Selling a house is a difficult business and sellers need to make sure they leave emotions out of it and rationally consider the finances involved.
Last time, I shared with you some lessons I learned from selling my home earlier this year. Here’s the rest of the story...
Lesson 3: Don’t get emotional about the house
While my kids grew up in the house and we have many memories, in the end selling a house is a business transaction. Part of this entails accepting the fact that the market determines what my home is worth — not me.
Many people peg the value of their home based on what they bought it for and hate to lose money. We’re so fixated on what we paid for it that we don’t take a rational approach to pricing our homes. It’s similar to what we do with our investments: we get caught up in what we bought a stock for and in our minds think that it’s worth $25 a share when the market price is really $10 a share.
Since direct real estate is an illiquid asset, it’s tough to know what the market value of a home is and how much I should list the home at. I bought the house for $300,000, and after looking at comparable sales in the surrounding area, we decided to list the house at $275,000.
Lesson 4: It’s what you keep that matters
On the surface it looks like I would lose only $25,000 on the house, but it’s what you net after all expenses (direct and indirect) that matters. Here’s a breakdown of what I pocketed after all expenses:
You can see that my loss after factoring all expenses for the transaction was actually $66,000 or over 20% from the original purchase price. If I really want to get picky, then I should add in the property taxes, insurance and repairs I’ve made over the years to the purchase price. As an estimate, suppose that’s about $50,000, then my net loss is actually over $100,000.
The lesson learned here is that you can’t just look at what price you agreed with the buyer to figure out what you’re netting on the house. You’ve got to think about total costs (especially those ridiculous real estate commissions!) and subtract those from the selling price.
This holds true even if you sell a house for a gain. If you bought a house for $500,000 and sold it for $600,000, do you really have a gain after factoring all expenses?
Lesson 5: Look at your overall financial picture
I decided to lower the price of my house, pay 3% of the closing costs for the buyer, fix a few items for him and buy a home warranty. In all this cost me over $15,000. My neighbors thought I was out of my mind.
This is when you have to take a step back. It was still more of a buyer’s market than a seller’s market at the time I sold the house in my area. Also, I only had one offer on the house, but the buyer was preapproved for a loan. In my mind that means he’s serious.
While I could hope for another offer to come along, what if that didn’t happen for six months? Now I’m paying property taxes, insurance and utilities on an empty house. Or what if a tornado rams through the area? More importantly the loss on the house really didn’t matter much anyway since my wife’s promotion and higher income made up for it in less than a year.
Next time I’ll share with you the financial lessons you can learn from buying a home.