If you’re just stopping by for the first time, this is a class in a series of classes over the next few months which will culminate in the development of a complete financial plan. Stop by HERE for a complete list of classes currently available and HERE for more information about the website.
Class Objectives: To learn the basic essential information needed to sell a home, including calculating closing costs and calculating how much you will actually get at closing.
Handout: Home Selling Resources
Assignment: Closing Disclosure Statement in Excel | Google Docs (previews in lecture material)
While buying a home, especially your first home is filled with excitement and dreams, selling a home can be full of stress and anxiety. Unless your home is located in an extremely hot market, be prepared to learn patience!
We had purchased three homes before we sold any of them. At one point earlier this year, we were extensively renovating one home to be our next primary residence, found out that our current renter was using the military clause to move out a month early from our rental home and we had to get it rented out sooner than expected, and also had our third home that we were currently occupying for sale on the market all at the same time. We had a great realtor to help us, but it still presented an enormous amount of stress (homes=stress!). My best piece of advice for selling a house is to everything one step at a time and everything will be more manageable. Also, did I mention learning patience?!
STEPS TO BUYING A HOME
STEP 1: RESEARCHING THE MARKET
Selling your home begins with researching the market so that you can get an idea of how much you can honestly expect to receive. At this initial point in time, you may decide based on this research that you are comfortable with the approximate price you think you can get or you may decide that it’s not the right time for you to sell. It may not be the right time for you if you owe more than you can get for the home, or if your current mortgage balance doesn’t leave you with any equity to be able to put 20% down on a new home (along with other savings you have for that purpose).
Zillow is a good place to start researching if you are already familiar with their app/website. Don’t simply trust their “Zestimate”, but really research recent home sale and current home postings for homes that are similar to yours in size, features, location and age. RedFin’s website also has some additional resources to be able to compare recent sales in the area based on specific criteria. The earlier you start watching your local market, the better idea you will have of how much homes are selling for as well as how quickly they are selling.
STEP 2: DETERMINE SELLING COSTS
Once you’ve decided that you are certain that you want to sell your home (for some this may be necessary due to a job move or other situation), you certainly want to know how much of the sale will actually be put in your own pocket. Fortunately, the costs associated with selling a home are easy to calculate. Unfortunately, the costs associated with selling a home are generally quite high.
The main costs include:
- Updates and repairs to the home to improve your selling price
- Paying off your current mortgage balance(s)
- Real estate agent commissions (both buying and selling agents which are generally 3% each in many areas)
- Transfer taxes (search online for your state and county transfer tax rates)
- Title insurance for owner
By using the Closing Disclosure form, you can see these costs presented (other than the updates and repairs of course!) in a format that will then be familiar to you when you close on your home sale. This form was presented in the previous class, ST201: Basics of Buying a Home and as mentioned there, it replaced the old HUD-1 settlement form.
If you are unsure of any of these costs, your realtor or real estate agent can help walk you through them (in the next step). The reason you may want to initially go through some of these yourself is to make sure that you are still making the correct decision by selling your home, even after all the costs are covered.
Click on the example Closing Disclosure form below for an enlarged example of what some typical costs are for the property seller:
In addition to looking at selling costs, if you are planning to purchase another home you will want to make sure that you get a pre-approval from the bank for the new expected home purchase mortgage before you put your current house on the market.
STEP 3: FIND A REALTOR
While I don’t believe that an agent is absolutely necessary for every home buyer, I do believe that they provide a lot of value when you are selling your home. This is especially true if you don’t have the time or desire to research the market yourself (did you skip step 1?!). Get recommendations from friends and family that have sold homes before and meet with the realtor before signing with them. You may be working with them for a while and want to have someone that is a good fit for you and your property.
A good realtor/real estate agent will:
- Walk you through the expected costs of the home sale
- Offer suggestions on how to improve the property before putting it on the market
- Have strong negotiation skills to be able to get the highest sale price possible
- Frequently communicate with you about the interest in the home and the feedback they receive
- Actively promote your property in various mediums and provide professional tools
STEP 4: GET YOUR HOME READY FOR THE SALE
After getting suggestions from your realtor/agent, you should plan to spend some serious time making updates and improvements to your home. Make sure that absolutely everything is in working order and is clean and tidy. The handout for this course provides a list of suggestions to use to make sure that your home will present at showings in the best possible way and be inspection-ready.
At a minimum everything should be in good working order (ready for that inspection!), a fresh coat of paint should be applied and clutter should be removed. Don’t forget the outside of the home as well! Also, don’t forget to check areas like the attic because you just may find some surprises, such as a family of bats up there (yes, this did happen to us…oh, the adventures we’ve had in home ownership!).
STEP 5: LIST THE HOME & SCHEDULE SHOWINGS
By this point, your home should be all ready to sell! You will decide on the right listing price to start based on your own research and the recommendation of your realtor/agent, write down a list of features that make your home a great purchase and take good quality photos to post of the home. Your realtor/agent will help you with all of these things as well as measuring the room sizes and more.
If your home is priced right, you should get a lot of initial interest in your home and have several showings within the first week of the listing. Be sure that you are ready for showings as soon as the listing goes live.
Be prepared with a plan for when/how much to reduce your listing price if your home isn’t getting enough interest or if you’re getting feedback that the home is priced too high.
Keeping up on the cleaning and tidying clutter is essential at this stage (essential for your sanity I mean!). When we sold our home recently, we had over 40 showings before we received an offer. I like a clean house as much as the next person, but it was a huge time commitment with three kids and a dog (a St. Bernard no less). Consider yourself warned.
STEP 6: PREPARE TO COUNTER-OFFER
When you finally get an offer on your home, it can be super exciting or super disappointing. It is somewhat of a game for the buyer/agent to get the lowest price they can possibly get on the home purchase. You have to decide before-hand what price you are willing to accept and things that you are willing to negotiate on. For example, covering some or all of the buyer’s closing costs is a good option to increase the selling price of the home while helping the buyer to be able to purchase the home with the cash they have available.
It is common to go back and forth several times with counter-offer. Many people will suggest that you never flat-out accept the first offer, as it may appear that you are too anxious to sell and there could be potential problems with the home. Always counter-offer and make sure you are getting what you know your home is worth.
This steps ends with a purchase agreement signed by both you (the seller) and the purchaser. After this step is completed, you can take a little break from the stress, but you do need to keep the home tidy for the buyer’s home inspection and for the appraisal.
STEP 7: CLOSING
After the purchase agreement has been signed, it generally takes 30-45 days to close on the home. One thing that will happen during this time is the buyer’s home inspection. The buyer generally accompanies the home inspector, so you should keep the home clean and organized for this and make sure they have access to under sinks, in the attics, etc. After the home inspection is finished and negotiations are completed for how much you are willing to provide in the way of repairs (if necessary, but they generally come up with something!), the buyer will schedule an appraisal. The appraiser only needs a few minutes and will take pictures and measurements of each room in the home. If the appraisal comes back at or above the purchase price, you’re golden! Just sit around and wait for the closing!
Right before closing, the buyer will schedule a final walk-through. At this point, everything should be cleared out of the home and property and should be clean and ready for them to move in.
The closing generally takes place at the title company and hopefully will just be a matter of signing your name on a few (million) pages. Enjoy the closing-selling a house is no simple task and you deserve these few minutes to relax…you probably have a lot of unpacking to do in your new home!
EXAMPLE: THE SMITH FAMILY
The Smith family analyzed purchasing a new home in the previous class (ST201: Home Buying Basics). Now, they are going to determine how much they would get if they were to sell their current home. Based on the analyzing the market, Jim Smith thinks he can get approximately $240,000. He would be able to avoid the 3% selling commission because he is a real estate agent, but would still have the following costs associated with the sale:
- 3% to a buyer’s agent at closing ($7,200)
- $2,064 for Michigan state and county transfer taxes ($3.75 per $500 for Michigan and $.55 per $500 for their county)
- $1,150 for owner’s title insurance
- $155,454 balance on their mortgage.
The expected closing disclosure for his home sale is shown below (click on the picture for an enlarged pdf version). The end result is that they would get an estimated $77,604 in cash at closing if they were to sell their home. In addition, they estimate they would spend approximately $1,500 getting the home ready for the sale.
Your homework assignment is to analyze a prospective home sale (yours if you have one) using the tools provided in this class.
- IMPROVING – If seriously considering selling, hire a realtor/real estate agent and ask them for an estimate of total expected selling price and closing costs.
- INVESTED – Analyze and total the 6% real estate commissions, transfer taxes and owner’s title insurance amounts to get a total of all the costs to sell your home. Add in the costs of repairs and updates needed to get the maximum value for your home. Estimate the selling price and get a rough estimate of what you would receive for the home.
- UNSTOPPABLE – Well in advance of the home sale, ensure that everything is in top condition and well-maintained. Add up the selling costs as explained above and fill out the closing disclosure form to make sure you know exactly what you will be receiving at closing. Ensure that you have a good realtor based on personal recommendations to list and market your home.
File your home sale analysis in your Financial Plan binder under the tab “Special Situations”