The Real Cost of Selling a Home
It's almost Thanksgiving, which means people everywhere will be sharing what they're thankful for while eating themselves silly. In the spirit of the holiday, I fully intend to eat my weight in turkey, green bean casserole and sweet potatoes. But I also thought I'd share one of the reasons I'm really thankful that I found BiggerPockets this year (in February, to be exact). Thanks to the podcast and blog posts, I understand that ARV minus purchase price and renovation costs does NOT equal profit. Knowing how to run the numbers correctly based on that understanding has been so valuable in my first nine months of really digging into real estate investing.
I'm primarily a buy-and-hold investor, so I don't plan to sell often. But I did recently sell my first rental (which I purchased BEFORE finding BiggerPockets) in order to put my money to work in a better investment. and thought the story and numbers might provide some good insight for fellow newbies into the real cost of selling a home. So let's start with the house itself:
MY FIRST RENTAL PROPERTY
Like many investors, I dipped my toe into investing by holding on to my first primary residence and renting it out when I bought a new house. Here's some background info on the property:
- 3 bed, 2.5 bath home with 2,100 sqft, plus a finished basement & two car garage.
- Purchase price: $217,000
- Down payment: $12,000
- Financing: $205,000 financed through a VA loan
- PITI: $1,307
- Rent: $1,795
- Monthly cash flow: ~$50 after property management, repairs, capex, etc.
As our tenants of two years were getting ready to move out, my husband and I chatted with our agent and estimated that we had about $80K in equity in the place. We decided to sell the property and put the money into a property that would provide better monthly cash flow. But it had been rented for two years, so it was going to need some work before we listed it. And, of course, there are a lot of other costs that add up, including holding costs, agent commissions, closing costs, etc. So what did it cost us to sell this place?
THE COST OF SELLING A HOME
To get our property ready to sell, we replaced all the carpeting, repainted the entire interior as well as the front porch, spruced up the landscaping, and did some miscellaneous repairs such as putting in fresh white electrical outlet covers and switching any brass hardware to brushed nickel. All this work, plus a deep cleaning and an occupancy inspection, cost us just under $19K.
The work paid off. After listing the property at $259,900, which was a top list price for the area, we received two full-price offers within 24 hours (though both requested a seller credit to help with closing costs). However, there were more costs to come. The inspection revealed repairs needed to the electrical box, water heater, and the front porch. All this work led to an additional $2K in costs. Of course, we also had holding costs during the 2.5 months it took to update, list the property, and get through closing. And then you have to factor in commissions and closing costs. So how did all this break down?
+ Sale Price: $259,900
- Mortgage Balance: $177,797
- Commission (5.15%): $13,385
- Closing Costs: $7,276 (includes title company fees, home warranty, closing cost credit to buyer, etc.)
= Proceeds from Closing: $61,442
We received a little over $61K from closing, but that isn't pure profit! Remember that we had money we had to put in prior to closing for our original down payment, renovations, and holding costs while updating and selling. So how much cash did we have into the property, and what was our actual profit?
- Original Down Payment: $12,000
- Renovations for Sale: $18,630
- Inspection Resolution: $2,075
- Holding Costs: $3,655 (2.5 months of PITI and utility payments)
= Total Cash In: $36,360
This means our Final Profit was $25,082 ($61,442 minus the $36,360 we put in). A $25K profit on $36K invested isn't bad... that's a 69% cash-on-cash return! But $25K is a lot less than the estimated $80K in equity I mentioned earlier. And we would have had even more costs, either from taxes or from the cost to do a 1031 exchange, if we hadn't lived in the property for 2 of the last 5 years, so that's even more to consider if you're considering flipping properties.
The moral of the story? Run your numbers and don't forget the hidden costs associated with buying and selling! In our case, the total proceeds from this sale were more than enough to purchase a property that will cash flow 8 to 10 times as well as our first rental property did! We close on that tomorrow, so more to come on that soon.
In the meantime, have a Happy Thanksgiving!