When selling a house, the goal is to minimize closing costs to maximize revenue. Taking these closing costs into account will help you to sell your home for the most amount of money possible.
It isn’t possible to completely avoid closing costs when selling a house. However, it is possible to minimize costs associated with transfer taxes, HOA transfer fees, capital gains tax, property tax, agent commissions, and pre-listing commissions.
Several hidden costs can add up and make selling your home much more complicated than it needs to be. Here are several creative ways to mitigate their damage.
Most sellers opt to hire a real estate agent to help sell their homes. When you hire an agent to sell your home, they will take a commission based on the total sale price of the house. It usually ranges from 3% to 6%, depending on the current state of the market. To reduce this cost, you should shop around for a real estate agent with a lower commission or consider selling the home yourself.
A few percentage points may not sound like much, but realtor commissions make up the majority of seller closing costs. For example, 5% of a $500,000 home sale is $25,000 in commissions paid by the seller. Certain scenarios don’t necessarily require you to work with a real estate agent. If you’re trying to sell a house to your friend, you don’t need a realtor to help you find other buyers. Of course, make sure that you are confident in your friend’s interest in buying your property. Ideally, you should get a written offer from them and hire a real estate attorney to review the document. Selling your property to a friend can help you avoid expensive realtor fees and save money on closing costs.
Most real estate agents will recommend that you have your house inspected before putting it on the market. This helps identify any problems and address them beforehand. pre-listing inspections are a great idea because they will ensure that you don’t get surprised by any last-minute costs. Inspections can be performed by a third-party company specializing in home inspections. It will cost anywhere from a few hundred to a few thousand dollars, depending on how thorough the inspection is. It is better just to pay this cost upfront so that you don’t get saddled with last-minute expenses that will strain your resources in the long run.
Transfer taxes are based on the value of your home and are paid when it changes ownership. Transfer taxes can range anywhere from 1% of your home’s sale price up to 10%, depending on where you live.
Transfer tax is tough to avoid unless the buyer offers to cover it. When selling a house to an investor, they will sometime offer to cover this closing cost to sweeten their offer. Calculate your total costs to sell your house before officially getting to the closing table to know where your bottom line stands.
Prorated Property Taxes
Prorated property taxes are calculated based on how much time remains before the end of the year in which the property changes hands. Just ask the buyer to pay for their proportionate share of the taxes based on when they took possession of the property. You’ll have to send them a copy of your tax bill and get an agreement signed by both parties before closing.
Capital Gains Tax
If you’ve owned your house for less than two years or if you have other rental properties, then this will apply. It works out to 15%-20% of any profits from the sale of your house, depending on if you have owned it for less than 1 year or more than 1 year. To reduce this tax, try and hang onto your home for at least a year to reduce the percentage of income that you will pay. However, make sure that you take into consideration the expenses that come with owning a home during that holding period. You will still come out of pocket in some capacity when keeping your house instead of selling it. Determine if your holding costs outweigh the closing costs you’d pay when selling your home.