Should you sell your home?

houseFive to one, more people are asking me if they should sell their home vs. if they should buy one. That said, I have more buyer clients than seller clients. Those buyers are simply not asking IF they SHOULD buy. The most difficult scenarios are those who need to do both at the same time, who cannot buy unless they sell, and who don’t want to put their home on the market until they know where they will go if and when it sells.

I ask three questions when someone calls or emails me asking if they should sell (now).

1) Why are you thinking about selling it?

2) When did you buy it?

3) Have you “cash out” refinanced it since you bought it, and if so, when?

When you read articles like this one, and see that Seattle Area home prices are at April 2005 levels (I agree) and peaked in May of 2007 generally (I say July 2007, but close enough), it should tell you that if you purchased during that timeframe, and even between April 2005 and present, it is highly unlikley that you will be able to sell it without bringing money to closing.

Funny…no one talks much about “bringing money to closing” these days, though it happens probably at least as often as a “short sale”. Everyone assumes “upside down” homes are “short sales”, when in fact many sellers simply walk into closing with a check the same way that buyers do. Even people who are qualified to do a “short sale”, often have to bring money to closing. Just because the home sold for less than was owed, does not automatically mean that the difference was waived permanently or temporarily. Sometimes the owner pays it in full, and sometimes the owner pays it in part.

Let’s take a somewhat ludicrous example to make that point. Say the net proceeds of the sale is $500 short from covering all expenses. Likely that $500 is going to be paid by someone, and not worth going through the “short sale” process. Another example: If someone is making their payments, has $100,000 in the bank and makes $120,000 a year and is “short” $20,000, not as likely that the lienholders are going to approve a short sale. That “seller” should be bringing $20,000 to closing. This is VERY important for agents to understand as many are listing homes as short sales simply because the amount owed is in excess of current fair market value. That is NOT the only criteria to “selling short” without bringing the needed difference to closing. If the owner can choose to stay in the home if they are not approved for a short sale, if they have the means to stay and plan to stay if they are not approved, that home should really not be on the market.

Given the knowledge we have that current prices are at April 2005 levels, give or take, let’s apply that to a specific example:

Should you sell your home if you bought it in January of 2004, and are relocating with your family to another State? Let’s say it is a 2,400 sf home in Redmond in X neighborhood, for example. I see several sales in the tax records of 2,400 sf homes in that neighborhood in the 1st quarter of 2005, all selling at approximately $530,000 which is about $100,000 more than they sold for in early 2004. Cost of sale is about 8%, so let’s call expected net proceeds after sale and possible repairs at inspection at about $90,000. Always best to round down to worst case scenario. Let’s call it $75,000, because you don’t want to put your house on market with the highest of expectations. Great if you get them, but not great if you have a vacant house on market for 6 months because you “want” $90,000 net proceeds.

If you would sell it if you could walk away with $75,000 plus your down payment back, then yes you should probably sell it. One reason you might want to rent it is if you want to “leave the door open” to possibly coming back if you don’t like your new job in that new State.

If you refinanced that same house in 2007 for $650,000, then you likely want to rent it for some period if you can, so you can take the loss as a write off by turning it into a rental property vs. a primary residence before you sell it. Check with your tax accountant before putting it on market for sale.

I can’t go through a lot of examples here in the blog post, but know that:

Why are you selling it?
When did you buy it”
Did you do a cash out refinance after you bought it?

are the three most important questions to be answered, that the person who is advising you needs to know before answering the question.

If an agent says “YES! You should sell it!” without asking these questions before answering, that probably means they just want a listing so they can get buyer calls from the sign and advertising, and use your home as “inventory” to get buyer clients. :)

About ARDELL

ARDELL is the Managing Broker of Sound Realty in Seattle/Kirkland. ARDELL was named one of the Most Influential Real Estate Bloggers in the U.S. by Inman News and has over 22 years experience in Real Estate up and down both Coasts, representing both buyers and sellers of homes in Seattle and on The Eastside. Follow Ardell on Google+

Comments

  1. Fantastic post, Ardell.

    I think more consumers (and agents, for that matter) need to know that not all homes that are upside down are short sales.

    Great explanation and great point about what an agent should be asking their clients if they’re truly looking out for them.

    Josh Sanders

    Founder, Shiloh Street

  2. Thanks Josh,

    There have been some changes in the rules regarding writing off a loss if you lived in the property for part of the ownership and rented the property for part of the ownership in the last 5 years. So anyone considering selling at a loss, or renting it out if they have a gain, should consult a tax professional before making any decisions.

    VERY often when people give me their rationale for that decision, they are quoting an old tax law that is no longer in force. Getting up to date info on the tax laws regarding gains and losses on a property sold is imperative before making any decisions.

  3. PatentGuy says:

    The picture of the upside-down house is a nice touch.

    With such thin margins, do many sellers attempt a FSBO or use a “discount” broker before listing with “full price” broker to try and reduce the 8% cost of sale you mention?

    We saw a fair amount of “for sale” signs on houses during our recent visit to Seattle, but I only recall one FSBO sign. Stopped by an open house in Queen Anne ‘hood which turned out to be a broker-owner working his own open house. Not sure if he really wanted to sell, or was just fishing for “clients.”

  4. Patent Guy,

    The upside down house is a reminder that if the answer to #2 is July of 2007…I mentally put your house upside down until proven otherwise :) The conversation stops at “July of 2007″ and I go look to see if you bought it zero down in July of 2007.

    “full price” broker and “discount” broker are often the same price. It’s a huge misconception that “traditional” broker is the name of a certain price for services. I’m a “traditional” broker and my costs are not the same for each client. So to suggest that you have to put what you charge up in neon lights to be “non-traditional” is a misnomer. The truth is that what a listing agent charges a seller for their services is an unknown number and not available in the mls at all.

    Many “traditional” brokers charge the same to list a home as a “discount” broker. The terminology of “full service” and “discount” broker is a bunch of hooey. I’m surprised you buy into that game. All commissions are negotiable between an agent and the owner/seller, and there really is no set commission.

    It makes no sense in the Seattle Area to be a true “for sale by owner”, as there are several alternative business models here that allow you to be “a fsbo in the mls”. So no sense in being a fsbo outside of the mls. That is why you didn’t see many. When it only costs $500 to be in the mls which puts you into the automatic feed to all broker sites, it’s a bit silly to be out of the mls to save $500.

    A lot of homes for sale are occupied by agents and builders. When you think about it, who has been hit harder in this economy than people who sell real estate? Only makes sense that a majority of the people who need to sell their home are people whose incomes are derived from the sale of real estate. As I said before, we didn’t lose our jobs, we just lost our income (to a large degree). If volume is down 50%, then income to people in the industry is down 50%. Scaling down expenses including mortgage payments is step #1 on the road to “recovery”. If you can’t pump the income, you’ve got to decrease the expenses or a little of both at the same time, the same as any “business”.

  5. PatentGuy says:

    I was just yanking your cord regarding “discount” and “full price”. I agree that for $500, you might as well list with broker, although that will not excite many “cooperating brokers” looking for some co-broke commission.

    Yes, not a surprise that the open house seller was a real estate salesperson. I did not look up or ask him how long he had owned the house. (Maybe was a 2007!)

    Yes, decrease expenses is good. This is probably the subject for another post on another day, but there seems to be a custom of potential buyers asking, and real estate agents coughing up an answer, about “why” the seller is selling. Why, why, why?!? (if this place is so great, why would you ever sell it?). When you ask a person why they are thinking about selling, and they say “because i want out of the payments” or something like that, do you encourage them to come up with a better sounding story to tell potential buyers?

  6. PatentGuy says:

    And regarding converting to a rental in order to write off your loss on a (former) primary residence, been there, done that in the early 1990s in LA. Saved maybe $30K in taxes in exchange for a couple of year’s of landlord grief. Also learned a valuable lesson that I had no business being a landlord …

  7. Patent Guy said: “I agree that for $500, you might as well list with broker, although that will not excite many “cooperating brokers

  8. Patent Guy asks: “When you ask a person why they are thinking about selling, and they say “because I want out of the payments

  9. Patent Guy said: “And regarding converting to a rental in order to write off your loss on a (former) primary residence, been there, done that in the early 1990s…”

    I believe the “old” rule was rent it for 12 months and then you can write off a loss. But I believe there is a new rule that takes the last 5 year period and prorates it between “rented” and “owner occupied”. I ran across it in the up market where people were not forgiven the gain tax for the whole five year period if they lived in it for 2 of the 5. Initially no gain tax if you lived in it for 2 out of 5, but they changed that (I believe) to a prorated gain tax. Not sure how that some rule may or may not apply against a loss. But given there is a commonly unknown change in that law, best to check it before deciding to rent.

    As to renting to take the loss on your return, I think most people who are renting vs. selling are doing it to avoid bringing money (that they do not have) to closing, or because they think the market will go up if they rent and sell later. I don’t agree that a short term rental will produce a significantly higher sale price, and the wear and tear of a tenant can easily negate that gain if there were to be one.

  10. PatentGuy says:

    Ardell, I think you know my comment was not about whether a buyer can have an agent and/or lawyer and/or a psychic and/or other “representative.” The “who really pays for the transaction costs?” topic has been beaten up to a fin epulp in prior RCG posts and comments, and I apologize for re-introducing. You get it.

    Back on the “should I sell” topic (skipping over the cost to sell part), how is your market doing these days as far as percentage of ill-priced listings?

    • Funny you should ask. In that short time between our comments I received an email from a buyer client about a new listing in a hot neighborhood in Seattle. The owner bought it in 2008 and looks like it is already pending at more than the owner paid before my client even sent it to me.

      So much for generalizations. Hot houses in hot neighborhoods appear to be “beating the odds” and the statistics. But there’s plenty of crap in crappy neighborhoods that is “priced well” if you’re interested. LOL!

      My point on the commission issue is always the same and it is NOT about who is “paying it”. Most For Sale by Owners have to allow for the buyer having an agent, even if they don’t “want” one. It’s a misnomer to think that For Sale by Owner means seller has no agent AND buyer has no agent. The truth of “who pays it” is the lender, as it is financed. The only issue is do you price it with or without that fee “showing”. Do you include it in the asking price or does the buyer have to “stack” it on top of the finally negotiated price.

      There is no way a seller can dictate whether or not a buyer “may” have representation, but they can insist that they do, for some protection against the buyer “missing” part of their due diligence. It clearly is better for the seller for the buyer to have an agent who is someone different than his own agent. Someone else for the buyer to blame if things don’t go well.

  11. PatentGuy says:

    “I don’t agree that a short term rental will produce a significantly higher sale price, and the wear and tear of a tenant can easily negate that gain if there were to be one.”

    You got that right. But, if your income is high enough and you pay a lot of taxes, it may be worth it to convert to rental in order to take the loss as a write off against your regular income. Key word is “might”. It “might not” … Once the higher rates kick in in 2011 (in California, marginal rate will be close to 50% on high incomes in 2011), this actually may be a way to soften the blow, so to speak, of the loss.

    But, people that become unintended landlords while waiting for 2007 prices to return are just digging a bigger hole. Being a landlord is not for everyone, and the wrong tenant can wreak havoc on your life, finacially and emotionally.

  12. You said “co-broke” which is an antiquated term. There is a fee for the agent for the buyer and a fee for the agent for the seller. To say there “is no co-broke” is to say the buyer is not allowed to have an agent. Seller doesn’t get to make that choice for “other people”.

  13. PatentGuy says:

    I should not have said “co-broke”. My mistake, and I see now has a meaning that I had not intended.

    You have a strong opinion regarding the “who actually pays for a buyer’s agent” debate, and certainly I am not going to cause you to change your opinion.

    And, yes, a great house in a great location will always be sellable if it is not overpirced. I was asking more in general. I understand there are exceptions.

  14. Consider this, PG, because I really do want to change everyone’s mind. It really and truly can’t be the seller paying someone for having worked for a buyer client for months on end or weeks on end studying all of the market options before landing at that particular “house”. When the seller thinks he pays, then he thinks it is about the agent’s performance only as to that one house, and that is not the case at all. In most cases I am telling the buyer why they should not buy a particular house…what seller would pay for “that”?

    As to the market generally, values have pretty much been flat since I called bottom around this time last year. Median home price is slightly above that level at the moment, but I expect it to be back there if not a tad lower by year end. It has not been lower than March 2009 since that time. March 2009 closings remain the lowest on record in recent history (roughly since April 2005.)

    In a “flat” market it’s all about some selling for a bit more than they should, and some selling for a bit less than they should, and that evens out at flat.

    There will always be someone who is overpriced and someone who is underpriced and someone who comes on market, dead on right, straight out the gate. Without a trending up or trending down market, it’s “every man for himself”.

    In general, it’s been pretty much the same as most any of the 20 years I’ve been doing this. January sucks. Lots of no one wants it at any price leftovers hanging around. Lots of buyers all wanting the same best house that isn’t on market that gets snapped up the second it hits. Every week a few new things come on that seem better than those leftovers, and a few things that have been around since forever sell at prices significantly lower than asking price.

    Nothing new under the sun…especially in a flat market that flat-lined a year ago. Lots of old news without much change. Can’t say it’s boring though. Every single transaction seems to be a bit of a battle and a skirmish. It may be flat, but it’s not easy.

    My old definition of “fair market value” has never been truer than it is today. “the price at which neither party is exceedingly happy”. In most cases the seller is taking less than they want and the buyer is paying more than they want, leaving no big w00ts in the dust.

    I would like to share this recent email with you, for no good reason. It’s not really on topic.

    “Ardell…we couldn’t be at this stage…if it had not been for your hardwork, insights and negotiation skills. We cannot tell you how fortunate we have been to have you as our agent. It has been great working with you and very educational too. Thank you!”

    The harder it gets out there to find just the right thing for this person at the right price at this time, the more emails like the one above make it all worthwhile.

    It really is easier for everyone when the market is on a continuous up. Even though prices are high, buyers buy with the confidence that they will get even higher. The only happiness in a down market is the joy of someone being able to get a house who could not afford one at all three years ago, or helping someone get a certain house that would have been way out of their price range 3 years ago. That makes most days, as difficult as this market is, very rewarding on a case by case basis, but not “in general”.

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  1. [...] or temporarily. Sometimes the owner pays it in full, and sometimes the owner pays it in part."Great advice!Upside down house "shamelessly stolen" from Ardell's post at Rain City Guide [...]

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