Most homeowners purchase a house with the intention of staying put for the long haul. According to statistics from the National Association of Realtors (NAR), the median tenure for American homeowners is 13 years, up three years from 2008. In addition to putting down roots and creating stability, holding onto real estate for an extended period of time can lead to an appreciation of property values and a greater profit down the road.
But sometimes, life goes in an unexpected direction, leading to the need to sell sooner than anticipated.
“If you want to, you could sell your house immediately after the paperwork says it is officially yours,” says Kimberly Porter, CEO of Microcredit Summit, a top personal finance publication. But because real estate typically provides the biggest benefit as a long-term investment, selling soon after buying could put you in a tricky spot financially. You could forfeit any chance at making a profit — or even face a loss on the sale.
To help you navigate an earlier-than-expected home sale, we talked with a top real estate agent and some seasoned property investors to create this in-depth guide. It covers everything you need to know to decide whether to sell now or wait, including the costs of selling, tax considerations, and how to calculate whether you’ll lose money on the sale.
What are the main reasons for having to sell early?
A homeowner’s decision to sell abruptly often stems from an unplanned life change, such as a job relocation, a death in the family, a divorce, or an injury or medical condition, notes Pennie Carroll, one of Des Moines, Iowa’s top real estate agents.
But sometimes, the homeowner might decide to sell for financial reasons, says Porter.
“Maybe the house is more expensive to keep up with than they realized, or they have buyer’s remorse for the high cost they paid,” she says. “Or perhaps it is just a seller’s market and selling makes sense, even after a short time.”
Another possible scenario is that the neighborhood is starting to decline, and the homeowner recognizes the need to sell quickly before property values plummet.
Has your home appreciated enough to sell?
Real estate isn’t a get-quick-rich scheme: Although there are some hot markets that might see quick appreciation, in most cases the value rises slowly over a period of years. The amount of appreciation will vary based on the amount of demand within a region and how much inventory is available.
“Under the right circumstances, your home could appreciate in even a short amount of time,” says Porter. “However, you could also lose money if the value of your home didn’t increase enough, which is likely the case in a short-term situation.”
According to the National Association of Realtors, the national median existing-home price for all housing types in June rose 3.5% over the previous year. Home prices remain solid; this marks the 100th consecutive month of year-over-year gains, despite the pandemic. At that rate, a $300,000 home would only see an increase of around $10,500 in one year, or $5,250 in six months.
Caleb Liu, a property investor with House Simply Sold, explains that there are two types of home appreciation:
- Natural appreciation.
This type of appreciation is governed by forces in the market. “Under normal market conditions, natural appreciation cannot be controlled and is typically a few percentage points per year,” explains Liu. “Prices rise and fall month over month, and there is no guarantee that they will be higher in any given month compared to the previous month.”
- Forced appreciation.
This can be triggered either through buying a property below market value and/or remodeling the property to sell for a higher price. “You can force some appreciation in a short amount of time by investing money into cosmetic upgrades, such as new paint and flooring,” says Liu. “But major remodels can take months and aren’t typically done on a short timetable.”
Even so, real estate agent Carroll points out that if the homeowner got the home at the right price at the point of purchase, they might not have a big financial burden whenever they choose to sell.
How loan amortization factors in
If you have a mortgage on your home, your housing payment will be the same every month — but in the first couple of years, the vast majority of that overall payment will likely go toward interest and will barely touch the principal balance.
“For example, on a 30-year, fixed-rate mortgage at 3.00%, the first 12 monthly payments are allocated to approximately 59% interest and only 41% principal,” Liu explains.
When you first take out your mortgage, your lender will provide you with an amortization schedule that shows each monthly payment and how it’s broken down into principal and interest. The longer you stay in the home, the greater portion of the monthly payment goes toward the principal. That means if you sell within those first couple of years, you’ll likely have earned very little home equity.
What are the costs involved in selling soon after buying?
As with any home sale, you’ll have to cough up some costs. The difference is that with a quick sale, the property hasn’t had much time to appreciate, which means the expenses could cut into (or even obliterate) any equity.
The typical costs associated with selling include:
- Staging and house prep fees (ranging from a couple hundred to a couple thousand dollars)
- The standard 5% – 6% Realtor commissions for the sale
- Inspection and repair fees (varies)
- Closing fees to sell, which include title fees, transfer taxes, escrow fees, recording fees, and prorated property taxes (1% – 3% of the sale price)
- A possible second set of closing costs if buying a new home
- Seller concessions (2% – 6%)
- Overlap costs (1% – 2%)
- Moving and relocation costs (varies)
- Mortgage payoff (varies)
To estimate the cost of selling your home and find out how much you could possibly lose, enter your information into our handy Net Proceeds Calculator.
Bill Samuel, a property investor and owner of Blue Ladder Development, offers up a real-world example: A home purchased in June of 2020 for $246,000 will cost the buyer $5,145 in transaction fees (title, attorney, transfer stamps, etc.) with a total cost basis of $251,145. If the buyer then sold the property the following year, they should expect to pay about $15,000 in fees alone.
“That means the property would have to have appreciated to a value of $266,000, which would be 8% in a year — not likely at all,” Samuel says. “Assuming the buyer bought the property with a 30-year fixed mortgage at current rates, they would have only accrued $4,109 of equity over one year of ownership.”
What to know about the capital gains tax
Even if you’re one of the lucky homeowners who experiences a quick appreciation in property value, the capital gains tax could take a big chunk out of any potential profits.
- If you’re selling less than a year after buying, you’ll have to pay a short-term capital gains tax, which is taxed as ordinary income according to your tax bracket. For instance, if you purchased a property for $300,000 and sold it 10 months later for $370,000, your gain would be $70,000. If your regular income is taxed at a rate of 20%, that means you would have to pay 20% of the $70,000 gain, which would be $14,000.
- If you’re selling more than a year after buying, but less than two years, any profits will be taxed at the lower long-term rate — either 0%, 15%, or 20%, based on your capital gains tax bracket.
- If you’re selling after living in the home for at least two years, you will not have to pay any capital gains tax on properties up to $250,000 for single homeowners and $500,000 for married homeowners.
That means the longer you stay in the home, the less tax burden you’ll have to carry.
What to expect when selling in different timeframes
When selling a relatively short time after buying, even a matter of a few months can make a big difference in terms of potential loss of money.
- When selling after six months, Liu says sellers should generally expect to lose money. That’s why unless there is an extremely compelling or unavoidable reason, selling within six months should be avoided. “Depending on the underlying issue, the homeowner may consider renting out their home and moving into an apartment short-term,” Liu suggests. “While it is extra work, this will allow them to hold onto the property and avoid the expensive selling costs.”
- When selling after one year, the seller could possibly break even if they’re in a fast-growing market that has seen strong appreciation, but that’s a slim chance. “In most situations, they’ll probably lose money when selling at the one-year mark,” Liu says.
- When selling at the two-year mark, the biggest benefit is that you will qualify for the capital gains exclusion. “While you will still incur selling costs, the tax-free appreciation after two years may be enough for you to at least break even,” says Liu. Be sure to consult with your real estate agent or tax professional to find out whether you’re eligible for the exclusion.
How to calculate whether you’ll lose money
Every situation is different. To determine whether you’ll lose money — and how much — follow these steps:
- Get an estimate of what your property is worth using a home value estimator. HomeLight’s Home Value Estimator steps you through a 7-question quiz to learn more about your home so we can provide the most accurate value possible.
- Deduct your outstanding mortgage balance (check with your loan servicer to find out the payoff amount, which could be different than the balance shown on your monthly statement),
- Deduct any costs of selling, such as real estate commissions, closing costs, title fees, and any expenses to prepare the home
- If you come up with a positive number (potential profit), deduct any short-term or long-term capital gains taxes if selling before the two-year mark.
“Ultimately, whether the homeowner loses money will depend on how big their down payment was, how they took care of the home, and any improvements they made,” Carroll points out.
What to tell buyers when selling quickly
When a house goes up for sale soon after it was purchased, will that raise a red flag for potential buyers? Do you need to explain to them why you’re selling within a short timeframe?
Carroll has seen quick sales trigger questions on the buyer side — and generally speaking, she says the seller should leave the explanations up to the agent.
“In these cases, it’s important for the seller to let the agent handle communicating to buyers about the reason for the quick sale,” she advises.
“Sometimes the seller can say too much, or say the wrong things, and put the sale in jeopardy.”
Liu says it’s a delicate balancing act. “You don’t want to appear to be hiding anything, but at the same time, you don’t want to appear desperate to sell,” he says. “It’s best to strategize with your Realtor, but a short explanation such as a ‘family issue’ should suffice.”
At the end of the day, notes Liu, if you have a well-maintained home that is priced right for your market, buyers generally shouldn’t be too concerned about why it’s available.
To sell quickly, or hold off?
While selling soon after buying does present the risk of giving up some equity, or even putting yourself in the red, it’s not always a recipe for financial disaster.
Particularly in a market like what we’re seeing now, where inventory is at an historic low and homes are seeing multiple offers, Carroll says homeowners could actually benefit from selling soon after buying — particularly if they’re under 50 years old and have a lot of homeowning years ahead of them.
“Even if you end up losing $5,000 on a home, will that really have a big impact across the homeowner’s lifetime?” she asks. “If they get a good deal on the next house, what they lose on the sale, they could gain on their next purchase.”
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