Disclaimer: This post discusses an actual home for sale. I have the permission of the owner to use their details in this post.
Selling and buying a home is one of the biggest financial commitments a person will make. It takes a lot of planning, saving, building credit, and research to find the right home, in the right location, at the right price. In fact, housing costs is the largest predictor of cost of living from location to location. Selling a home is a large cost; especially because the seller is the one to pay the real estate commission. Much of a person’s equity in their home can be siphoned away in commission and associated fees. Even though buyers pay less fees as part of the closing costs, they still have to consider many factors.
My friend and I are both dealing with the real estate market right now, so of course I find this an interesting topic to discuss. My friend is selling in Richmond, VA. The house looks like the after footage of a HGTV show. One would think that a beautiful move in ready home would be easy to sell. Yet, for some reason my friend is having a difficult time selling his home. The solution seems to be to lower the price, which eats into the equity of the home, and thus the available budget for the next home.
Looking at selling a home from a budget perspective, there are many costs to consider. The commission is the most obvious. A house listed at $370,000 is going to pay a commission of $22,200. Other fees include title insurance, sales taxes, escrow fees, and other miscellaneous fees depending on where you live. For my friend in Richmond it is going to cost about $4,000. Always assuming he does not pay any buyer fees or concessions. Add to these costs associated with making the home ready to sell, such as painting. The list can go on depending on the home. For my friend his additional costs were about $3,000. At the end of the day much of the equity in the home goes to the fees associated with selling.
One may not always have a choice about when to sell, but if you do it is worth looking at all the associated costs before deciding if selling is the right choice from a financial perspective. I know some people move because they just want to be somewhere different, some move for work, and others move because they have outgrown their house. Whatever the reason, it is import to consider the real cost associated with the decision.
I am also in the housing market, but I am on the buyer’s side of the transaction. I mentioned in previous posts that my old job ended because we finished doing what we were hired to do. Contracting work is like that. My new job is in a much bigger city with a much higher cost of living. What I used to pay for a spacious home in my old city won’t even get me a small apartment near where I work. This is supply and demand at play. Instead I must look farther out and for a smaller place. Okay, fair enough.
As a buyer I do not pay as many fees as the seller does, but there are fees associated with buying a home that must be factored into the budget. Recent statistics show the buyer will pay fees roughly 2-5% of the cost of the home. If we go for the middle range of 3% this cost can quickly add up in high cost housing market. I estimate the closing cost will be at least $10,000 but probably more.
Other things a buyer has to factor in when hunting for a home is how much of a down payment should they have, the cost of loan origination fees, and of course interest rates. As rates push higher the amount one can afford to spend on a home goes down. The bottom line is my salary will only allow me to spend X amount on housing. If the cost of the loan is higher then I have to lower the amount I can afford to spend on the base sales price.
A while ago I wrote a post about an article that listed 30 money mistakes. One of the money mistakes was spending more on housing than one can afford. When you live in an expensive city there is not a ton you can do about affordability issues. One of the biggest questions to ask yourself is how much space do I really need. Then consider things like, how far to commute, neighborhood safety, schools if you have kids, and local amenities. I am looking in areas near the metro to help with the commute but it turns out that has a huge impact on cost.
Whether you are a buyer or seller, do your research and then take the time to build a solid budget before you jump into the complicated housing process. It might take some of the stress out of the process.