The Finances of Selling a Home Can Be Complicated, Too
Home, as the cliche goes, is where the heart is. But sometimes, the heart must move on. Our lives change, and our family needs a bigger place. Or a smaller one. Or one that is in a different location. But the average U.S. homeowner only stays in a given house for about a decade, so whatever your reason might be, the odds are strong that you'll eventually be putting yours on the market.
Needless to say, selling your most valuable single asset is complex, and you'll want to do everything you can to maximize your profit. (We certainly hope you didn't lose money.) So in our ongoing Motley Fool Answers series covering major life events, cohosts Alison Southwick and Robert Brokamp have asked financial planner Ross Anderson of Motley Fool Wealth Management -- a sister company of The Motley Fool -- to share some of his best home-selling advice. In this segment of the episode, they talk about the money side. And while you may naturally be more worried about figuring out the payments and mortgage details on your next abode, there are some easy-to-overlook details on the selling side that you'd do well to pay attention to, and some options for smoothing out the process that you might not have considered. They also discuss the value of tapping the right professionals to help you.
To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. A full transcript follows the video.
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This video was recorded on May 14, 2019.
Alison Southwick: Let's talk about the money part. You know...
Ross Anderson: Yes...
Southwick: ...that part. It gets tough, especially if you are selling your house and buying another house...
Anderson: For sure.
Southwick: ...because basically you're looking at carrying two mortgages, potentially, or having to time it right. Let's talk money!
Anderson: The logistics of this and the finances of this are really challenging. You've got to decide, first of all, whether you can afford to carry two mortgages if you're going to have to before you've got a closed deal. And really we're focusing on the buying side, but when we were buying our home, the person we were buying from had our closing date sale and they were closing on their new property on the same day.
What we ended up finding out is that when we went through the home inspection, we found some extra stuff that we weren't really prepared for. We kind of had them on the ropes a little bit, because they clearly needed that sale to go through and they were very worried about losing that deal if we had backed out at that time. We got to renegotiate price and seller credit again at that home inspection point.
I think there's a couple of lessons there. No. 1, try not to paint yourself into a corner if you can, and if you do, make sure your realtor doesn't tell the other person that's buying your home. That puts them at a huge information disadvantage. Again, I don't think we took advantage of them. I think there were real things in the home, but that is really critical to me that you control some of that information flow.
So, if you're going to put yourself in a position where you have to have the new money out to make your down payment, I think you've got to be thinking about maybe having a gap, there, where you're going to be in some sort of an extended hotel, or something like that, for a couple of weeks, maybe, so that you're not right against the ropes for making the closings work.
Robert Brokamp: There are a couple of ways of doing it, and I've done one of them. That is the bridge loan. It's a very short-term loan that you use as the down payment on the purchase of the house until you sell your house and get that money out and pay off the loan. It was very easy to do, and I almost wondered why the bank was even bothering, because we only had the loan for a month or two. Regardless, that is an option.
Another thing that people have done is borrowed from their 401(k), which can have advantages.
Southwick: Some people. Some people you know have done that.
Brokamp: Some very responsible, smart people.
Southwick: Thank you!
Anderson: One of the three people in the room.
Brokamp: Yes. And the good thing about that is that it's very easy. It's actually not even a loan...
Southwick: It's so easy!
Brokamp: So you don't have to get a credit check or anything like that. And the interest that you pay is to yourself. The downside is that money's not in the market, so if the market shoots up while that's happening, you miss out on that. And if you don't pay it back, it's considered a distribution, and you pay taxes and penalties. So it's definitely an option for very responsible people.
Anderson: The other way to do it -- and this was the plan that we ended up doing and then I screwed that up a little bit...
Southwick: Hey, everybody makes mistakes!
Anderson: Yes, it's fine. The other thing you can do -- I ended up doing my purchase loan with Rocket Mortgage. And one of the things that you can do with a loan that's in good standing is called "recast" it. For example, if you take out a bigger loan on the purchase, you can then put a huge payment against it. If you typically put a big payment against a mortgage, it doesn't change your payment, but if you recast the loan, they basically redo the amortization schedule with the same ending date, so that actually lowers your payment.
I think this is a fascinating strategy. We may even disagree on this. Some people would say just pay it against the principal, keep making the same payment, and pay it off sooner, but if you're worried about that cash flow month to month and you don't want to have the bigger bill, recasting the loan is like doing a smaller loan for the same time period that you originally started with. I think it's about $100 to get them to do that, where other lenders may charge a much bigger fee.
That was one of the main reasons I ended up going with them on the purchase side, was because my plan was to buy the new home with a bigger mortgage, take the money out of the sale, and then recast the loan. Where that failed is I ended up putting all that money back into renovations, so I still have the bigger loan that I took out, and I bet that's probably what happened to a lot of people in that same strategy, is they can't sit on the cash. That's my failure, but at the same time, the house looks nice.
Brokamp: Anecdotally, for the people that I know -- either personally or members I've spoken with -- who have gone the two mortgages route, sell the one house and all that, I would say in about half of those situations, it took longer to sell the house than they expected. So you've just got to make sure you have that room in your budget just in case something happens and you end up having those two mortgages longer than you expected.
Southwick: One thing that happened to us is my credit score took a really big hit. We were puzzled by it, and then Ron said maybe it was because for like 30 days we were $1 million in debt, because nothing had really changed in our lives except that we were massively in debt for a very short amount of time. So I think it's going to take a little while for my credit score to recover, which is kind of sad.
Anderson: You also don't have payment history on the new loan, yet, so that's going to be part of it, is just that you haven't proven yourself to be good at paying.
Southwick: I am. I am good!
Brokamp: You'll get the money!
Anderson: I trust you!
Southwick: Thank you!
Anderson: I'll lend you money. Don't worry!
Southwick: Do you have some money to loan me?
Anderson: No, I don't.
Southwick: We're good now. Well, you're going to need help selling your house. I know people who just went through a lawyer, but you are going to need some help, whether it's a realtor or lawyer. Let's talk about that kind of help.
Anderson: This is where I think the numbers really get serious. The biggest cost in selling your home is going to be the commission that you pay to actually have the house sold. Normally, I think a traditional real estate commission is in the 6% range, so you're going to assume whatever you list the home for, you're going to end up with 94% of that hitting your bottom line.
There's been pressure on those prices from a lot of places these days. Redfin advertises a 1% listing fee. There's a minimum, there, depending on where you are and what the home is worth. So you're starting to see that come down. It is a negotiation point, so if you're going to work with a realtor, we had the same listing agent on our selling side that we did on our buying side, and they were willing to work with us a little bit there.
Southwick: How much did they work with you?
Anderson: I think we took 1% off of it. I think we ended up listing for 5%. I probably could have been more aggressive than that, but I want it to be win-win. They did a lot of work for us in helping us get the house ready, quite frankly, so I wanted to make sure that they were making money and we were. That's not the most capitalist thing I've ever said, but I wanted it to be a fair deal all around and not come out one-sided.
Brokamp: I would say the same thing. I've negotiated every time we've used a realtor, and I would say we've done it between 4%-5%, especially if you are using them on the buy side, as well.
Anderson: But the new services depend on what you need and how much coaching you need. Now, this is our first time selling a home. If I did it again, maybe I would do something with less of a personal touch. This time, since it was my first time through, I wanted the handholding. I can recognize that about myself, and being in the advice business, I've learned to trust professionals when I feel like I'm out of my depth, and this was one of those spaces. I was happy to do it the way we did it.
Brokamp: And really, if you get a good realtor, it's definitely worth the money. And by good I mean helping with the staging, for sure. Helping with the decisions about what needs to be upgraded or not. If your fridge is 10-15 years old, should you upgrade on that? They'll help with that. They'll help with the pictures. And everyone is going to see your house first online in pictures, and you want to make sure that you have good pictures, and they know how to do that.
And then also they serve as the negotiator. So you're not negotiating with the people who want to buy your house. They're doing all of that. Sometimes if you want to play hardball, it's a lot easier if someone else is doing it for you than if you have to do it yourself.
Anderson: Yes, because you can kind of do a little bit of a good cop-bad cop routine. And quite frankly, you may get an offer that's insulting. Somebody may send you a lowball offer. Again, it depends on the heat of your market at the time that you do this. And your response to that person might be, "Heck, no!", and they may be a little bit more measured in terms of how they respond, or this is what they're looking for. But hopefully they're also going to help you find a listing price that makes sense. They're going to look at the comps in your market. They're going to look at what's around you. What else is for sale and hopefully help you come in at an attractive place where the deal all goes just a little bit quicker.
Southwick: One thing I would add from my own personal experience is realtors are going to be sending you lots of contracts. When they start bringing contracts in, they're like, "Hey, take a look at this one! Take a look at this one!" Definitely check them to make sure they are right, because we had offers that they put the wrong address in and they were trying to put in an offer on our neighbor's house. And we got offers where they didn't have my name on it.
Anderson: What a good neighbor, that you could go to your neighbors and say, "Hey, good news!"
Southwick: I have sold your house!
Anderson: You're moving!
Southwick: Got you a good deal! Obviously, you can go through it with a fine-tooth comb, but at least look at the parts where there is the highest opportunity for human error, and you will see them. Because every contract we received there was something where it was, "Well, actually, Alison should be on this. Actually, that's not our address."
Anderson: I also love that the documents, this time through -- and again, it had been six-and-a-half years from when we bought our place originally -- are electronic now. We used DocuSign for everything, which was just incredible vs. having to sign all this junk over and over again. It was much easier.
Southwick: And did you guys get any personal letters from people saying, "Hey, this is who we are. We really want to live in your house. Choose us."
Anderson: We didn't. We did get the aggressive lowball cash offer. "Well, you're not going to get anything better than this."
Southwick: Oh, really!?
Anderson: We told them to pack sand.
Southwick: We received some really sweet letters from people saying, "Hey, we just got married. We have a dog. We want to have babies." And I was like, "That was just like you and me when we bought the house." Give them the house. Give it to them!
Anderson: It's funny when you get the cash offer. In theory, the cash offer could close quicker because the buyer isn't waiting on financing, and so if they're making that cash offer, they seem to assume that you're going to show that some preference. I don't really care if it's cash or not. I'm going to get the same check regardless.
Southwick: I'm going to get the same amount of money anyway.
Anderson: I'm worried about the number. Let's go ahead and come to the table. And again, if you're a little bit more desperate to sell, or if you're on a tighter timeline, maybe that quick close becomes more and more important to you, but I wasn't going to give up $5,000-10,000 to close three weeks earlier. I don't care. I'll just sit around and wait. And again, that strength of having that patience or being in a position that you're comfortable I think is really important.
Southwick: With us, too. They wrote very sweet letters and I got teared up, but the fact is we want the one whose clause escalated the highest. That's what really got me sentimental! [laughs]
Anderson: There it is!
Southwick: There it is! Actually, to be fair, both of them were exactly like we were.
Brokamp: Another thing that I think is helpful for a realtor to have around is managing the inspection. And every house is going to have an inspection, and an inspection is always going to turn up something.
Southwick: Oh, so much something! It's pages and pages of stuff where you're like, "What? No. This house is fine."
Brokamp: Right.
Anderson: And I know some sellers do this. They actually will do a pre-inspection. They'll hire their own inspector to come through and basically do it like a buyer's inspection just to understand what's going to be uncovered. I wasn't willing to go to that length to figure out what was wrong with the house -- I had ideas of what was wrong already -- but that's certainly an idea if you think there might be a long list. If you're a little bit worried about what they're going find, just go and pay somebody. It's a few hundred bucks to do it, and you can be out in front of it.
Brokamp: And there are some things that turn up that you have to fix. Depending on where you live and state laws, you cannot sell a house if this one thing is wrong. Everything else is negotiable, and that's where the realtor comes in, and that's helpful, too. But just know that you are going to spend hundreds, if not thousands of dollars after your house gets inspected.
Anderson: The listing number you've got to keep out of your head. I mean, I think you should go into it with a bottom-line number. We want to get at least this. That's what we ended up doing -- managing to that bottom-line number, but when you start at the top, if you do the math, there, you're going to be disappointed at the end. Between the repairs -- between all the additional costs of moving and all this stuff -- you're going to end up with less in your pocket than you think.
Brokamp: One reason why you would consider getting an inspection beforehand is once the inspection gets done and something gets found, the buyers will want a certified plumber, or electrician, or handyman to fix that. They don't want you to say, "Oh, yeah, I'll fix that. I'll run to Home Depot." If you find out things that are wrong beforehand, you have the opportunity to fix it yourself before hiring outside help.
Anderson: That's a great point, but yes, you have to prove receipts for anything they ask you to fix.
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