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. In addition, there was a massive real estate ruling against the National Association Of Realtors, Keller Williams, and more that states the industry colluded against buyers and sellers to keep real estate commissions artificially high! The penalty is at least $1.8 billion.
As a result, the cost to sell a home should be coming down over the coming years. Stand strong home sellers and buyers!
Here's my fascinating conversation with Mike Ketchmark, the attorney responsible for winning the landmark real estate collusion lawsuit against the National Association Of Realtors.
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 outperformed the stock market during down years. The platform funds invest primarily in residential and industrial properties in the Sunbelt, where valuations are lower and yields are higher. The real estate platform has over 400,000 investors and manages over $3.3 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 $954,000 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 ~$380,000.
What Does It Cost To Sell A House is a Financial Samurai original post.