When you’re thinking about listing your house for sale, it’s important to understand how much money you’ll walk away with after the transaction is complete.
After the sales price and your remaining loan balance, closing costs are the biggest factor that will affect your profit or loss on the sale of your home.
For most sellers, the biggest closing cost is the real estate agent’s commission.
The traditional commission is 6% of the home’s sales price, and of this 6%, 3% will go to the buyer’s agent and 3% will go to the seller’s agent.
The commission you pay could be lower if you negotiate with your agent or do a for-sale-by-owner transaction. It could also be lower if the same agent or same real estate company represents both you and the buyer.
The next biggest closing cost is the seller’s contribution toward the buyer’s closing costs. This contribution isn’t required, but sellers commonly request it in their purchase offers.
The buyer’s closing costs typically range from 3% to 6% of the purchase price, so you could give up a lot of your potential profit here. How much you’ll contribute depends on your location, your negotiating skills and market conditions.
In some parts of the country, sellers typically pay certain closing costs, such as the cost of a wood-destroying pest inspection.
And in a buyer’s market, buyers know they have the upper hand and can ask for a large seller contribution toward their closing costs.
The term “seller concessions” sometimes refers to closing cost contributions, but it can also refer to any other money or property the seller kicks in to sweeten the deal. While not technically a closing cost, they will also affect your bottom line.
The type of loan the buyer uses will limit how much the seller can hand over to the buyer for closing costs and other concessions, but these limits aren’t terribly favorable to sellers.
For example, VA loans allow sellers to pay buyers’ closing costs and contribute up to 4% of the sales price as an additional seller concession.
These additional concessions might include leaving your 60-inch flatscreen television with the house. A seller who chose to make the maximum contribution to a VA buyer would see a serious reduction in net proceeds.
FHA loans limit seller concessions to 6%.
Conventional mortgages also limit seller concessions to 2% to 9% of the purchase price based on the buyer’s down payment and whether they will be occupying the home or purchasing it as an investment property.
As a seller, you probably don’t relish the thought of paying 6% to real estate agents and another several percent to the buyer, but you should be prepared for buyers to ask for as much as they can and you should know how much, if any, you can afford to fork over.
Another important expense is taxes.
In some places, sellers pay government fees like a transfer tax when the home changes ownership. These taxes don’t exist everywhere, however, and they aren’t always the seller’s responsibility.
Legal fees are also location-specific. For example, in New York, it’s customary to hire lawyers in residential real estate transactions, but in Los Angeles, it isn’t.
The bottom line is that a sales price of $250,000 for your home doesn’t mean you’ll walk away with $250,000 minus your mortgage payoff.
The actual amount will be far less after the closing costs and other fees sellers typically pay. Make sure you’re well-acquainted with these numbers before you list your home.