Estimating how much cash you can net from selling your house
Understanding the realities and costs of relocating
As Forrest Gump would’ve said if he’d been a real estate agent, “House selling is like a box of chocolates … you never know what you’re gonna get.” You never know how much your house is really worth until you reach an agreement with a prospective buyer. And even after you decide to accept an offer, you never know what surprises and costs may crop up before your deal actually closes.
However, although it’s an inexact science, there’s no reason you can’t reasonably estimate your expected proceeds of sale. This chapter can show you how.
If money isn’t a constraint for you and you can comfortably make the move that you’re proposing, feel free to skip this chapter. Spend the free time reflecting on how fortunate you are!
Estimating Proceeds of Sale
You may need to get a certain amount of money from the sale of your house, or at least know before you can close on a deal how much you’ll receive. Take the time to understand the particular probable proceeds of sale under the following scenarios:
You’re strapped for cash because you want to buy a more expensive home. You need to know before you sell if you’ll have enough money to complete your next purchase. If you don’t know this amount, the worst-case scenario is that the sale of your current house doesn’t leave you enough money to buy your next one. Although you probably won’t end up homeless, you may end up renting for a while and having to make an extra move, or having to scrounge around at the last minute for more money.
You’re trading down because you need more money for retirement. Perhaps you want to receive a certain amount of money from your house sale to afford a particular retirement standard of living. If you’re not realistic about how much cash you’ll net from the sale, you may end up wasting a great deal of time and money on a house sale that yields less cash than you need or expect.
You’re relocating, in part, because of finances. If you have a choice about taking a job in some other part of the country, you may be tempted to relocate if you think you’ll be more comfortable financially. However, if you’re simply assuming or guessing that you’ll be better off in the new area, you may be wrong. You need to gather and review some facts before you move.
Note: This discussion of estimating house sale proceeds assumes that you don’t have an employer who’s willing to pay for some of your house selling and moving costs. If you’re relocating because of a new job, by all means negotiate to have your new employer pay for some or even all of the expenses related to your house sale. You’ll have that much more money to plow into your next home.
Estimated sale price
Clearly, the price at which you can sell your house is the biggest factor in determining how much money you’ll be able to put in your pocket from selling your house. The estimated sale price, unfortunately, is also the hardest number to pin down.
You shouldn’t allow your needs to dictate the price at which you list your house for sale (see Book 6, Chapter 5). Prospective buyers of your house don’t care about your needs, wants, or desires — such as, “I need $250,000 from the sale of my house to retire.” Your house’s asking price should be based on the house’s worth — which sometimes may not be to your liking. Your house’s worth is best determined by examining the recent sale prices of comparable houses. A good real estate agent can put together a comparable market analysis for you. If you’re selling your house yourself, Book 6, Chapter 5 explains how to prepare a comparable market analysis.
Estimated house sale price
$ ____________________________
– Closing costs
– $ ____________________________
– Mortgage payoff
– $ ____________________________
– Moving costs
– $ ____________________________
= Estimated proceeds from house sale
= $ ____________________________
Closing costs
Selling a house costs a good deal of money. Generally, expect to pay about 7 to 10 percent of the house’s sale price in various closing costs for which you, as the seller, may be responsible. A closing cost is an expense that you incur in the sale of your house and that reduces the total money you receive from the sale. The typical closing costs include the following:
Real estate agent commissions: If you’re selling your house through real estate agents, they typically take a commission of 5 to 6 percent of the selling price. If you work with agents, the commission percentage you pay is negotiable and may be somewhat lower on higher-priced properties.
Repairs: Unless you’ve taken really good care of your house over the years or you’re selling in a strong local real estate market, you can also expect to shell out some money for corrective work. For example, in some communities, you may need a pest control and dry-rot clearance to sell your property. Inspections of your property may uncover building code violations, such as faulty electrical wiring or plumbing problems, that you must repair. Consider having your house inspected before listing it for sale.
Transfer tax: Taxes, taxes, taxes — the three sure things in life. Some cities and towns whack you with a transfer tax when you sell your house. Such taxes are typically based on the sale price of the property. Check with your friendly local real estate agent or your local tax collector’s office to get an idea about your community’s transfer tax rates.
Prorated property taxes: Depending on the date you close on the sale of your house, you may owe money to bring your property tax payments up-to-date. In most towns and cities, unless you’re delinquent with your payments, you probably won’t owe more than six months of property taxes. In fact, because many communities require that you pay your property taxes in advance of the period that the payments cover, you may find that you’re owed a refund of taxes from the buyer of your property.
Because you can’t predict the date your house will sell, estimating the amount you may owe in property taxes at closing is a tad difficult. You do know, however, whether you have to pay your taxes well in advance. If your local community doesn't have such a pay-in-advance payment system or you wait until the last minute to pay your taxes or make delinquent payments, you may want to budget three months or so of property taxes as a closing cost.
Possible credits: If you’ve paid ahead on your property taxes, you may get a “refund” from the buyer of your house. You may also get a refund from your homeowners insurance company for the unused portion of your homeowners policy. And, finally, if you put less than 20 percent down when you originally purchased the house, your lender may have required that you pay a portion of your property taxes and homeowners insurance in advance each month and then held these payments in an impound account. (An impound account refers to money held in a trust account established by the lender, which is used to pay property taxes and insurance premiums on your behalf when they’re due). The lender refunds the unused funds from your impound account money when the sale is complete.
Do the necessary research for the preceding expenses if you want to more closely estimate expenditures on closing costs. Otherwise, for a safe ballpark estimate, assume that 10 percent of the expected sale price of your house will go toward paying closing costs.
Estimated house sale price
$ ____________________________
– Closing costs
– $ ____________________________
– Mortgage payoff
– $ ____________________________
– Moving costs
– $ ____________________________
= Estimated proceeds from house sale
= $ ____________________________
Mortgage payoff
For most people, the need to pay off an outstanding mortgage (or two) greatly depletes the expected proceeds from a house sale. Figuring out your mortgage payoff balance usually is a snap.
Simply review your mortgage lender’s most recent monthly statement to find out the amount you still owe as of the date of the statement. You may need to make a couple of adjustments to this amount to make it more accurate.
First, on most mortgages, your outstanding balance should decline each month as you make additional payments. Because you can’t sell your house immediately, your balance should decline between now and the date that you close on the sale. If your loan has negative amortization (the monthly payment falls short of paying the monthly interest that’s accruing), your loan balance may be growing rather than shrinking.
Subtract from your outstanding balance the sum of the principal payments you’ll be making between now and the proposed sale date. For example, if your most recent monthly mortgage statement shows that $200 of your payment went toward principal reduction, and you expect to hold onto the house for at least six more months, you can subtract $1,200 from your current outstanding balance.
Add to your balance any penalties that your mortgage lender may charge you for prepaying. Hopefully you avoided that by getting a mortgage without a prepayment penalty.
If you have any doubts at all about whether your mortgage has a prepayment penalty, find out. You can either check your loan agreement (issued to you at the time you closed on your mortgage) or ask your mortgage lender (check your statement for a phone number). Write down the information you’re given, the name of the person you spoke with, and the date. You may also ask that person to send you something in writing to confirm the information you were provided by phone.
You can try negotiating with the lender to reduce or remove the prepayment penalty. A good bank may offer to cut you a deal if it realizes that you may do more of your future banking there if it keeps you happy. Your lender may also waive or greatly reduce a mortgage prepayment penalty if the buyers of your house use your lender to finance their purchase. If it’s a large prepayment penalty, you can ask that the buyers obtain their mortgage from your lender, presuming the lender has competitive loan terms.
Most mortgage lenders assess a nominal fee for sending you a payoff statement that details, to the penny, the cost of paying off your loan balance on a specific day, as well as for other paperwork fees. These fees usually don’t amount to more than $100 or so, but if you want to know exactly how much to expect, simply call your lender. If the fee seems excessive or you’re willing to haggle, ask the lender to reduce these fees; some will comply with your request.
Estimated house sale price
$ ____________________________
– Closing costs
– $ ____________________________
– Mortgage payoff
– $ ____________________________
– Moving costs
– $ ____________________________
= Estimated proceeds from house sale
= $ ____________________________
Moving expenses
Over the years, you’ve probably accumulated more stuff than you realize. Whether you’ve piled knickknacks in your closets, filled your attic with boxes of gadgets, lined your garage with old bikes, or decorated every room with the finest furnishings, you’re going to have to pack up all your stuff and have someone haul it away.
Most people don’t have the equipment, experience, and muscle power to move all their stuff themselves. If you’re like most folks on the move, you call a moving service. As with any other service business, prices and quality of service vary.
The farther you move and the more weight you’re moving, the more the costs escalate. Move the contents of a typical one-bedroom apartment about one-third of the way across the United States, and you can easily spend several thousands of dollars. Move the same items all the way across the country, and the cost may double. Moving the contents of a spacious four-bedroom house halfway across the country can run you about $15,000 to $20,000.
Be sure to research moving costs, especially if you’re selling a big house filled with furniture and other personal possessions or if you’re moving a great distance. Get bids from several reputable movers and check references. Price and quality of service vary greatly.
Estimated house sale price
$ ___________________________
– Closing costs
– $ ___________________________
– Mortgage payoff
– $ ___________________________
– Moving costs
– $ ___________________________
= Estimated proceeds from house sale
= $ ___________________________
Putting it all together
After you understand the important elements of determining your proceeds from the expected sale of your house, you can work through the numbers to figure out how much moolah you can hope to have coming your way.
Estimated house sale price
$ ____________________________
– Closing costs
– $ ____________________________
– Mortgage payoff
– $ ____________________________
– Moving costs
– $ ____________________________
= Estimated proceeds from house sale
= $ ____________________________
Now that you know what proceeds you can expect from your house sale, what can and should you do with this information? As mentioned earlier in the chapter, this estimate is necessary if you’re at all cash-constrained in buying your next home or if you’re selling to finance some important financial goal, such as retirement.
Assessing the Financial Feasibility of a Move
In the event that you’re staying in the same neighborhood or community, estimating the cost of living in another home should be fairly easy.
If, on the other hand, you’re relocating to a new area, don’t make the common mistake of neglecting to consider possible changes in your overall expenses. Many people simply assume that their finances “will work out,” whereas others fall prey to wishful thinking: “Because housing costs are lower in the area we’re moving to, I’m sure we’ll be financially better off.”
Wouldn’t it be great if life were that simple. Unfortunately, it isn’t.
Researching living costs and employment opportunities
Before you commit to listing your house for sale and sell it, understand what your cost of living will be in the new area. Your property taxes, utilities, food, commuting costs, and many other important items in your personal budget will change when you move into a new home in a different area.
If you don’t consider the cost of living in the new location, you may end up facing unpleasant surprises. That’s what happened to Joanne and Andy:
Weary of working long hours to afford the seemingly high cost of living in Northern California, the couple viewed Andy’s Midwest job offer as their ticket to financial freedom. Although the pay was about what Andy was receiving in his present job, Joanne and Andy figured they’d be on Easy Street, given how much cheaper home prices were in the town where they expected to live.
So Andy happily accepted his new job offer, and he and Joanne quit their current jobs. They sold their house and decided to rent for a while after they moved so they could better assess exactly where they wanted to live.
After moving, Joanne and Andy spent the next several months in their new Midwest community looking for a home. Although they’d thought that housing would be far less costly in their new area, they discovered that replicating what they had in Northern California — a community with parks, cultural amenities, and a good school system — cost more than they expected.
And then they discovered that some of the other things that they spent money on each month were even more costly in their new area. For example, Joanne and Andy found that their first winter’s heating bill eclipsed the total annual utility bill that they’d paid out west. Food was more expensive, as were property taxes. And Joanne had great difficulty replicating her previous job because her profession was less in demand in the new area. When all was said and done, Joanne and Andy’s new home in the Midwest put them in the same financial boat they were in in California.
Now, if Joanne and Andy had moved for nonfinancial reasons, then the fact that they didn’t end up being better off financially may not have mattered. But, except for the seemingly high cost of living, Joanne and Andy had liked their location in Northern California. As they found, however, high home prices are only a piece of the local personal financial puzzle. You must also consider the other items in your budget and figure out how your income and expenses may change if you move.
Five years after their move, Joanne and Andy moved back to the San Francisco Bay Area. They made some adjustments to their spending so they could accomplish their goals and live in the community of their choice.
Numerous resources are available for estimating the cost of living in a particular area:
The American Chamber of Commerce Research Association (ACCRA) publishes a quarterly cost-of-living index (online at ACCRA’s Cost of Living Index website, www.coli.org). It charges $7.95 for a two-city comparison (subsequent comparisons keeping one of the cities the same are reduced to $4.95 each).
The U.S. Department of Labor’s Bureau of Labor Statistics calculates the cost of living for major metropolitan areas, and you can access this free information online at www.bls.gov/cpi/home.htm.
Cost-of-living indexes and surveys should be used only as a starting point and as general guidelines. They shouldn’t replace a thorough budgetary breakdown that addresses the specifics of your situation. Sure, the indexes may tell you that Louisville is generally a less expensive place to live than Boston, but they ignore the fact that, for example, you never needed a car in Boston because you could walk to work and take public transit almost everywhere else. Your job in Louisville may require you to buy a car, auto insurance, and fuel for commuting, not to mention more airplane trips to visit your family in the Northeast.
Avoiding relocation traps
As Joanne and Andy found, you shouldn’t act first (move and buy a new home) and ask questions later (see the section “Researching living costs and employment opportunities,” earlier in this chapter). Don’t base such a critical decision on assumptions and wishful thinking.
Here are the common pitfalls that ensnare those making relocation decisions, so you can avoid falling into them yourself:
Equating lower housing costs with a lower cost of living: This was one of the big mistakes Joanne and Andy made. The cost of housing probably accounts for no more than a third of your spending. So if you don’t consider the other goods and services you spend money on, you neglect the lion’s share of your budget. Research all the major costs of living in an area before you commit to relocating to the area.
Not doing an apples-to-apples comparison of housing costs: Again, Joanne and Andy made this mistake. To a certain extent, you get what you pay for. Housing costs are lower in communities with fewer amenities, inferior schools, poor commuting access, and so on. So if you’re looking at relocating to an area with much lower housing costs, you need to be skeptical instead of thinking that you’ve found the deal of the century. Ask yourself, “What does that area lack that my current area offers?”
Ignoring the overall opportunities in the local job market: Your next job is just that — your next job. You’re probably not going to stay in this job for decades on end. So when you’re contemplating moving to a new area, think bigger than just this “next” job. Unless you enjoy the cost and hassle of relocating frequently, consider your chances for finding your next couple of jobs in a given area. Although it’s impossible for some people to know what they’re going to want to do several years down the road, considering the job market for more than your current job can save you from relocating more than you need to or leaving behind an area you otherwise like.
If you’re married, you also need to consider your spouse’s job prospects in your new community. In Joanne and Andy’s case, they learned the hard way about the pitfalls of focusing on only one person’s job.
Taking the place where you live for granted: All too often you appreciate what you liked about a place more after you move away. Maybe, for example, you’re tired of the urban congestion and dream of the relaxed pace of a more rural community. After you make the move, however, you really start missing going to the theater and dining at cosmopolitan restaurants. Pretty soon you find yourself spending a great deal of money to escape the “boondocks,” traveling back into the city to see musicals and eat Indian food.
Estimating how much cash you can net from selling your house
If money isn’t a constraint for you and you can comfortably make the move that you’re proposing, feel free to skip this chapter. Spend the free time reflecting on how fortunate you are!
If, on the other hand, you’re relocating to a new area, don’t make the common mistake of neglecting to consider possible changes in your overall expenses. Many people simply assume that their finances “will work out,” whereas others fall prey to wishful thinking: “Because housing costs are lower in the area we’re moving to, I’m sure we’ll be financially better off.”