Before plunging headlong into selling a home, savvy homeowners know it’s important to do some basic math to figure out whether selling will be financially profitable … if they truly can afford to sell their home. It’s absolutely critical to do these calculations before you decide to sell.
Expenses associated with selling your home
Sales costs of selling your current home
A good rule of thumb for predicting the selling costs on your home is about 10% of your home’s expected sales price. These costs include the real estate agent’s commissions, minor repairs required after the home inspection, any advertising needed, and other general expenses that always seem to pop up.
If you’re using a real estate agent to sell your home, he or she will be able to determine an approximate selling price for your home and from it, you’ll be able to calculate your selling costs. If you’re selling your home by owner, take your sales price and multiply it by 90 percent. That may actually be your eventual selling price.
Paying off your mortgage principal
If you currently have a mortgage on your home, you’ll obviously have to pay the principal (remaining balance) in full when you sell your current home. If your current loan has no prepayment penalties, you won’t have to pay any additional fees to pay off your principal. If your loan does have prepayment penalties (those are pretty rare), confirm with your lender the specific amount you’ll be required to pay.
Contact movers or a rental-truck company in your area to get an estimate for a move. Don’t forget to include the packing costs as well as the UN-packing costs in your new place. Add 20 percent to any estimate you’re given. These estimates are always low.
Add the total taxes you expect to incur when you sell. These might include transfer taxes, unpaid property taxes, and any capital gains taxes. Your real estate agent should be able to help you with these anticipated expenses.
Calculating your potential profits from selling your home
Too many people simply subtract their mortgage balance from their anticipated selling price and make plans based on that number. If you owe %150,000 on your home and plan to sell it for $250,000, you’ll be planning on a $100,000 profit. Nothing could be further from the truth!
Subtract the sum of the four costs above from your projected sales price. For example, if your selling costs total $175,000 (mortgage balance of $150,000 and $25,000 in selling costs) and your sell your home for $250000, your profits will be $75,000, not $100,000. If you’re counting on using that profit as your 20 percent down payment on your next home, you’re going to come up short.
- If your number is positive: You can probably afford to sell your home, as long as the amount of your profits will cover the costs required to buy your new home and you can afford to pay the ongoing costs of owning that new home.
- If your number is negative: You probably cannot afford to sell your home right now. Your options include (a) waiting until your equity increases or (b) waiting until your savings account can help you handle the expenses of selling your home. If you already have a significant amount in your savings, you might still be able to sell, unless you need those funds to cover monthly bills, medical bills, or other pressing expenses.
The decision to sell your home is not one that should be considered without knowing the financial consequences … good or bad. Make sure your calculations include all the expenses associated with selling your largest asset.