As an investor, I immediately explain to the seller that I won’t be able to pay as much for their property as an end user (someone who will purchase and live in it) because I need to be able to, over time, make a profit. They understand that. If they’re still interested in what I have to say, I continue to explain what I can offer and why.
To determine what we can pay to purchase, we start with what it will cost us to sell at a later date, then we work our way back to today’s offer price. Selling numbers are EXTREMELY important to know before you buy.
We determine what we will ask for the property when we sell by using online sites which gather information from county records. These sites show recent sales prices in the area. We prefer sales from the last 6 months and within a half mile from the subject property.
It’s very rare, in today’s market, for a buyer to offer full asking price. Nationally, the discount from listing price (market value) to selling price is five to seven percent. We subtract this number from our predicted asking price.
Real Estate Commissions:
When a property is listed with a real estate agent, typical commission, paid by the seller at closing, is six percent. This rate can vary by area and property features including waterfront or mountain properties, so always check rates with your agent.
Closing costs are another expense negotiated between buyer and seller. In the past, most closing costs were paid by the buyer but, in this buyer’s market, more are paid by the seller to attract scarce buyers. Closing costs are typically around three percent and include: attorney fees, title search, title insurance, recording fees, inspection fees, and other miscellaneous expenses.
Holding Costs and Selling Expenses:
The average time on market is currently eight months.
Expenses during the eight months include:
- Loan Payments – principal and interest payments to the bank
- Utilities – heat, air conditioning and lights must all be functioning so potential buyers are comfortable when they view the property.
- Vacancy Insurance – when a property has been vacant for over 30 days, additional vacancy insurance is required. Vacant properties are not protected under a normal homeowner or landlord policies. (vacancy insurance is much more expensive than normal homeowners insurance)
- Yard maintenance and cleaning – The yard must be maintained no matter what the season and the house clean to be ready for potential buyers.
- Home Owners Association Fees (HOA)
- Taxes – if the taxes are not already included in the loan payments (escrowed).
- Appraisal – Necessary to verify asking price to buyers.
- Survey – Needed to verify property lines if there isn’t a current survey for the property.
- Transfer tax/ Excise tax – This tax is paid by the seller when the property is deeded to the new buyer. Costs vary by state, sometimes county.
- Repairs – These are repairs an agent tells us are necessary to sell in today’s market. They include obvious repairs as well as needed upgrading to modernize the house. Kitchen and bathrooms are the most important to keep updated. There will, of course, be numerous repairs the buyer wants after their home inspection.
- Home Shield Warranty – Buyer’s expect a home warranty, a service contract that covers the repair or replacement of many of the most frequently occurring breakdowns of home system components (i.e. HVAC) and appliances.
- Appliance Allowances – If the appliances are old, buyers want them replaced. Often, sellers give an allowance (i.e. $1000) allowing buyers to pick their own.
- Termites – Pest inspections are required in many states, especially in the south. Treatment and repairs will raise our expenses further.
Total Cost To Sell – Estimating all of the above for about an eight month time period.
Mortgage Payoffs – Deduct the loan payoff amount.
Deducting all these costs will show (1) what you will truly receive at closing if you have a house for sale and (2) how much you will make on a house at the end of your ownership if you’re buying for re-sale.