for potential buyers. In a weaker market, however, incentives of one kind or another can make a difference. Common incentives include offering to pay points toward the buyer's mortgage (known as seller-paid points), covering some of the buyer's closing costs, or leaving some furniture and appliances behind.
Paying Off Your Mortgage
If you still owe money on your mortgage, you'll have to use some of the sale's proceeds to pay it off. For the deal to go through, you'll need a payoff letter or statement from your lender. It will show how much you owe the lender, including any fees or prepayment penalties associated with the transaction.
If you have an escrow account with your lender, the lender should either apply that amount to your outstanding debt or refund it to you.
Real Estate Agent Commissions
The largest cost involved in selling a home is often paying the real estate agents' commissions. And it may come as a surprise to some first-time sellers that the seller is typically responsible for paying both their own agent and the buyer's.
Traditionally, a 6% commission split between the seller's and buyer's agents has been the standard. But commissions are negotiable, and many agents are willing to come down a bit. According to RealTrends, which collects data on real estate transactions, the national average commission today is about 4.9%, down from 5.4% a decade ago.
There are also discount brokers that charge the seller either a smaller percentage (often 1% to 2%) or a flat fee. Those include both local agents and online brokerage sites. There are tradeoffs, of course, and you may not get all the services or attention you would by paying a higher rate. Plus, you may still have to pay a standard commission to the buyer's agent.
You can also save on commissions by selling your home without an agent. Again, you may still have to pay the buyer's agent, and you will be taking on a great deal of work that your own agent would otherwise handle for you. Still, it works for some sellers.
The costs of the real estate agents' commissions are generally the bulk of the seller's closing costs. Some choose to sell a home without an agent in order to save, but you will take on a great deal of work, and you may still have to pay the buyer’s agent.
Hiring a Lawyer
Whether you're required to use a lawyer in selling your home varies from state to state, but it's often a good idea either way. The seller's lawyer can draft the sales contract and represent the seller's interests at the closing. What you'll pay can vary widely from place to place, but it's likely to be from several hundred to several thousand dollars.
Other Closing Costs
Paying the real estate agents' commissions will account for the bulk of the closing costs the seller is responsible for, but there can be some others, as well. For example, the seller is generally expected to pay any transfer taxes, which some states impose when a property changes hands. If the property is part of a homeowners association, the association might charge a transfer fee, as well.
These rules also vary from state to state, and who pays a particular closing cost can often be negotiated between the buyer and the seller as part of the contract.
If you make a large enough profit from selling your home, you may be subject to federal income taxes. Fortunately, you're eligible to exclude a portion of your profit if you meet these two tests: You owned the home for at least two years and you lived in it for at least two years out of the past five.
Assuming you qualify, you can exclude up to $250,000 of the profit as an individual or $500,000 as a married couple filing a joint tax return. Note that your profit isn’t based on what you paid for the home initially but your adjusted cost basis. That consists of what you paid for the home plus the cost of any improvements you've made over the years. So, for example, if you added a new roof, central air conditioning, or wall-to-wall carpeting, those expenses will increase your basis and lower your profit. You can add some of your closing costs from when you purchased the home to the basis as well.
Also note that the length of time for which you owned your home will have an impact on the capital gains tax you'll have to pay. If you owned the home for at least a year, your profit (if any) will be taxed as a long-term capital gain. If you owned it for less than a year, it will be taxed at the potentially much higher rate for short-term capital gains.
What Closing Costs Does a Homebuyer Have to Pay?
Homebuyers are responsible for a long list of fees, so plan to bring plenty of checks to your closing. Typical closing costs include a mortgage origination fee, property appraisal fee, title search fee, title insurance premium, and first-year homeowners insurance premium. Note that some of these fees may be negotiable and the seller may agree to chip in as part of your deal. In total, a buyer's closing fees often range from about 3% to 6% of the home's sale price.
Are Closing Costs Tax Deductible?
Most closing costs are not tax deductible. The exceptions are mortgage interest (including points) and real estate taxes, and that's only if the buyer or seller itemizes deductions when they file their tax return for the year. However, sellers are allowed to add some of their original closing costs to the adjusted cost basis for their home, which can reduce their tax liability.
What Is a No-Closing-Cost Mortgage?
A no-closing-cost mortgage is one in which the lender will either add the borrower's closing costs to the loan amount or charge a higher interest rate to make up for them. In other words, even if you don't have to pay any closing costs initially, you'll still be paying them over time.
The Bottom Line
Selling a home isn't free. The largest single expense is likely to be real estate agent commissions, but there are other costs and fees, as well. If you sell your home for a significant profit, you may also owe income taxes on a portion of that amount.