The scorching housing market is creating stress for homeowners as to whether now is the time to sell a home.
Home prices hit a new high this summer. The housing stock remains low, as potential buyers engage in bidding wars.
Those looking to capitalize on the binge should be careful and calculate several variables before making a decision. There are many ancillary costs and significant tax issues associated with selling your home that can erode profits. Plus, a happy seller can quickly turn into a frustrated buyer if the next place to live isn’t already defined.
Len Kiefer, deputy chief economist at mortgage giant Freddie Mac, said a first step for homeowners is to calculate the “sunk costs” they incurred when they bought their home.
“If you buy a house it could come at some pretty substantial costs: transaction fees, taxes, closing costs, if you get a mortgage, all of those things come with the cost of buying a house,” a- he declared. “In general, the shorter your time at home, the less time you have to offset these costs. ”
According to the Mortgage Bankers Association, closing costs typically average 2% to 5% of the loan amount, but it depends a lot on the borrower and the loan product. Freddie Mac estimates that a home closing cost of $ 356,700 – the median home price in August 2021, according to the National Association of Realtors – could cost a homeowner more than $ 8,600.
Dave Schoen, a 56-year-old college preparatory tutor on Long Island in New York City, is among the group of Americans who feel pressure to sell.
He and his wife are responding to inquiries about the sale of the house they just bought three years ago. They said an investor offered them $ 200,000 more than they paid.
So far, Mr. Schoen has not sold. He is concerned about several things, including finding a new affordable home.
“Maybe now is the time to take a step, but again there is a lot of uncertainty and we’re not really sure on the right move,” he said.
““Make sure you factor in how much you’re going to spend when you move. ““
Those who are tempted to sell a few years after the purchase should also calculate the costs that they can recover quickly, if at all, said Cynthia Meyer, financial planner and founder of Real Life Planning. Ms Meyer said there are obvious expenses such as realtor fees and other closing costs that could reduce the winnings. Some buyers also forget about other costs, such as paying for new furniture when they move into a home.
“Make sure you factor in how much you’re going to spend when you move,” she said.
Ms. Meyer recommends that curious homeowners record the cost of buying a home in a column, including down payment and home improvement. Then, in another column, add up the potential costs of selling the existing home: things like how much you would pay to move, real estate agent fees, advertising, home staging, and more. If these things exceed the potential profit from selling your current home, you still have some thinking to do or may need to spend more time in the home.
Keep the calculator away to sort out tax issues, which housing experts say are among the most common pitfalls for sellers. Different state and local tax rules, income, and time lived in a home can all erode profits.
Many sellers are familiar with the Home Sellers Tax Exemption, which allows sellers to avoid or reduce capital gains taxes on home sales by exempting up to $ 500,000 in profits. However, the exemption has many stipulations. For example, single tax filers must have owned and lived in the home for at least 24 months within the past five years. In addition, a couple must have lived in the house during the same period, and at least one of the spouses must have owned it for 24 months in the last five years.
Meeting these requirements and benefiting from the exemption could mean waiting to sell or canceling out the potential gains offered by putting the house on the market.
Home prices in Austin have risen dramatically since marketing consultant Chris Schorre and his wife bought their home in the Texas capital 19 years ago.
Despite the housing boom in Mr Schorre’s area and the almost constant interest in their home – “We get offers from investors, one every week I would say” he said – the couple said that he did not plan to sell soon. He said that was largely because the couple wouldn’t be able to find a similar home in their area within their budget.
Mr Schorre also said he had looked into the “confusing” tax issue and decided that in his personal situation the benefits of the sellers tax exemption would be partially offset by the capital gains he they would pay then.
Those determined to sell should carefully monitor home improvement costs and the paper evidence of those upgrades, said Andrew Ragusa, Managing Director and Broker of REMI Realty in Plainview, NY.
“If you have the receipts for all the work you’ve done, take them to your accountant and say, ‘This is what I spent to add value,’ he said. “At this point, these expenses are written off. ”
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For those who have yet to plan for a new home after the sale, many will find that the same housing boom that raised the price of their current home also raised the cost of a future future. Mr Kiefer points out that the math will be different for those who are considering selling investment property or vacation homes, as they are unlikely to have the problem of finding a new primary residence afterwards.
Freddie Mac’s Mr. Kiefer warns that homeowners should carefully weigh whether it is more profitable to buy or rent, which they can calculate on their own with the calculation tool on the Freddie Mac website. Salespeople who are nearing retirement, emptying their nest, or otherwise considering downsizing may find an added incentive to increase their lead times, grab earnings earlier, and rent for a few years, he said. declared.
If a salesperson knows for sure that they will be in a certain location for an extended period — say 10 years — then they have more than enough time to recoup the costs. The Mortgage Bankers Association recommends that people consider staying in their primary residence for at least three to five years. This means that even for homeowners who have regrets, such as those who recently bought homes without seeing them or who impulsively moved to less populated areas during the pandemic, may find it more cost effective to stay on. place for now.
“When you do the math, that benefit starts to lean toward homeownership for that period,” says Kiefer.
Write to Julia Carpenter at [email protected]
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