Few home sellers realize at the time they sign a realtor listing agreement that paying a real estate commission could make it impossible to buy their next home. They simply assume that by hiring a real estate professional, and putting the property on the local multiple listing service, that the sale will go more quickly and bring even higher proceeds.
Real estate agents will certainly explain it that way, but that doesn’t change the fact that paying the real estate commission – which is typically 6% of the home’s final sale price – could make it impossible to buy your next home.
That’s more than a remote possibility, and here is how it could play out…
The Real Estate Commission is a Direct Reduction Of Your Equity
I’ve emphasized the point in other posts on my site that the real estate commission that you pay comes right out of your equity in the home, not the sale price. But this point is worth re-emphasizing.
While it’s true that the real estate commission is calculated based on your final sale price, it is nonetheless paid out of your net equity in the home. That is to say that the commission is not so much a reduction of your sale price, but a reduction in the amount of cash that you will walk away from the closing table with.
So if you sell your home for $250,000 and pay a 6% real estate commission, you’ll have to pay $15,000 ($250,000 X 6%) for the commission upon closing. But the $15,000 will come out of your equity in the property, leaving you with less money for the down payment on the next home you purchase.
If you also had a $200,000 mortgage on the property, your equity in the home is just $50,000 – not $250,000. The $15,000 commission payment will reduce your net equity by a whopping 30% ($15,000 divided by your $50,000 in equity), and chop the cash proceeds from the closing from $50,000 down to just $35,000.
In today’s financing environment, where you often need a minimum down payment of 20% of the purchase price, the $15,000 commission paid could make it very difficult for you to come up with the down payment needed on the next home. You’ll have to make up the difference out of your savings or from the sale of other assets that you own.
Paying Sales Concessions Could Be Out Of the Question
Any time you try to sell home, you can expect there to be some sort of sales concessions in order to facilitate the sale for the buyers of your property. These concessions typically involve paying certain closing costs for the buyers, and they can force you to put out thousands of dollars in order to cover them.
But if you are also paying a real estate commission, you may be reluctant to further reduce your net proceeds in order to cover seller concessions. For example, if you add paying 3% of the purchase price toward the buyers closing costs – plus the 6% real estate commission – you’ll now have to pay 9% of the sale price out of your equity.
This will add $7,500 ($250,000 X 3%) to the $15,000 real estate commission. Again, if your equity was $50,000 to begin with, you’re now down to just $27,500 in cash proceeds from the closing ($50,000 – $15,000 – $7,500).
Walking away with just $27,500 of your $50,000 in home equity will cut deep into your down payment for the next home, and might even make the purchase unworkable.
Repair Allowances Could Be a No-Go
If you are already paying the real estate commission, plus picking up the buyers closing costs, you may not be in a position to handle repair allowances, should the buyers request that you do.
Repair allowances can be an issue if your carpeting needs to be replaced, if there is significant cosmetic damage to the property, or even if there are poorly functioning appliances that need to be replaced.
Selling your home typically involves a succession of minor concessions that will bring the buyers to the point of being willing to complete the purchase. If you are not in a position to cover the cost of these concessions, you may not have a sale at all. The real estate commission will limit your options once negotiations on the final sale price begin.
The Damage Will Be Greater in a Soft Housing Market
So far we’ve discussed what the real estate commission could do to harm your chances of buying your next home. But we’ve discussed those concessions within the context of a normal housing market. However if the market in your area is soft – and it still is in much of the country – all of the issues we’ve discussed so far will be magnified.
While you may have the option to pay the buyers closing costs or to make repair allowances in a strong market, these are virtual requirements in a weak market. And the amount of money that you will have to provide will likely be even higher.
For example, in a strong market, a buyer may be perfectly willing to overlook the fact that your home has a 20-year-old roof on it. But in a soft market, buyers will almost certainly require that the roof be replaced. The same will be true with appliances, carpeting, and various other repairs.
Buyers will insist that you cover these costs simply because they can – the market is on their side. And they can because every home seller in town is competing for the attention of a very limited number of potential buyers.
You can make it easier to sell your home, and to have the down payment available to buy your next home, by selling your home yourself (FSBO) without using the services of a real estate agent. If you don’t think that you can do it yourself, check out my Selling Your Home Made Simple program. You’ll learn how to sell your home the way a real estate agent will – and you’ll learn it from a real estate agent – me – with many years of experience in the business.
Selling your current home is never simply about getting the property sold. If you plan to buy a new home, you will need every dime you can get to make a down payment on that property. Selling the house without using a real estate agent is one of the very best ways to make sure that you maximize the cash that the sale of your home can provide.
I’m here to help you do that.
( Photo by Images_of_Money )
