Few homeowners go into a home purchase with the intent to turn around and sell it right away, though technically you have the right to sell a home as soon as you sign the papers to purchase it. Though the longer you own your home the more profit you will make on it when you go to sell and thus it is widely advised to not to purchase a home unless you plan to live in it for at least five years.
But life is very unpredictable at times and unexpected things can happen that cause us to change major life plans. So what should you expect when needing to sell your home shortly after you purchased it?
Here is a guide to selling your home shortly after purchasing it:
Ask Yourself the Main Reasons for Selling Early
In most cases, a homeowner chooses to sell a home shortly after purchasing out of emergency necessity. Things like your job relocating you, the death of one homeowner, or a family member that brings in the inheritance of a home, divorce, life-altering medical diagnosis, etc.
Some homeowners decide to sell for unexpected financial downfalls, and others see the neighborhood taking a fast and steep decline and want to sell the home before the property values decline.
Look into How Much the Home has Appreciated
Real estate is not a means to make money fast. Home values rise slowly as compared to making a profit in other markets. The amount of appreciation does depend on the demand for homes in a certain area and the inventory available, but usually, a home does not appreciate enough to make it worthwhile to sell in a short period of time.
The National Association of Realtors reports that the national median existing home price for all types of homes rose 3.5% in June from the previous year. Even at the continuous incline of value, a $300,000 home would only see an increase of $10,500 in just one year.
Loan Amortization Factors In
If you took out a mortgage loan on your home the payment stays the same every month with a fixed rate mortgage. In the first few years of the loan, most of those payments go to paying interest and a very little amount goes to paying the principal. In the first year of a traditional 30 year mortgage with 3% interest, 59% is paid in interest and 41% goes to the principal. The longer you own the home the more your payments go toward paying the principal. So if you decide to sell within the first two years you will have very little equity earned in the home.
The Costs of Selling Sooner
All home sales have costs of putting a home on the market. With less equity made over less time, this could take a huge cut of the profit or even all of it.
- Typical Costs Associated with Selling:
- Staging and preparation fees
- Realtor commissions
- Inspection and repair fees
- Closing costs including title fees, transfer taxes, escrow fees, recording fees, and prorated property taxes
- Seller concessions
- Overlap costs
- Moving costs
- Mortgage payoff fees
- Capital Gains Tax
Even if you get lucky and your home balloons in value, you could end up getting hit with a large property gains tax that will take a big portion of your profit. If you sell a year after purchase the tax is a short-term gains tax which is taxed like ordinary income. So if you made $70,000 dollars in profit on your home and your income tax bracket is currently 20% you would have to pay 20% of that 70,000. If you sell between one and two years after buying you could be subject to 0%,15%, or 20% tax based on your tax bracket. If you live in the home at least two years you will not pay capital gains on a home up to $250,000 for a single owner and $500,000 for a married couple. So the longer you stay in the home the less tax burden.
Calculating if You Will Lose Money
Each selling scenario is different, but here is how to calculate whether you could lose money and about how much:
- Find a home value estimator online and find the approximate value of your home.
- Subtract your current mortgage balance, a good question for your mortgage servicer because the actual could be different than your statement.
- Deduct predicted costs of selling the home such as listed above.
- If you have a positive number at this point deduct capital gains taxes if it is under two years.
So Should You Sell or Hold Off?
Selling shortly after buying does bring risk of giving up equity and taking a loss on the home, but it is not always a negative thing. Right now when home prices are rising quickly and inventory is low, sellers could come out okay.
If you are unsure about selling a home you just bought please contact me. I’m able to help you process if you should sell your Chandler property or Gilbert home or maybe hold onto it or even rent it for a little while.