You may believe you’ve bought the home that you’ll live in forever. But circumstances change, and you may want to sell much sooner than you had expected.
Need to sell right after you buy? Consider these factors and consequences to help you decide.
Maybe you’re having unexpected financial problems. Or you’ve just accepted an out-of-town job. Whatever your motive, whether you can sell your house soon after purchasing it depends on a variety of factors, including your unique circumstances, the terms of your mortgage, and any applicable regulations.
What You Need to Consider Before Selling Your Home
Mortgage Terms: Know Your Contract
The terms of your mortgage play a crucial role in determining when and how you can sell your house. So you need to thoroughly review your mortgage agreement. Some mortgages contain a due-on-sale clause stipulating that if you sell the property, you must pay off the remaining mortgage balance immediately.
But this clause is becoming less common, and many mortgages are now assumable or portable; that is, they allow you to transfer the mortgage to the new owner. Discuss the details of your mortgage with your lender to make sure that you understand your options.
Equity Matters
Equity is the difference between your home’s market value and the outstanding balance on your mortgage. Selling your house shortly after buying it may not be viable if you have very little equity in the property, because you may be unable to cover the transaction costs and make a profit. You may even lose money. It usually takes time to build equity.
Transaction Costs: Consider the Expenses
Selling a house involves such transaction costs as real estate agent commissions, closing costs, and capital gains taxes. If you are selling it soon after purchasing it, you may not have built up enough equity to cover these costs, which can eat into your proceeds from the sale.
Market Conditions: The Importance of Timing
The current state of the local real estate market may affect your ability to sell your home quickly and at the price you want. In a seller’s market, characterized by relatively high demand for housing, you may have a better chance of selling promptly and at your desired price. In a buyer’s market, characterized by relatively low demand for housing, it may be harder to sell quickly at your desired price.
Consider the home values, supply of housing, demand for housing, and other trends in your neighborhood; whether it’s off-season for the real-estate market; and interest rates, inflation, and other aspects of the current housing market. Ask your real estate agent to obtain a comparative market analysis (CMA) and to explain it to you. Based on the CMA, your Realtor can help you determine a competitive price for your property.
Reasons Homeowners Sell Sooner Than Expected
You may believe you’ve bought the home that you’ll live in forever. But circumstances change, and you may want to sell much sooner than you had expected. Some of the reasons:
- Housing market conditions. It’s a seller’s market, you have gained equity quickly, and you want to turn a profit.
- Changes in your family. You’ve just had a baby, and now you need more space. Or a child has left for college or there’s been a death in the family, and now you need less space.
- Health emergency. You want to be closer to a family member with sudden health problems. Or you need money to pay medical bills.
- Relocating for a job. Taking advantage of the opportunity may require a quick sale.
- Financial difficulties. If someone in your household loses a job, your monthly expenses may become too much of a burden.
When You Benefit From Selling Quickly
Sometimes, you just want to turn a profit by selling your home.
- You got a great deal, perhaps due to foreclosure, and now you can sell the property for substantially more than it cost you to buy.
- You increased the resale value of your home by making extensive renovations and repairs.
- The average home value in your area has increased thanks to a new commercial strip, a big company moving into the area and creating a lot of new jobs, or other such developments.
What Is the Five-Year Rule?
This “rule” — more like a suggestion — advises you to remain in a new home for at least five years before selling. Otherwise, you might not even break even on the investment. The rule takes into account your transaction costs, the time it takes for the market value of the home to grow, and the money you spend on home repairs, upgrades, and other improvements. Moreover, the longer you stay in the home, the more equity you can build. You also need to consider the effects of mortgage prepayment penalties and capital gains taxes.
Is It Possible to Sell After Two Years?
Although it’s often smarter to wait longer, you usually can sell after being in your home for just two years. There are a few provisos though. To avoid capital gains taxes, you must have owned the home and used it as your principal residence for two out of the last five years (up to the date of closing). Those two years don’t have to be consecutive. If you’ve got those two years under your belt, the principal residence exemption enables you as a single taxpayer to exclude up to $250,000 of the profits of the sale from your taxes; or, if you are married and filing jointly, up to $500,000 of the profits.
What Is the Break-Even Point?
Sale expenses and moving expenses add up. And you usually can’t recoup closing costs without having gained equity. This is where the break-even point comes in. Calculating this number tells you when you can expect to sell your home and recover what you’ve spent on buying it. Because home values and the rates of adjustable-rate mortgages fluctuate, so does the break-even point.
How to Calculate the Break-Even Point
Determine the following costs:
- Down payment.
- Closing costs.
- Monthly mortgage payments you’ve made to date.
- The balance owed on the mortgage.
- Property taxes you’ve paid to date.
- Mortgage insurance you’ve paid so far.
- How much equity you’ve accrued so far.
- Costs associated with selling your house.
The goal is to figure out when you can reach the break-even point with equity and monthly mortgage payments in the current housing market. Knowing this break-even point will also help set a realistic price for your home, which is likely to differ from the price you paid for it. A professional home valuation and a comparative market analysis of your area should help.
Consequences to Consider If You Sell Your House Soon After Buying It
Capital Gains Taxes
You’ll have to pay long-term capital gains taxes if you sell your house after owning it for only up to two years, a steep 15% to 20% of the sale price. If you lived in your house for at least two years, though, as indicated above you are exempt from paying capital gains taxes on all or a significant portion of your proceeds.
There are some exceptions to capital gains tax regulations, such as an exception for when you may move without financial penalty if you have suffered from a natural disaster. In any case, we recommend that you consult a tax professional before selling.
To minimize your capital gains taxes:
- Live on the property you own for at least two years.
- Use the principal residence exemption.
- Itemize your construction, repair, and sale expenses.
- Make the sale at a time when your income is at its lowest.
- Consider using IRC Section 1031 to defer paying taxes. 1031 allows you to postpone paying taxes on your gain from a property sale if you reinvest the proceeds in a similar property as part of a “qualifying like-kind exchange.”
Mortgage Prepayment Penalty
Some lenders impose penalties if you sell your home before a certain amount of time has passed because they then miss out on interest payments you would have made. Typically, the penalty is determined on a sliding scale of 2% to 5% of the remaining balance on your loan, depending on how long you’ve been paying. So before you sell, review your mortgage agreement to make sure that you will not be subjected to this penalty.
To avoid a mortgage prepayment penalty or to minimize it:
- Avoid or minimize refinancing.
- Pay a higher down payment.
- Obtain a cosigner for your loan.
- Choose an established lender.
- Avoid alternative lenders that promise fast financing.
Seller Closing Costs
Seller closing costs, which may be steep, include title insurance, real estate agent fees and commissions, attorney fees, administration fees, and various taxes, like a deed transfer tax.
Selling Costs
Expenses in addition to closing costs may include the costs of staging and of making repairs or renovations and can add up to thousands of dollars.
Prospective Buyers May Get a Little Leery
Somebody looking at your house may assume that there’s something wrong with it if you are selling it quickly. Your Realtor can help with marketing and answer the questions of potential buyers to alleviate any concerns.
How to Build Equity
You can build equity in two ways: by holding on to your house longer, as equity builds by itself, over time; and by making renovations, upgrades, and improvements to add value. You’ll have to spend a lot of money on some projects, like a complete renovation; others, like simple cleaning, you can do even on a tight budget.
Possible improvements include deep cleaning, decluttering, and inside repainting; adding square footage by converting your attic into a living space, finishing your basement, or adding outdoor living space; adding a pool; refinishing hardwood floors; renovating kitchens and bathrooms; updating fixtures and appliances; and improving curb appeal by landscaping and outside repainting.
Home appreciation rates vary depending on market conditions, where you live, and what kind of property you have. But as the market appreciates, so does your home.
Alternatives to Selling Your House Prematurely
If you have any doubt about whether you should sell your house soon after buying it, other options may make more financial sense given your circumstances.
- Maintain ownership and generate passive income as a landlord to cover your expenses.
- Lower your monthly payments and hold on to your property to build equity. Depending on the circumstances, refinancing may not always be ideal. So talk to your real estate agent and a mortgage broker to help you evaluate the pros and cons.
The Bottom Line
It’s usually advisable to hold onto a property for a fair amount of time so that you can build equity and the property can appreciate. In light of the transaction costs, if you sell too soon you may not be able to make a profit or even recoup your initial investment.
Before making any final decisions, consult a real estate professional and your lender to understand the terms of your mortgage and the implications of selling your house shortly after purchasing it. Also, consider the conditions of the local real estate market and your reasons for wanting to sell.
If you are ready to sell your New Orleans home, contact our Realtors and let us help you make the best decisions for you.