Selling a house for the first time can be just as intimidating as buying a house for the first time. Our first-time home seller series addresses all of your questions by covering every step of the process. We’ll cover: the cost to sell your home; what to expect from your listing agent; how to stage, list and show your home; how to field and negotiate offers; how to prepare to move; what closing day looks on from the seller side; and as a bonus, we’ll address the top 10 pieces of advice most sellers receive. Selling your house for the first time doesn’t have to be scary. We’ll spell it all out for you so you can confidently and successfully sell your home. Read the entire series here.
It probably seemed like just yesterday that you were saving up to buy your first home. When you first moved in, you probably couldn’t even imagine yourself ready to sell it one day. But now the time has come to sell your first home and you may be wondering- how do I even do this?
Before you even think about hunting for your next home, you need to do some serious number crunching. You’ll have to cover a lot of costs from the sale of your home, which includes agent commissions for the buyer’s agent and your agent, property taxes, home improvements and repairs, and your mortgage payoff – all while saving up for the cost of hiring movers. Phew, that’s a lot of money!
We’ll break down how much it will cost to sell your home and what you should expect as a first-time seller. We’ll cover:
- How do you know when it’s time to sell?
- How to find out how much equity you have
- The eight most common seller costs to consider
- How much money you can expect to make on the sale
If you’d like to jump a certain section of the guide, just click one of the links above to jump down.
Let’s dive in!
How Do You Know When It’s Time to Sell Your House?
You may be just starting to consider selling your house and wondering if it’s the right time and if the benefits of selling outweigh the costs. You may have heard the general rule of thumb is to stay in your home for at least five years to start earning equity on your mortgage so you won’t owe more on the house than you own when the time comes to sell.
According to the 2019 Profile of Home Buyers and Sellers from the National Association of REALTORS® (NAR®), the median amount of time sellers live in their homes is about 10 years. However, sellers between the ages of 18 and 34 tended to sell their houses within two to five years.
The biggest reasons? Most first-time sellers wanted to move into bigger homes, although work relocation, growing families and the desire to be closer to friends and family all closely followed. According to the NAR® report, these are the top five reasons most first-time sellers list their homes:
- Their first home is too small now (25%)
- They’re relocating for jobs (14%)
- Their family situation has changed, such as getting married or having children (14%)
- Their neighborhood has become less desirable (11%)
- They want to move closer to family or friends (10%)
So while you may have only lived in your first home for a few years, it’s normal to feel ready to move on up if you find yourself able to upgrade to a bigger home, need more space for a growing family or received a job offer that is too good to turn down- even if it means moving.
But, before you say yes to the new job or promise your parents you’ll start looking for a home in their neighborhood, you need to do the math on your home mortgage and find out just how much equity you have and how much you’ll need to pay off the remainder of your home loan.
How do I find out how much equity I have in my home?
To find out how much equity you own in your home you’ll need your latest mortgage statement. It will show you how much of your home loan balance is left to pay off. In order to calculate how much equity you have, you’d subtract how much you owe on your home loan from how much your house is worth. So:
Current market value – how much you owe = Your equity
You have to be sure your home’s sale price will be enough to cover what’s left of your home loan. You should consider other options (such as renting or not selling) if the sale price won’t be enough to cover paying off your mortgage, cover the seller costs listed below and provide you with a downpayment for your next home.
How do I find out how much my house is currently worth?
Your home is most likely not worth the same amount now that it was when you first bought it. We all know the real estate market fluctuates and it could be worth more (or less) than when you bought it, depending on the market.
Do not rely on sites such as Zillow, Redfin or any other third-party sites to calculate an accurate home value. They will give you an estimate, but it’s not necessarily an accurate one. We’ve talked before about how these sites can only use public information, like records of sale. They can’t take into account factors like recent home improvement, changes in your neighborhood or market data from the local multiple listing service (MLS).
Your best bet for an accurate home value estimate? Talk to your real estate agent about a comparative market analysis or get an appraisal from a third-party appraiser.
What’s the difference between the two?
Remember, you had to have an appraisal before your lender would approve your home loan when you bought your current house. An appraisal is done by a licensed appraiser to determine the market value of your home in order to satisfy lending guidelines for a mortgage. It will usually cost you a chunk of change (think $300-$450) to get an appraisal done. You don’t have to do one at this point and it would cost you some real money, but you can get one done if you’d like.
On the other hand, a comparative market analysis (CMA) is done by your real estate agent to determine what your home should be priced at in order to sell it. The agent will evaluate your home and use current and recent selling prices of homes that are similar to yours in your area to determine a good selling price. Appraisals also take into account selling prices of similar homes but are much more in-depth in their evaluations of your home to make sure your loan amount matches what the house is actually worth.
A CMA can be a good starting point for you to determine how much you may be able to sell your house for but it does not take the place of an appraisal and one would still need to be conducted by the buyer’s appraiser if they’re obtaining a home loan.
A CMA usually won’t cost you anything. Most real estate agents are willing to do them for free so they can try to earn your business and become your listing agent. So, while it may not cost you anything monetarily, you should probably wait until you’ve found a seller’s agent you want to work with before you request a CMA from anyone.
You can use the same real estate agent you used to purchase your first house or you can find a new one by talking to friends and family about the agents they’ve used lately. We’ll talk more in-depth in the next post about finding a seller’s agent and the services they can provide for you.
8 Common Seller Costs You Should Be Prepared to Cover
Home sellers need to be prepared for a suite of upfront costs before they can actually seal the deal and sell their home. We’ll walk you through the eight biggest costs you’ll have to cover as the home seller so you can be prepared to include them in your budget.
After we’ve covered the biggest expenses sellers cover, we’ll show you what an estimate of proceeds is and how you and your agent can use it to calculate how much money you may actually earn from the sale of your home.
Let’s review the biggest costs you will cover as a home seller!
1. Agent Commissions
When you were on the homebuyer side, you probably didn’t have to account for agent commission. But as the seller, you will most likely cover the cost of commission for both your agent and the agent the buyers will use. Of the 5,780 sellers surveyed in the 2019 NAR® Home Buyers and Sellers Report, 75% reported that they were the ones who paid the real estate agents, while only 11% said they split the cost with the buyer.
Standard agent commissions range from 6-7% of the home sale price which will then be divided between the two agents. For example; if your home sells for $200,00 and the agent commission rate is 6% then $12,000 would be taken from the sale price to be divided between your agent and the buyers’ agent.
Your agent’s commission is negotiable and we’ll go more in-depth on their role in the process in the next post.
2. Property Taxes
Iowa homeowners pay their property taxes in arrears. This means when property taxes are paid, they are for the previous year rather than paying for the year ahead.
In Iowa, annual property taxes are split in half and paid in two installments: once in March and once in September. So when property owners pay taxes in March 2020, they are paying for taxes that accrued from January 2019 to June 2019. When they pay taxes in September 2020, they will be paying for taxes that accrued from July 2019 to December 2019.
This means that when you sell your house, you are still responsible for covering the property taxes that accrued while you lived in the home. This extends all the way to closing day, so even if you sign a purchase agreement months before you actually close, you will still be responsible for the taxes accumulated while you still lived in the house.
Let’s say you sign a purchase agreement in March 2020 with a set closing date of June 30, 2020.
Not only would you still pay your property taxes when they’re due in March (for the first half of 2019), you would also have to pay the property taxes that would be due in September 2020 for the second half of 2019 and the prorated taxes for 2020 that would accumulate up until your closing day.
In this scenario, let’s say your annual property tax amounts to $1,600. In this case, at closing you would pay about $1,591 to cover the property taxes for the previous year and the prorated amount for 2020 that accrued while you still lived in the house. You would pay this off in a lump sum at closing that comes out of the sale price of your home. Your real estate agent will be able to help you estimate how much you will have to cover in property taxes once a closing date is set.
3. Closing Costs
Closing costs come with every real estate transaction! There are fees to be covered for all of the legal services and documents that have to be prepared, in addition to fees owed to either the closing company or attorney who handles the closing.
Sellers are also responsible for covering revenue stamps. Revenue stamps in real estate are taxes levied on legal documents (also called a stamp tax). In Iowa revenue stamps are $0.80 for every $500 of the purchase price. So if you sell your house for $200,000, you’d pay about $320 in taxes for the legal documents.
It’s also very common for buyers to ask the sellers to cover their side of the closing costs. You can also offer it as an incentive for the buyer during negotiations. According to the 2019 NAR® Home Buyers and Sellers Report, about 14% of the sellers surveyed offered to cover closing costs as an incentive for buyers. Regardless of whether you offer it or the buyers ask for it, if you agree to cover their side of the closing costs, it will also come out of the sales price of your home to be paid at closing.
4. Renovations and Repairs
Even if you’ve only lived in your home for a few years, chances are good you’ll have to make some kind of improvements before it’s ready to sell.
Your agent will advise you on the best (and most cost-effective) quick fixes you can implement, like painting the bathroom a different color or planting more flowers in the front yard to up the curb appeal. They may even bring in a professional designer or home stager to redecorate your house. This is normal! Hardly anyone sells their house without making some kind of cosmetic improvements. This will cost you money out of pocket before you even get to the negotiating table with buyers. After all, you’re trying to make your home as appealing as possible.
You may even find yourself making major repairs or renovations. If there’s a known problem with the house, such as an outdated kitchen in need of renovation or plumbing in need of repair, your agent will either advise you to fix it preemptively or wait and negotiate with buyers. It will likely depend on how serious the problem is and how much it will affect the sale of the house.
If you wait to negotiate with buyers, they can ask you to cover the cost of the fix before closing or you can offer an allowance for them to handle the repairs themselves. If you fix the problem yourself, it will come directly out of your pocket. If you offer an allowance for the buyers to fix it themselves, it will come out of the sale price at closing. But beware, if the problem is big enough buyers have the right to negotiate a lower sale price or walk away.
5. Inspection Costs
Who pays for the home inspection and pest inspection? What if you’re in a rural area with a well, septic tank or fuel tank- who pays for those inspections?
This can sometimes vary by market but usually the seller does not pay for the home inspection. However, in the Des Moines market, the seller is responsible for the cost of the pest inspection. These can cost around $70-$100 and you would need to cover the cost at closing. If the pest inspector finds a pest problem that requires treatment, you as the seller would most likely be responsible for the cost of treatment.
In Des Moines, if you live in a rural area and your property has a fuel tank, well or septic tank, you as the seller are responsible for paying for the inspections of these specialized systems. If any issues are found, you will be responsible for the cost of repairs.
6. Mortgage Payoff
We walked you through how to find out how much equity you own in your home and how much your home is worth for a reason! One of the biggest costs you’ll face as a home seller is your mortgage payoff. Unless you own your home outright, you will have to settle the remainder of your home loan before you can officially sell your house. There are two scenarios to avoid here: 1) You should not try to sell your home if it’s worth less than what you owe on it, and 2) You should not sell your house if you won’t walk away with a profit after paying off the mortgage and other costs.
1. If your home is worth less than what you still owe on your mortgage, you can’t afford to sell your home. If you’ve only been in your home for a couple of years, chances are good you won’t be able to afford the mortgage payoff from the sale proceeds. When you first meet with your real estate agent and they conduct a CMA, they should be able to tell you outright if you are in a good position to sell. A good real estate agent will be honest with you about your financial position and if you shouldn’t sell yet, they should tell you that and advise you to wait another year or two so you can earn more equity.
2. You need to make a profit after you’ve covered your mortgage payoff and other seller costs. For example, if you have a $175,000 home loan and only own $25,000 in equity because you’ve only been in your house for a couple of years, then you would still owe $150,000 of your home loan.
Let’s say your agent’s CMA values your home at $175,000 (about what you paid for it). Your lender is responsible for making sure $150,000 is taken out of the proceeds of the sale of your home. In this scenario, you could potentially walk away from the sale with just a few hundred dollars in profit after you pay off your mortgage, pay for any renovations or repairs, closing costs and legal services, property taxes and agent commissions (to name just a few).
Not sure how much you would walk away from the sale with? Your agent can run an estimate of proceeds for you which will break out exactly how much you stand to make from selling your house. We cover the estimate of proceeds more in-depth below.
7. Downpayment on a New Home
If you’re selling your home so you can move to a new one (or build a new one!), you’ll need a downpayment just like you did when you bought your first house. There are several ways you can make this happen.
Some people are able to save for a downpayment before and during the selling process so they don’t have to wait for or depend on the proceeds from the sale to secure a new home. If you want to build a new construction home with a builder, you would most likely have to make a downpayment before the builder starts working on your new house. You may find it easier to already have that downpayment saved, just in case.
However, most sellers wait and use the proceeds from the sale of their home as a downpayment on a new house. If you walk away from your sale with a check for $50,000, that would cover a 20% downpayment on a $250,000 house. The timing here is very important as you’d have to be in the buying process already on another home.
Your real estate agent will be a great asset as you try to balance selling your house and buying or building a new one. They will help you navigate both processes so you can either use your savings to make a downpayment or use the proceeds of your sale.
8. Emotional Costs of Selling
The emotional costs of selling your very first home are hard to quantify. After all, you went through a lot of financial planning and hard work to buy your first house.
It’s easy to get caught up in the excitement of possibly building your dream home or upgrading to a bigger house in a better neighborhood. But selling your home is going to come at an emotional cost to you. It’s tough selling a home you’ve made memories in with family and friends, especially if it’s the first home you ever bought.
You should also be prepared for the emotional toll of having strangers walk through your home and critique it. Remember, they’re looking at your home from a different perspective. When you were house hunting, didn’t you walk through a few and critique the things you didn’t like? You have to be prepared for the same thing to happen now- only you’re on the other side of it.
Prospective buyers might criticize your paint colors, they might hate the updates you made to the kitchen, they may talk about the changes they will make once they move in. You might hear that and feel hurt, annoyed, angry or frustrated. And that’s okay! It’s tough to hear people talking about your house in a less-than-positive way. But it’s only because they don’t see your house the same way you do- they haven’t lived there!
Your real estate agent will coach you on this so you can be prepared to hear critiques of your home and not let your emotions influence your negotiations or interactions with buyers. There is definitely an emotional rollercoaster that comes with selling your house and it’s best to be prepared for it.
How Much Money Am I Going to Make From the Sale?
We just walked through most of the big expenses you will have to cover as a home seller. At this point you may be wondering, “Am I going to make any money here?” If you can afford to sell and have a great real estate agent who can price your home competitively then yes, you will!
How do I find out how much money I will make? During your initial meetings with your real estate agent, the two of you will discuss pricing. After they’ve done a CMA on your house and you’ve reviewed the costs listed above, your agent will work on an estimate of proceeds.
An estimate of proceeds is exactly what it sounds like- an estimation of how much money you will actually make once you’ve covered the cost of the sale. Every agent’s estimate of proceeds will look a little different but they will use a basic formula.
This is just an example of what your estimate of proceeds could look like but it should give you a good idea of how much you can expect to pay out from your sale. Some of these costs are variable. Your closing costs may be from 1-3% of the sale price, just depending on your lender and if you close with a closing company or a lawyer. Your seller concessions will vary as well depending on what you and your agent negotiate with the buyers. Ideally, you want to walk away with enough money for the downpayment on your next home with enough left over for the cost of moving.
Selling your home can be an emotionally fraught experience, especially if it’s the first home you bought. It also comes with a number of expenses on the seller side that you should be prepared to cover. Before you do anything, you should sit down with your agent to review how much it would cost to sell your home, which should include a CMA of your home and an estimate of proceeds once you decide to sell. If you don’t have a real estate agent yet, don’t worry! In our next post, we’ll take a deep dive into the role of a seller’s agent, what services you can expect and how to find one!