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May 2024

A Deep Dive into Buying and Selling A House

Justin Hearty
Whether you’re buying your first home or returning to the real estate market, it’s crucial to understand the complexities of home transactions.
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Embarking on purchasing or selling a home is thrilling and daunting, especially regarding financial considerations. Beyond the initial price tag, there are a plethora of costs that can significantly impact the bottom line. Let’s explore the intricacies of these transactions, shedding light on the apparent and hidden expenses involved.

Unveiling the True Costs

When entering the realm of homeownership, attention often gravitates toward the down payment and closing costs. While these are the highest-ticket items, it’s essential to acknowledge the myriad of additional expenses that may catch buyers off guard during the closing process.

Closing Costs

Closing costs encompass a spectrum of fees, including loan origination fees, title insurance, property taxes, escrow fees, homeowners association fees (if applicable), and recording fees. Typically ranging from 2% to 5% of the home’s purchase price, these costs represent a lump sum payment due at closing. The loan estimate sheet will show the amount due, but the attorney’s office will calculate the final total due at closing.

Down Payment

A cornerstone of home buying, the down payment constitutes a percentage of the property’s purchase price paid at closing. Typically ranging from 3% to 20% of the home’s value, the down payment influences mortgage terms and monthly payments. Be sure to review the loan type and its requirements to avoid any surprises down the road.

Interest Rates

Interest rates directly impact the affordability of a mortgage. With the current national average for a 30-year fixed rate hovering around 7%, buyers may have to reassess their desired purchase price.

For example, with a 30-year fixed mortgage of $400,000 at 7%, principal and interest will cost $2,661. A 5% rate would lead to a payment of $2,147 for principal and interest. If a buyer is budgeting for a P&I payment of $2,147, they would only be able to afford a total mortgage of ~$325,000 in this current environment.

Earnest Deposit

An earnest deposit, also known as earnest money or a good faith deposit, is a sum of money that the buyer provides to a seller as a sign of their serious intent to purchase the property. Depending on the state, the deposit is held in escrow with the title company or real estate broker. The deposit often ranges from 1% to 2% of the home’s purchase price, but depending on the market, buyers may want to exceed the average to make their offer more attractive.

  • The Good News: Although this deposit is made during the early stages of the contract, it will be applied towards the closing costs and down payment. Buyers can get their earnest deposit back through contingencies, mutual agreements, or legal remedies.
  • The Bad News: Buyers will not have access to this deposit throughout the closing process, meaning they should only submit an amount that won’t cause a financial burden. Additionally, suppose a buyer fails to fulfill their obligations under the purchase agreement, such as backing out of the sale without a valid reason. In that case, the seller may be entitled to keep the earnest deposit as compensation for their time and effort.

“Hidden Costs”

Amidst the excitement of acquiring a new abode, buyers mustn’t overlook the “hidden” expenses lurking beneath the surface. Here are a few examples of additional costs that you should prepare for.

  • Home Inspection: If the contract includes a home inspection, the average cost will be around $300 – $5001.
  • Additional Inspections: Depending on the age, location, and condition of the home, additional inspections may be needed that go a few steps further than the home inspection. The most common of these specialized inspections are Radon testing, termite and pest, mold, and foundation. Although it may seem more straightforward to avoid these, it is wise to pay for them now to avoid substantial costs down the road.
  • Appraisal Fee: The buyer is responsible for the appraisal fee. Typically, the lender requires this payment upfront, but the fee can sometimes be included in the closing costs. On average, appraisals cost $4002. However, this fee can easily double depending on the location, complexity of the property, and loan type.
  • Attorney Fee: These fees have a wide range of potential costs. A few factors that can influence this cost are the complexity of the transaction, the location of the property, and the decision to pay a flat fee or an hourly rate. Buyers should thoroughly research their options in order to choose the right real estate attorney.
  • Moving Costs: It is easy to forget the costs associated with moving while focusing on everything else above. If buyers want to move without hiring help, they should budget for the moving truck, packing materials, and any other items that may be needed. If assistance is required and hiring movers is the preferred option, the average cost of a local move is $1,2503. For a long-distance move, the average cost is $4,8903.
1. How Much Does a Home Inspection Cost? – Realtor.com
2. Home Appraisal Cost: How Much Is a Home Appraisal? – Zillow.com
3. How Much Do Movers Cost? – Moving.com
7.14%

National average interest rate for a 30-year fixed mortgage

Source: Bankrate. As of March 11, 2024

Selling a Home: Understanding Financial Obligations and Benefits

As sellers embark on the journey of parting ways with their beloved abode, they must grasp both the financial responsibilities and potential benefits awaiting them.

Closing Costs

While sellers may rejoice at the prospect of bidding farewell to their property, they must brace themselves for the associated closing costs. These may include agent commissions, transfer taxes, settlement fees, and providing a home warranty for the buyer. Recognizing these expenses allows sellers to budget effectively and avoid last-minute surprises.

Outstanding Liens or Judgements

Sellers are responsible for settling any outstanding liens or judgments against the property. This may include paying off mortgages, property taxes, or other debts secured by the home.

Repairs, Maintenance, and Miscellaneous Costs

Sellers may be required to make repairs or perform maintenance tasks to prepare the home for sale. This could include cosmetic upgrades to improve the home’s appeal to potential buyers or fixing issues identified during the inspection. Depending on the circumstances, sellers may incur additional fees such as attorney fees, title insurance premiums, or homeowners association fees.

Capital Gains Exclusion

Herein lies a silver lining for sellers, particularly those who’ve called their property ‘home’ for an extended period. Under the 2-out-of-5 rule, individuals can exclude up to $250,000 of their capital gains from taxation if they’ve resided in the property for at least two of the past five years. This exclusion doubles to $500,000 for married couples, provided both spouses meet the residency criteria. Leveraging this rule can significantly mitigate the tax burden of selling a primary residence. It is important to note that the two years do not have to be consecutive.

Home Improvements

Home improvements can increase the basis, essential for calculating the capital gains tax when selling. A few examples that increase this are additions to the home, remodeling, systems upgrades, and structural repairs. To calculate the basis accurately, it’s essential to keep detailed records of any improvements made.

National Association of REALTORS® (NAR) Settlement

After many years of litigation, a significant settlement was reached on March 15, 2024. The settlement aims to dismantle current commission structures to enhance transparency, fairness, and competitiveness in the real estate market. The changes to the rules are scheduled to go into effect in mid-July, pending court approval. This process may take several months and will allow those with objections to present their cases.

What This Means for Buyers

Buyers will have the opportunity to negotiate their agent’s compensation. This means they can confirm that the payment structure aligns with their expectations and the services provided. However, real estate agents for the buyer typically receive their commission from the seller as part of their closing costs. Post-settlement, this cost may be the buyer’s responsibility, meaning it can be more expensive to purchase a home, depending on the negotiated compensation.

What This Means for Sellers

In the post-settlement landscape, sellers may save thousands in commissions, directly boosting their profits and making the sale more lucrative. Of course, market forces prevail, and perhaps house prices will come down to compensate for the change.

Final Thoughts

Understanding the costs of buying and selling a home is crucial for informed decision-making. Whether preparing for upfront expenses or capitalizing on tax benefits, financial awareness empowers buyers and sellers to navigate the process confidently. Tax professionals and financial advisors can be valuable partners throughout this process and help avoid costly mistakes that could impact your financial plan.

About Strategic

Founded in 1979, Strategic is a leading investment and wealth management firm managing and advising on client assets of over $2 billion.

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