Should I Sell My House?

[macklinmustache]

Hi All,

I've been reading here for some time; this is my first post. As a disclaimer, I recognize that real estate markets can be highly contextual, so I'm going to try to provide as much context as I can, but please let me know if you need more. My goal in posting here is to figure out if I should access the equity in my house due to a massive spike in home price over the last year.

I live in a suburb of Dallas, TX, and my wife and I bought a home last September for $255k. We put 10% down and secured an interest rate of 3.375% on a 30 year mortgage. This house had a lot of cosmetic issues due to the previous owners letting their teenaged sons live their unsupervised after a messy divorce. We were able to fix it up a bit, especially by putting new flooring throughout. The house is 2500 sq ft and a 5 bed, 3 bath. It is a monster, I know. We are planning for a large family and I wanted to buy while interest rates were low and before our local market started to get hot.

Over the last year, home values have soared. We are regularly seeing houses in our neighborhood sell for $330k+. In particular, a house just down the street from us just sold for $338k. It was a 4, 2.5 with less square feet and a slightly nicer finish out. I would estimate that we could get at least $330k if we were to sell. Doing some back of envelope math, this would be a profit of $~90k [330k (sales price) - 224k (loan amount) - ~8k (closing costs/selling fees)] - ?? taxes on sale since we lived less than 2 years here]. I'm not including the amount we have put into repairs and flooring (maybe 20k? at most) because I haven't been thinking about this as an ROI situation, but instead the benefits and risks of keeping the house and what I could do by cashing out my equity.

On the one hand, we love this house. It could be the last home we ever need to buy. We locked in a great rate, and like the neighborhood a lot. On the other hand, if we sell we can make a killing and use that money elsewhere. Additionally, after buying, I think that we are able to better estimate our needs and could see ourselves in a smaller home, living with less overall expense.

I want to sell to access this cash so it can be invested (some in rental properties, some in our stocks/bonds). We would rent until we accumulate cash to buy outright or see a downturn in our housing market. My wife wants to keep the house because she is afraid we will be priced out of the market eventually, assuming things will continue here as they have been.

Can we expect a housing market downturn? Job growth is massive here and demand far exceeds supply. Should we sell and access this sudden growth in value of our home to put that money to work? Will selling now mean that we forfeit the opportunity to buy in the future as prices continue to grow?

Would love your advice. Thanks for reading this wall of text.

[LadyMuMu]

I would wait. After Katrina, many of the affluent folks who lived in New Orleans moved north to affluent areas away from the coast. It took about a year for the full force of it to hit. Home prices skyrocketed. I suspect after Harvey, several Houstonians are looking at Dallas.

[macklinmustache]

Interesting point I hadn't even considered--thanks!

[frugalnacho]

I think you are under estimating agents fees.  Typically agents will take 6% of the sale price of the home which is paid from the sellers side.  The closing costs are paid by the buyer.  6% of $330k is $19.8k.  If you sell it yourself with no agent you are still likely looking at $9.9 going to the buyer's agent.

Unless you are going to use geographical arbitrage and move to a place that is LCOL I don't see how this sale will help.  If you down size and are happy with a smaller home, why did you buy the big home in the first place? Sounds like your plan is to down size, and then buy back into a big house when the market dips, but what if it just keeps on marching on? Are you prepared to rent until your child is in high school to avoid over paying for a family sized house you actually want?

[macklinmustache]

You're correct on underestimating fees--I think I mixed up 6% with 6k, and then threw on 2k to be conservative.

Not necessarily looking to get back into a bigger house. We bought big because we could and thought with the direction the market was headed we would see the most appreciation with buying more square footage.

Either the market will make a correction and I should sell now (or soon) at a high point, or wait it out, because it will increase indefinitely. I don't like having this value tied up in the home and not in something that could be earning money more actively, which is why I'm considering the sale. My monthly expenses may not change if I sell, because I will need to rent somewhere comparable, but I will see an influx of cash from the sale which could be invested. Does that clarify the dilemma? I am afraid of missing an opportunity to use this money if we see a dip in our home's value, and because we own more house than we need.

[Cwadda]

I think you are under estimating agents fees.  Typically agents will take 6% of the sale price of the home which is paid from the sellers side.  The closing costs are paid by the buyer.  6% of $330k is $19.8k.  If you sell it yourself with no agent you are still likely looking at $9.9 going to the buyer's agent.

Unless you are going to use geographical arbitrage and move to a place that is LCOL I don't see how this sale will help.  If you down size and are happy with a smaller home, why did you buy the big home in the first place? Sounds like your plan is to down size, and then buy back into a big house when the market dips, but what if it just keeps on marching on? Are you prepared to rent until your child is in high school to avoid over paying for a family sized house you actually want?

Isn't the commission paid for by the buyer? It's the buyer who is the one shelling out all the money. The seller isn't paying even $1 at closing.

[waltworks]

Commissions are all paid by the seller. So you'll cough up roughly $20k there (assuming you use an agent).

You will pay 15% in federal taxes on any remaining profits (let's say that's $55k so $8250) since you haven't been there long enough for the capital gains exemption.

You put $20k into the house already.

So your profit here, if all goes well, is something around $27k. And you'll have to pay significant money to move and to close on a new house (if you decide to buy again).

Not worth the hassle, in my book, especially since the house meets your original (large family, like the neighborhood) goals.

-W

[macklinmustache]

Thanks for the clarification on fees.

Makes sense when you look at it all at once. It frustrates me to have value in the house that doesn't affect my monthly cash flow--wonder why that is? Maybe it's a wiring issue...

Thanks!

[frugalnacho]

I think you are under estimating agents fees.  Typically agents will take 6% of the sale price of the home which is paid from the sellers side.  The closing costs are paid by the buyer.  6% of $330k is $19.8k.  If you sell it yourself with no agent you are still likely looking at $9.9 going to the buyer's agent.

Unless you are going to use geographical arbitrage and move to a place that is LCOL I don't see how this sale will help.  If you down size and are happy with a smaller home, why did you buy the big home in the first place? Sounds like your plan is to down size, and then buy back into a big house when the market dips, but what if it just keeps on marching on? Are you prepared to rent until your child is in high school to avoid over paying for a family sized house you actually want?

Isn't the commission paid for by the buyer? It's the buyer who is the one shelling out all the money. The seller isn't paying even $1 at closing.

The seller gets the sale price of the home, less 6% for agent fees (typically, can potentially be a different amount), less any outstanding mortgages they have on the property.  The buyer pays for the inspection, appraisal, and all fees related to their new mortgage.  I believe insurance and taxes are prorated based on the selling date. 

[Cwadda]

I think you are under estimating agents fees.  Typically agents will take 6% of the sale price of the home which is paid from the sellers side.  The closing costs are paid by the buyer.  6% of $330k is $19.8k.  If you sell it yourself with no agent you are still likely looking at $9.9 going to the buyer's agent.

Unless you are going to use geographical arbitrage and move to a place that is LCOL I don't see how this sale will help.  If you down size and are happy with a smaller home, why did you buy the big home in the first place? Sounds like your plan is to down size, and then buy back into a big house when the market dips, but what if it just keeps on marching on? Are you prepared to rent until your child is in high school to avoid over paying for a family sized house you actually want?

Isn't the commission paid for by the buyer? It's the buyer who is the one shelling out all the money. The seller isn't paying even $1 at closing.

The seller gets the sale price of the home, less 6% for agent fees (typically, can potentially be a different amount), less any outstanding mortgages they have on the property.  The buyer pays for the inspection, appraisal, and all fees related to their new mortgage.  I believe insurance and taxes are prorated based on the selling date.

Ok, thanks for the clarification. The buyer is still technically paying the commissions because they are bringing all the cash to buy the house, but it's coming out of the seller's final walk away number.

[macklinmustache]

Commissions are all paid by the seller. So you'll cough up roughly $20k there (assuming you use an agent).

You will pay 15% in federal taxes on any remaining profits (let's say that's $55k so $8250) since you haven't been there long enough for the capital gains exemption.

You put $20k into the house already.

So your profit here, if all goes well, is something around $27k. And you'll have to pay significant money to move and to close on a new house (if you decide to buy again).

Not worth the hassle, in my book, especially since the house meets your original (large family, like the neighborhood) goals.

-W

So, to hijack my own thread and look at this more theoretically...in an instance where your home's value as dictated by the market exceeds what you believe it to be worth, you just sit on it? Is there a price point where you decide to sell? Or certain market conditions that would indicate a sale to be valuable because of a potential downturn?

[waltworks]

Mostly, you just sit on it. But there are some circumstances where you tap that equity.
-Have other investment opportunities and appetite for some risk - take out a HELOC and invest proceeds (you'll need to pay for a new appraisal to get the bank to sign off, usually).
-Have a flexible life plan and/or want to move anyway - sell and move, or sell and rent while you wait for the market to turn (remember that it might not, at least in your preferred timeframe).

Selling your house comes with HUGE overhead costs in almost all cases. So it's not something you do lightly.

-W

[Dicey]

What Walt said, both times.  Plus, you have to live somewhere.

Here's a tale I hope will help. When I worked at a fancy-ass department store, we handled a fair amount of cash. The used to tell my team to think of it not as money, but merely a means of conducting a transaction. If you think of it as what it would buy you, you're constantly going to have to deal with temptation. It's not today's lunch, tomorrow's new outfit, next week's car payment or next month's rent. It's just paper in a drawer that's locked for a reason.

Stop looking at your equity and thinking about what you could buy with it.

Start an investment account, fill it with new money and watch it grow instead. Your future self will adore you for it.

[robartsd]

Assuming 330k sale price, 6% commissions, 15% taxes: you'd have about 30k after tax profit if you sold now based on the purchase price and renovation costs you stated. Myself, I would probably wait at least another year to get the tax break (5.25k in my numbers). If you still feel like downsizing at that point, great. If you liked doing a live-in flip; even better - look for another one.

[jtraggie99]

My sole question would be, where are you going to live?  I live in Dallas as well, specifically north Dallas where a lot of the growth has been.  Home prices have been going up since about 2012, although they really took off around 2014-2015.  And it is not just home prices, rent is following in suite.  If you sale, you're just going to have to buy another property at inflated prices.  Or, you're going to have to rent at inflated prices.  And with all the families moving here and the housing market being so competitive, finding anything above a 2 bedroom for rent is becoming difficult and really expensive. 

So, I am not sure where you are going to see much in the way of gains.