Selling my first real estate property was exciting. Taking money off the table is always nice. Only mistake I made was not properly calculating the amount I was to be left with upon closing of the sale, leaving me in a bit of a pickle because I had already committed my miscalculated return to another investment opportunity… lesson learned. Just don’t want you to make the same mistake.
So be warned. When selling real estate, prepare yourself for multiple parties getting their hands in your pocket.
For novice real estate investors looking to sell a property, it’s important you take into consideration the costs of closing the sale. What you agree to sell your investment property for and what you end up taking home after it is all said and done are two significantly different figures.
Selling Your Investment Property
Let’s use an investment property I recently sold in Vancouver for approximately $280,000 to explain the costs incurred by the seller. The obvious first expense to consider is the remaining mortgage owed on the property. Secondly, if you sell before the end of the term on the mortgage (interest term), there is a fee associated with breaking the mortgage contract early (depending on how many months remaining in the term and the balance owed). Expect it to be around half a percent of the outstanding balance. Lucky for me, the timing of this particular sale worked perfectly as my mortgage term ended within one week of the sale (that’s uncommon). Those are the first couple obvious expenses you have to cover as a seller.
Realtor Commissions
On the majority of property sales, realtors are overpaid for the service they provide. They’ll never admit it, but it’s the truth. And as a seller of an investment property, the burden of paying the real estate agents (your agent and the buyer’s) falls squarely on you, not the buyer. Depending on your agent and the state or province in which you live, realtor commissions can really cut into your bottom line. In fact, it’s the greatest expense in the whole transaction.
For a property under $500,000, you should prepare for roughly a 4% commission to be paid out. That’s big bucks and will diminish your capital gains. This is a key reason why investors who routinely buy and sell properties get their realtor license. It provides a huge selling cost savings.
A general guideline on realtor commissions: 7% on the first 100k and 3% on the balance.
Most real estate investors also have a line of credit attached to their investment properties to utilize some of the equity they build up over time. I know I do. And when you sell the investment property with a line of credit attached to it, you have to close that line out after paying the balance. It’s treated the same way a mortgage is. The closing cost on the line is minimal, typically a tenth of a percent of the total amount of the line.
Real Estate Sale Legal Fees
The final standard expense to be aware of when selling an investment property is the legal cost. On the cheap end, you’re looking at about $650 and on the high side $1,000. This is an unavoidable expense, so don’t forget to add it into your calculations before agreeing on a sale price.
So there you have it. Selling an investment property is not cheap. For most properties, the cost of selling can easily exceed $10,000 thanks largely to realtors being overpaid… but that’s a rant for another time. Make sure to incorporate these additional expenses into your listing price and throughout the negotiation process.
Stay hungry,
Aaron
