Ways To Lose Money In Real Estate #2 (Sell Too Soon)
Buying and selling real estate is expensive. If you sell your home too soon, you may not get your whole initial investment back.
See other videos in the series here.
Hey I’m Zac MacDonald, your real estate agent with Real Property Associates and we’re gonna continue the series, Ways to Lose Money in real estate, and this is Episode Number Two.
Today’s episode, I wanna focus on selling too soon. If you sell too soon, you will lose money in real estate. Now let me explain a little bit, when you buy a home there are fees associated with the purchase. If you’re getting a loan, you’re gonna have loan fees, you’re going to be also having closing costs, typically a couple percent of the purchase price, so there’s money that you put in upfront. Additionally, when you sell your home, there are also closing costs. Now in the current real estate market, and the current way real estate is done, sellers pay a commission to both the listing firm and also a portion of that commission is shared with the buyer’s agent’s firm or the selling firm. Additionally, they’re also paying closing costs, you’re also going be paying an excise tax. Right now it’s about 8%, 7-8% of the dollar amount that you sell your house for, so that sales price, about 7-8% of that is closing costs, money that you’re going to be subtracting from your take-home dollars.
So coupled with the money you put out upfront, plus the money that you’re going to be spending on the back end, you need to hold on to your house for a certain amount of time. Now in a hot market like Seattle, back in 2014, 2015, there was actually an article that [Zilla 00:01:51] put out, saying that your break-even horizons were around one and a half years roughly. Now, I’m trying to go off of memory so forgive me if it was one point four or one point six, but it was roughly one and a half years which is super fast. If you’re able to buy a house and have all these closing costs on both ends plus also sell and make a profit after you’ve paid out all of your closing costs and all the fees associated with the real estate transaction, means you’re in a really hot real estate market. And even right now, the cost to purchase is higher so we’re seeing between three and four years depending on your size of down payment until you actually would recoup the money that you put into the sale.
So the big idea here is that you need to hold on to your property for a little while, unless you’re flipping house, and that’s completely different and we’ll talk about that in a different video, but flipping house is, you’re going in and buying a house for super-cheap, adding value to it and then selling it, in a timely manner, generally speaking quick, so that you can turn a profit. That’s a different idea. If you’re buying a house to live in, or even if it’s a rental, and you’re putting money into it and holding on to it, you’re going to have a smaller margin, or no margin starting out, and then you’re going to be building equity in the property as you hold it, in theory.
Now again you don’t wanna sell it for less than you paid for it so if the market goes down, you need to hold on to your property and you wanna be in a financial situation to hold on to the property through that downturn and wait it out, assuming you’re in a good market that recovers.
The other part of that is, that you do need to hold on to it just til it’s profitable, so maybe you do … maybe you’re somebody who’s moved to Seattle, or an area like Seattle, for a few years. Maybe you have a two-year plan and then you wanna go back to wherever you’re from unless you were planning to hold your property as a rental later on, it might not make sense, especially right now, to purchase a house. Because if you buy a house and then lets just say, even if it does appreciate a little bit, even in this area we’re seeing three to four years, is that breakeven horizon, so if you sold at any point before that, at this point, you’re probably going to be walking away with less, even if it’s appreciated, you’ll probably be walking away with less money than you put into it.
The other piece is if the market changes again, now you’re selling for less, and now you’ve got both of those factors working against you, so it’s my recommendation that when you go into your purchase you are considering the time horizon and your timing with the purchase and how long you’re planning to live there. The average seven to ten years that people live in a house, if you’re within that range, you’re gonna be just fine buying a house, but if you are thinking of a shorter timeline, maybe two to three years before you were to sell, that would be a little speculative and I wouldn’t suggest that.
So, I’ll recap it, one of the ways to lose money in real estate is to sell too soon, and if you’re in a situation where maybe you wanna make a quick purchase and then a sale pretty soon after, it might not be the best time to buy a house.