It's been a little over 3 months since we bought our new house and almost 2 months since we sold our previous home. That was a chaotic time but I feel like the dust has settled. I've been involved in 2 purchases (the purchase of my condo and this latest purchase) and 2 sales (the sale of my condo and sale of our recent home which Phil bought on his own before we were married) so I feel like I have a decent handle on the buying and selling process and have learned a lot. My finance posts tend to go over well, so I thought I would share what I've learned in the process. I feel like people talk about the purchase process quite a bit, but there's very little discussion of selling a home so I thought I'd focus on that.
Selling a home
There is really just one big take away from selling a home - IT IS EXPENSIVE. We talk about fee compression in my industry (financial services) but holy smokes, there is no fee compression happening in real estate. When I was a mortgage underwriter in my 20s, we assumed that people would pay about 10% in closing/transaction costs when selling their home. It turns out this is pretty accurate, especially if you have to contribute towards your buyer's closing costs. 8% would probably be the lower bound of transaction costs, unless you don't use a realtor - which I honestly wouldn't recommend unless you are very comfortable with real estate transactions and don't mind negotiating directly with buyers. The realtor commissions (you pay for the buyer's realtor, too) are where the bulk of the closing costs come from, but there are other title-related expenses and, like I mentioned, potentially seller-paid closing costs. Our closing costs for our most recent sale were over $30,000 so it is a significant amount of money!!
So bottom line, you want to sell as few homes in your lifetime as possible (in my opinion) because to 'break even' you need your house to appreciate by 10% - otherwise you are going to lose money.
Our most recent sale worked out well for us because Phil bought at a good time and sold at a time when first time home buyer homes had appreciated quite a bit. His house had appreciated by 38% in 5.5 years which is NOT normal! For example, the home we purchased this fall appreciated 6% in the 4 years since the owners purchased it. They certainly did NOT make money on the sale (plus we were told they put over $15k into the stamped concrete patio/steps in the back yard).
I've been on the losing side of a purchase before as I bought a condo in 2005 and sold it for 15% less than I paid for it ~13 years later in 2018 (I bought close to the market peak). While I didn't have to bring money to the closing table since I had paid down my mortgage quite a bit over 13 years, I certainly did not 'make money' or break even on that purchase. I was stuck owning that condo for far longer than I would have liked as I couldn't afford to sell it since I would have had to bring quite a bit of money to the closing table. Luckily I was able to rent it out, but that wasn't ideal either.
Knowing selling a home is expensive, does buying make sense for you?
Here are a couple of things worth considering when buying a home:
- How your mortgage/taxes/insurance (referred to at PITI by mortgage lenders) plus other expenses like HOA dues compare to your rent payment? If the PITI and other expenses is significantly lower than your rent, buying a home might be the right decision, even if you technically lose money on the sale down the road.
- How long will you be in the home? If you plan to be there for a long time, then you don't really need to think about the sale of the home down the road. I think the best reason to own a home is that eventually you won't have a mortgage payment if you stay there for a long time. So your monthly housing expenses will be much lower eventually. You'll always have to pay for insurance and taxes but that should be much lower than a rent payment. So the longer you plan to stay in the home, the less future value of the home matters. In our case, we expect to be in this home for 20+ years. We will keep the value of the home in mind as we make changes/improvements but we are less concerned with the future value of the home since we won't don't anticipate selling for a very long time.
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By writing this post, I'm not trying to scare anyone away from purchasing a home. I just think there is so little discussion about the economics of buying and selling a home. I felt such pressure to buy a home in my 20s which is why I bought one at age 24 and rushed into the purchase since my lease was expiring. So I wanted to provide a counter argument to the assumption that everyone should buy a home!
Do you own or rent a home? Have you sold a home before?
7 comments:
This is really interesting, Lisa. Lots of things I haven't thought of because I've never sold a home. I'll probably sell this one in five to ten years. I've lived here for 25 years this summer and the projected sale cost has doubled in that time. I'd probably move to rent the other half of Rick's duplex. The rent would be high, more than my current payment, even though he'd give me a deal (he'd better!) but without $3,000 in taxes and insurance I think I would be ahead of the game. That said, I wouldn't be paying for snow removal, other costs. It would probably be a break even. Of course, it all depends on the market and home prices, too. Fortunately, my neighborhood has always had very good turnaround and if that keeps up, yay!
It was interesting to read your thoughts from the financial perspective you bring... We made a decent bit of money when we sold our home in 2005 that we'd built in 1999. The bad news was we bought a new house in 2005 right before the housing bubble burst. Almost 15 years later, our house is MAYBE worth 10k more than we bought it for but that is with some pretty expensive post purchase upgrades. We will pay the house off in the next year or two which will be great. We don't plan to move until our youngest is out of school- we want to live a few years being mortgage free :). It was tough to see our house depreciate in value when the recession hit; fortunately, month after month we've made the mortgage payments and soon it will be ours outright. So, while the value has not appreciated like we thought it would when we bought (no bubble burst in sight (at least to us) then), I have no regrets about buying the house.
Thanks so much for this, Lisa. I appreciate your insights, especially because you work in the finance world.
As you might remember, we bought a home 4 years ago and then sold it again last year. It did appreciate enough that we made a profit when we sold, but yeah, closing costs are no joke. I definitely would have put more thought into it at the time if I had known more about the process.
This was super interesting! While I have bought two homes, I'm yet to sell a home. I'm nervous to sell our townhouse that is not a rental property because I've heard horror stories about how much we'll pay in capital gains tax, so since it's plugging along well as a rental property (our tenants will have been there for 3 years this summer!) and we've spent less than $1,000 per year on repairs since moving out almost 4 years ago now, we'll hold onto it for now. Our current home likely isn't our "forever" home either but I also don't see us moving out anytime soon, I'm sure we'll be here another 3 - 5 years at least and we've already been here for 3! All that to say, when I do eventually have to deal with selling costs I am not looking forward to it!
This was super interesting to read because I'm starting to explore the idea of buying after realizing how much rent is in my area. (My plan would be to stay where I am for another 2-3 years and save aggressively in order to buy a condo/townhome.) But I'm not totally sold on the idea yet, because owning property scares me and is such a big decision. This helps to put things into perspective, especially the selling aspect because that sounds like a LOT to deal with. Oof.
We own our home, and it is our first home. We also don't plan on moving for at least 15 more years (when I will retire). After retirement, we have talked about building a home, probably in BC. But, you never know, we could end up just staying put.
Forget the money - buying our first house was one of the most stressful things ever (and then as soon as we moved in we had major issues to deal with...whomp, whomp).
These people that flip houses or regularly move are made of stronger stuff than me. I honestly thought the whole thing was so incredibly overwhelming I never want to think of moving again.
But...also...a very good point about the closings costs...and all the other expenses that aren't included in closings costs. Switching over accounts, forwarding mail, movers and, where we live a 1.5% land transfer tax that is on top of closing costs. Yikes...it's expensive. But, like you, we're keen to pay off our mortgage ASAP and we moving quickly in the right direction; we're up for our 5-year renegotiation next year and I think we can have it paid off in the next 2-3 years (if not before). Yay!!
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