Are you wondering how much does it cost to sell a house? Unfortunately, it costs a lot to sell a house. Even with online real estate platforms like Zillow and Redfin, it still costs anywhere from 5% – 7% of the value of a home on average to sell a house.
Given it still costs so much to sell a house, less people are selling. The average homeownership tenure in 2022 is now greater than 11 years. This holding period is way up from 4.5 years back in 2015.
Further, the desire to own a home during a pandemic has also gone way up. As a result, the cost to sell a house should come down to increase transactions.
How Much Does It Cost To Sell A House? A Cost Breakdown
Here are all the costs it takes to sell a house. Included in the cost to sell a house are the real estate fees, transfer and excise tax, inspection costs, 3R reports, staging costs (optional), water compliance costs, and any home beautification costs.
When homeowners think about the cost of selling a house, they mostly think about the selling commission. In the old days, it used to cost on average 6% in commission to sell a house. Today, the average selling commission is 5%. However, real estate platforms like Redfin lower the cost to sell the house to 3.5%. H
Please see the cost breakdown of the cost to sell a $1,850,000 home.
To sell a $1,850,000 home in San Francisco costs an expensive $116,735! That’s 6.3% of the value of the home chopped off right there. The cost also assumes “only” a 5% commission. In comparison, the cost to sell $1,850,000 worth of stock in 30 positions will cost nothing.
Roughly half of the 5% selling commission goes to the agent who brings the buyer. The other half goes to the listing agent, who does most of the work. The difference is that the listing agent has a much higher chance of earning her commissions. The buyer’s agent has to hustle and compete amongst other buyers. As a result, the chances of the buyer’s agent getting a commission is lower.
Meanwhile, depending on the listing agent’s contract with the real estate firm, she will have to give at least 20% of her 2.5% commission to her firm as well. So instead of taking home $46,250, the listing agent may take home at most $37,000 for roughly 2 – 3 months of work.
$37,000 is still a healthy income. However it is a far cry from the $92,500 you may think she gets for charging 5%. Most realtors don’t have many listings each year. Most realtors help people find homes. In a competitive market, you lose out on bidding wars more often than you win.
It is tough to be in the real estate business. The ideal scenario is if you can continuously win listings.
Cost To Sell A House: City And County Taxes
The cost to sell a house also includes Transfer / Excise Tax of $13,875. Every city and state has one, so check yours. The tax rate is variable, depending on the purchase price OR the fair market value, as shown in the chart below.
For a $1,850,000 property, the math is therefore $1,850,000 / $500 = 3,700 X $3.75 = $13,875. The city loves an increase in transaction volumes. Not only do they get to collect a large transfer tax for filing a piece of paper at City Hall, they also get to revalue your property higher and make more in property tax income.
For example, my home was being taxed at an assessed value of roughly $100,000 because the one owner bought it for only $50,000 back in 1946. We have a law where the assessed value can only go up by no more than a determined index (~1-2% a year). The city’s take was therefore $1,200 a year ($100,000 value X 1.2%). Given I bought the home for $1,230,000, the city is now making $14,760 a year for the same property!
But holy crap. Look at how there’s almost a 3X jump in Transfer / Excise tax if you sell a house for more than $5,000,000. We’re talking a minimum $100,000 Transfer / Excise tax bill here. What a waste of money. Can you blame city officials for not doing as much as they should to fix our housing shortage?
Cost To Sell A House: Staging, Fixing, Painting, Landscaping
The cost to sell a house also includes Other Costs equaling $10,300. All these costs re necessary except for perhaps the $8,500 staging. Because most buyers have zero imagination, staging is generally recommended.
The house will look cleaner, brighter, and as good as it ever will to attract max money. $8,500 alone sounds like a lot to rent furniture for 2-3 months. But the hope is that staging will more than pay back its cost. The higher priced your home, the more staging is worth it.
The house I’m currently living in was not staged back in 2014. It had gross shaggy green carpet and green paint throughout. Some of the aluminum windows were cracked and everything seemed untouched from 1946. As a result, competition was sparse.
Because the listing agent also priced it too high, he scared away the flippers as well. This was a perfect scenario for me. I love buying un-staged homes because after seeing thousands of open homes over the years, I know what things could be.
Cost To Sell A House: Taxes
The final cost to sell a house is Taxes. Although the property may sell for $1,850,000, the net proceeds is only $1,733,000 in this example. All these costs are deductible.
Further, if the sellers are a married couple, they can make up to $500,000 tax-free if they’ve used the property as their primary residence for at least two of the last five years prior to selling. A single seller can earn up to $250,000 tax free under the same terms.
Any overage is taxed at the applicable long-term capital gains rates, which is 20% for higher-income taxpayers ($413K single /$464K married), 15% for most individuals and 0% if you are in the 10% – 15% income tax bracket.
Hold Onto Your House As Long As Possible
Given the cost to sell a house, it is wise to keep your house for as long as possible. The taxes, fees, and commissions are economic waste that don’t go to you. Instead of selling your house, you should consider renting it out for passive income.
There should preferably be a flat fee for selling a home, just like there should be a flat tax above a poverty income level. The internet should have lowered commission levels by now. However, they haven’t because realtor advertisement revenue is a key source of revenue for internet real estate companies.
The irony is that if real estate commissions were lower, there would be a lot more transactions. More transactions would generate a lot more revenue for the entire real estate industry.
How To Lower The Cost To Sell Your House
As someone who has sold a $2,740,000 property before, here are my tips for how to lower the cost to sell your house.
- Aggressively negotiate with the listing agent
- Make sure you get at least three listing agent pitches
- Get the listing agent to find a buyer and have the listing agent remove half the selling fee as a result
- See if you an save on commissions by doing a direct sale without an agent
- Have your agent act as a dual agent
As as a seller, you have leverage to ask for a lower selling commission rate because there isn’t much inventory. They should be more flexible on commissions. Earning a 3% or 4% commission is better than earning nothing. Further, the more listings an agent has, the greater their credibility.
The cost to sell a house needs to come down. Otherwise, fewer homeowners will sell. Instead of paying all those selling costs, why not use the money to remodel your home and make it nicer instead? Keep the money for yourself!
I never plan to sell my homes until selling costs come down. Even if selling costs come down, I will probably continue to hold onto my properties for my children.
Invest In Real Estate More Strategically
If you don’t have the downpayment to buy a property, don’t want to deal with the hassle of managing real estate, or don’t want to tie up your liquidity in physical real estate, take a look at Fundrise, one of the largest real estate crowdsourcing companies today with over 250,000 clients and $1.2+ billion under management.
Real estate is a key component of a diversified portfolio. Real estate crowdsourcing allows you to be more flexible in your real estate investments. You can invest beyond just where you live for the best returns possible. Further, no leverage is needed.
My other favorite real estate crowdfunding platform for accredited investors is CrowdStreet. CrowdStreet focuses primarily on deals in 18-hour cities where valuations are lower and cap rates are higher. Due to the spreading out of America, more people should be moving to 18-hour cities.
Both platforms are free to sign up and explore. I’ve personally invested $810,000 in real estate crowdfunding to diversify my San Francisco real estate holdings. I love earning income 100% passively and not having to deal with maintenance issues and tenants!
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