Selling real estate is challenging in a stable market. But what about selling a house in a competitive market, when momentum has shifted from sellers to buyers, prices are falling, or recession talk abounds? In this article we’ll cover the pitfalls to avoid and provide some tips for homesellers.
Emotional bias can set in when selling a home
With a purchase or sale of any large asset, it’s easy for emotions to get involved.
We’d like to believe that we always go by the facts and figures; but being human, it’s easy for anxieties, fears, and exuberance to sneak in and invade even the most carefully constructed of decisions.
- Framing bias: A buyer’s market means readjusting your expectations. “Getting the best price” may mean getting a better price compared to the next sale, not the previous one, even if your selling price is lower than it would have been had you sold your house last year.
- Regret: We may regret not selling sooner and envy those who did; we hunger for a better price; we believe that we somehow earned the prices that similar homes sold for in the past and feel anchored to them.
- Panic: It’s easy to become compelled to act and think irrationally when the above asking price offers that you got used to are not the norm anymore. Remember that cooler heads prevail in any negotiation.
When you become captive to your emotions and set an unrealistic asking price, you become the biggest obstacle to successfully selling your home. Setting a realistic price will allow the property agents to confidently tell potential buyers that your property is the best buy for the money.
We suggest that you scope out the competition by going to open houses, and pay special attention to new homes for sale. Establish a dollar-per- square-foot range for your type of property and neighborhood. Also, consulting with a neutral party such as a fiduciary financial advisor, accountant, or attorney may be a useful move to make.
Optimize your house’s physical appeal
A poorly presented property is one more roadblock to a sale. The curb appeal of the property is even more important when trying to sell a home during times of high competition. Chances are there are many homes on the market, and you’re likely to have a great deal of competition.
- Solicit, and listen to, honest feedback about what can be done to cost-efficiently show your home at its best, perhaps by hiring a staging company.
- Get an appraisal from a firm that works with local lenders. The appraisal will help you view the property the way a lender will.
- Offer the property at 2 to 3 percent less than the appraised value to reassure the buyer that they are getting a good deal.
- Invest in a home inspection ($300-$400) prior to listing and consult with your Realtor about what items should be addressed. Presenting a completed to-do list can ease the buyer’s mind and shorten the escrow (opportunity to back out) period.
- Offer the buyer a one-year home warranty ($500-$800). It’s not that expensive, and it will help you compete with some new homes.
- Be prepared to negotiate; you may need to give just a little more. If you have done your homework and you’re sure the home is priced to sell, be patient.
An offer is not a final sale
When you get an offer, remember, an accepted offer doesn’t mean you’ve sold your house! The process of selling a house is complete when all contingencies are removed and you get the check from escrow, not before.
- Beware of offers that are contingent on the sale of the buyer’s house, even if the buyer claims that their home is in escrow.
- If you accept an offer in which the buyer must sell their home to purchase yours, consider asking for a significant (5 to 10 percent of purchase price) nonrefundable deposit upon removal of their offer contingencies on your home.
- Beware of “lowball buyers” who may make multiple offers, loaded with contingencies, in an effort to bring desperate sellers to the surface.
- When an offer is accepted, don’t stick a “pending sale” sign in the ground. Continue to market your house for backup offers, in case the deal falls through.
In this world where the only constant is change, you can sell your home in any market condition. In a buyer’s real estate market, the successful seller is the one who gets “real” the quickest.
Be mindful of capital gains tax when selling a home
The tax impact of selling a home is something that sellers often overlook.
Do you pay capital gains tax when selling a home? Yes.
- If the sale price is greater than the cost basis of the home, you will be subject to capital gains tax.
- If you were to sell the home within a year of owning it, the gain is taxed as ordinary income.
You may qualify to exclude up to $250,000 of that gain (filing single) or $500,000 (filing jointly) under the IRS Section 121 Exclusion. You’ll have to have owned and used your home for two out of the five years prior to the sale. Just to be clear though, this isn’t legal or tax advice, so please be sure to consult with your attorney or CPA on this matter if it applies.
Selling a home when price competition is high: final thoughts
As selling your home is one of the largest transactions you make in your life, it’s not to be taken lightly. Stay grounded and hold your emotions in check, do everything you can to maximize the presentation, and don’t rush the final sale.
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IRS. Topic No. 701 Sale of Your Home. https://www.irs.gov/taxtopics/tc701