Wondering what does it cost to sell a house? A lot! Even with technology lowering commissions, it still costs a lot to sell a house. When you add on commissions, taxes, and fees, it can easily cost anywhere from 6% – 8% of the value of a home to sell a house.
Despite the creation of Zillow, Redfin, and a bunch of other internet real estate companies, commission rates still haven’t come down as much as they should. Just look at the wealth management industry. They used to charge 2% – 3% of your assets to manage your money. Now the industry charges under 1%.
As a result, I’m on strike for having to still pay 5% – 6% in commissions to sell a property. The selling fee is too damn high. Only when it costs 4% or less to sell a house might I even consider.
However, with the housing market strong, I’d rather just hold onto my properties for as long as possible. If you don’t ever sell your house, you never have to pay any commissions or taxes!
The Internet Should Lower The Cost To Sell A House
Every property I’ve bought since 2003 I found through the internet. It’s why I’ve always asked for my realtor to share some of their commission once the deal closes. They always oblige since they didn’t do anything except help write the offer I deemed was fair. Today, you can just write an offer in minutes using DocuSign.
Then in 2014, I decided to take saving money a step further by getting the listing agent to also represent me to save an estimated 8% off the purchase price (1% commission refund, 7% lower offer price FTW). It was a no brainer because I understood the transaction process after writing a couple dozen offers already.
Selling a home for top dollar does require skill because marketing a property well and having a large network makes a big difference. The listing agent who sold me my current home basically left $120,000 on the table for his sellers. As a retiree, he didn’t have a network, didn’t market the property over the internet, priced too high, and became friends with me! You don’t want to be friends with me if you’re trying to get the best deal possible.
A great realtor is absolutely worth her weight in silver. But that weight is still worth less than 5% of the value of a home when home prices are now so steep in major coastal cities in the U.S. Instead of a fee based on a percentage, a flat fee seems much fairer to consumers.
Let’s look at a real cost breakdown for a home that sells for $1,850,000 in San Francisco. It was part of the presentation the visiting realtors gave me if they were to sell my home. I think you’ll be shocked to see how much selling a home costs!
How Much Does It Cost To Sell A House? 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.
To sell a $1,850,000 home in San Francisco costs a whopping $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 $150 based on $5 a trade.
In the realtor’s defense, half of her 5% commission goes to the agent who brings the buyer. Not a bad deal for the buyer’s agent (curiously labeled as Selling Office in the chart).
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 take, but 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 like San Francisco, you lose out on bidding wars more often than you win.
City And County Costs
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?
Other House Selling Costs
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.
Taxes As A Big Selling Cost Of A Home
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.
Never Selling My Properties Due To High Selling Costs
Given the cost to sell a house, I NEVER plan to sell my properties until there’s at least a sliding scale in commission rates. For example, 3% commission for homes under $1M, 2% commission for each $1 over $1M, etc.
The longer you can hold onto your property, the better. In a high inflation environment, keeping your rental property makes even more sense. You want to benefit from high inflation for as long as possible.
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. Post-pandemic, the average homeownership tenure has ballooned to 10.5 years, partly because of a strong housing market. But also partly because selling costs are still stubbornly too high.
Given each city also has a huge Transfer / Excise tax for simply pushing paper, lower real estate commissions would boost city revenue as well. The real estate industry is ripe for disruption.
Selling causes leakage. Further, you never want to sell a cash cow in this lower-for-longer interest rate environment. All income generating assets must be cherished like a spoiled only child.
Take advantage of people who don’t have the discipline to hold on. 20 years from now you will probably be very glad you did.
My best advice for lowering house selling costs is:
- Aggressively negotiate with the listing agent
- Get the listing agent to find a buyer and have the listing agent remove half the selling fee as a result
- List the house on your own
As as a seller, you have leverage to ask for a lower selling commission rate because volume is down. Further, you may want to let your listing agent act as a dual agent to try and save on the buyer’s commission. For example, if are a selling a $1 million home and the total commission is 5%, you might be able to save $25,000 or 2.5%.
Frankly, I wouldn’t sell a home now unless you really need the money. The selling costs are still way too high. Further, the housing market is likely going to continue going up for the next several years.
Post-pandemic, people have pent-up savings and looking to buy property. Further, mortgage rates will likely continue to stay low. In an inflationary environment, you want to hold onto real estate forever.
Invest In Real Estate More Strategically
Real estate is my favorite way to achieving financial freedom because it is a tangible asset that is less volatile, provides utility, and generates income. Stocks are fine, but stock yields are low and stocks are much more volatile.
The combination of rising rents and rising real estate prices builds tremendous wealth over the long term. Meanwhile, there are more ways to invest in areas of the country where valuations are lower and net rental yields are higher thanks to crowdfunding.
Take a look at my two favorite real estate crowdfunding platforms that are free to sign up and explore:
Fundrise: A way for accredited and non-accredited investors to diversify into real estate through private eFunds. Fundrise has been around since 2012 and has consistently generated steady returns, no matter what the stock market is doing. The real estate platform has over 300,000 investors and manages over $3 billion.
CrowdStreet: A way for accredited investors to invest in individual real estate opportunities mostly in 18-hour cities. 18-hour cities are secondary cities with lower valuations, higher rental yields, and potentially higher growth due to job growth and demographic trends.
I’ve personally invested $810,000 in real estate crowdfunding across 18 projects to take advantage of lower valuations in the heartland of America. My real estate investments account for roughly 50% of my current passive income of ~$300,000.
What Does It Cost To Sell A House is a Financial Samurai original post.
If I had only read this in 2011. At that point i sold my property in Nashville without a loss (but no profit either). Since then it has doubled in price. Monday morning quarterbacking can hurt the soul!
The real estate industry in general needs to be more transparent. Not long ago a listing agent gave me the run around on a property because he had a potential buyer lined up and wanted double commish.
As a buyer in this market would you be extra cautious? Because as you said you never want to sell a cash cow in this low rate environment.
Financial Samurai says
Always good to be cautious whenever spending an enormous sum of money relative to one’s income and wealth!
There is always another property if you miss one. Hence, I recommend folks incorporate the Spray N’ Pray method for property hunting at this current time.
I would also look more surgically around the country for better returns with smaller investment sums through real estate crowdsourcing via RealtyShares. I’m planning on allocating capital at $10,000 – $30,000 a pop now instead of $1.5M a pop.
I am glad someone wrote this article. The inflated real estate broker fees is a very good arbitrage opportunity for a creative technology entrepreneur.
Let us summarize the dead-weight loss to society due to the real-estate agents first —
1. Fewer transactions: Sam, as well as many of the readers, admitted that they will never sell their houses or think long and hard before buying a house about how long they can stay in it. In other words, the market is less fluid because of this high overhead transaction cost.
2. Buyers and sellers pay the middle-man: Obviously the cost of the transaction (realtor fee + taxes) is built in and reflected in the ultimate listing price of the house, making real estate more costly for the consumers.
What are the social benefits of #1 and #2? The “knowledge” of the realtor? In the few real-estate transactions I have had so far, the realtor did not bring much knowledge to the table: (a) The houses for sale were listed online and in hot areas most have open houses; (b) The home inspectors do the job of checking if there is anything wrong with the house; (c) The offer price must be determined based on the buyer’s knowledge of the market, and in today’s world, Zillow, Trulia, Redfin etc. give a list of comparable properties/prices, which is the most a realtor will tell you; (d) The selling requires putting up a listing online and sitting around for an open house for a few hours – something any reasonably polished/pleasant person should be able to do. So, the benefits brought to the realtor on the table are rather small in value, and as many feel, entirely unjustifiable for 5-6% commission fee in higher property priced coastal areas.
So why do people put up with it? It is not just a “bad social equilibrium”, it is the barriers to entry. As some readers have stated, getting real-estate and/or brokerage licenses are expensive. But they are not that expensive. For someone selling $1 million + properties, it may well be worth it. The other barrier to entry can come from skill, but most of us can agree that getting one of these licenses does not require tremendous skill or hard work.
I have to conclude that the missing ingredient here is the technological innovation. Like online brokerage made stock brokers obsolete, like Uber made Taxis run for their money, and like Airbnb disrupted the hotel industry, a real-estate disruption is likely and should/will come from technological innovation. I wouldn’t list that as a career of choice for young people choosing a profession.
In the meantime, like other readers, either I am not selling my properties and contributing to a non-fluid market thanks to realtors, or I am getting my own license before the sale.
I looked into becoming a real estate professional in my state and found the problem here isn’t agents but brokers. To be a broker has barriers to entry (ex 3 years as an agent) and a license in the thousands of dollars. This makes it cost prohibitive for people to justify getting and maintaining a broker’s license unless they are serious about the enterprise. Therefore the casual sellers wind up as agents, and the typical agreement around here has the agent portion of the commission as less than half of the broker’s portion.
With that being said, as others have pointed out discount brokerages, the woman we purchased our house from negotiated directly with a local broker who put her listing on MLS for a flat fee, then referred all inquiries directly to the owner. She did a fair amount of work, and the transaction was a bit more of a hassle, but it wasn’t too bad and she saved a bit of money and managed to have an agent list the property in MLS.
The true commission rate is 40-60% on most homes not 5-6%.
$ 40,000 Equity
$ 24,000 Commission at 6%
The commission is 60% of your equity! $24,000/$40,000=60%
This is why 1 in 8 homes is now sold direct and 1/ in 5 homes is bought direct. “Highlights from the 2015 Profile of Home Buyers and Sellers by the National Association of Realtors” showed that FSBO homes were priced more accurately and sold slightly faster. Add that to studies done by Northwestern and Stanford that FSBO homes sell for 4-7% more plus the commission.
There are some amazing platforms for FSBO sellers that take an intimidating process like FSBO and break it down into actionable steps similar to what TurboTax, Etrade, and LegalZoom have done. Simple and SOLD is a great book that walks you through the process.
ZJ Thorne says
My friend is an immigration attorney who worked in mortgages before law school. Watching her go through the home buying process has been fascinating. She is not using an agent, because she knows the forms and Zillow is great. She is getting precisely what she wants. I intend to use her expertise when I buy.
An important point to note is that the commission and the who pays the commission is completely negotiable. If you’re selling in a strong seller’s market, why not just set terms where the buyer pays for any and all commission fees?
The Real Money Boss says
When buying a home (purchased for $223K) for my mother-in-law in Georgia earlier this year, I had asked the seller’s agent to cut her commission from 6% to 3%, if we didn’t get our own agent. She said that she couldn’t do that due to her agreement with the seller, either she would get 6% if we were unrepresented, or she would get 3% and our agent would get the other 3% if we were represented. So we ended up getting our getting our own agent. I would have preferred getting a 3% discount on the price, rather than agent.
Ever heard of this already being agreed upon by the agent & seller and unable to change?
You’ve left out one more reason not to sell–applicable perhaps only in California: Proposition 13 which limits the property tax increases as long as one owns the property. The longer I own a property, the more valuable this benefit becomes, assuming future appreciation matches historical appreciation.
With Proposition 13 and the transaction costs, it makes much more sense to do a cash out refi to invest in another property or anything else rather than sell the property. Of course, people may need to sell for all sorts of reasons (e.g., bad investment, relocation, etc.) or may be unable to refinance so this strategy doesn’t always work out.
One challenge with refinancing a single family home (as the Financial Samurai has documented) is that it is highly dependent upon the financial picture of the owner and W-2 income is preferred by most lenders. Apartment (i.e., 5+ units) financing is much more dependent on the financials of the building. If the building cash flows, one can typically borrow up to 70 to 75% of the appraised value.
Yes, to put an even finer point on it, if you buy a fixer and do beautification that does not require a permit, they can’t raise your tax, but you can make more on a rental, so you have income on a 2M asset, but tax on a 1M asset.
That real estate commissions haven’t dropped is crazy. The problem is, as others have pointed out, Realtors own and control access to the MLS. That’s the major way residential property is sold in the U.S. As a real estate investor, I have also heard stories of agents refusing to show properties not listed on the MLS, so I can understand the reluctance of people to go it on their own.
You should be able to negotiate a lower commission, especially if you are an investor and can offer the agent regular listings.
But you can also use the commission to your advantage. Got a property in a not so good part of town and it’s taking a while to sell? Increase the buyer’s agent’s commission! You’ll be amazed at how well that works. I’ve even selling raised the price to offset the increased commission and the property still sold. It’s all about motivating the buyer’s agent.
I highly recommend checking out the book Freakonomics. There’s a chapter or two in there on selling real estate and what words to include in your listing for a higher selling price. Would probably work for rental listings as well.
I also recommend thoroughly going over the HUD form at least 1 day before closing. I have been through the escrow process more than a dozen times and there has NEVER been one time where I did not find an error somewhere. That has saved me thousands of dollars.