Closing on your home sale is supposed to be an exciting moment. The long process of selling is finally over, and you walk away with a nice check that you can put in the bank or use toward the purchase of your next home.
Sometimes, however, home sellers can end up paying to close a deal. In fact, circumstances like this happen far more often than you might imagine. Let's look at what could happen to put a seller in this position—and how you can cope if it happens.
- The costs associated with selling your home can exceed the amount of equity you have built up if you have not owned the home very long.
- Your home's value and sale price can be affected by changes in the neighborhood and by the real estate market as a whole.
- Last minute repairs can add significant costs and delay your home's closing.
- If you can't afford closing costs, you may want to consider borrowing money, tapping into retirement accounts, or applying for a short sale.
Not Enough Equity
If you've owned your home less than two years and took out a type of mortgage loan that was greater than 90% of the purchase price, it's possible you don't have enough equity to pay closing costs on a new sale. Closing costs, including a real estate commission, can run 7% to 11% of the purchase price. These are first and foremost the buyer's responsibility, but buyers will often negotiate for sellers to pay at least a portion.
Declining Real Estate Market
Perhaps you're trying to sell in a falling real estate market, which would mean your home might not be worth enough to generate a profit upon selling. Real estate cycles can make markets move down as well as up. Not every home appreciates every year, and sometimes you may have to time your sale during a downturn.
Neighborhood Values Change
Sometimes external factors or nearby foreclosures affect property values. When new subdivisions are built nearby and the homes are offered for less, buyers will gravitate toward the new construction, shunning slightly older homes. New commercial developments change the value of surrounding homes. Sometimes homes with views lose those views when high-rise buildings are constructed.
Few deals are closed until the buyer has completed a home inspection. Home inspections and pest inspections can turn up undisclosed problems or home deficiencies that run into thousands of dollars to fix. What can start out as a simple repair job may expose other problems when walls are opened up or roof shingles are removed.
If a home inspection reveals a material issue, or something that needs to be repaired, prospective home buyers can make the sale contingent on these repairs.
How Sellers Pay to Sell
It's not always easy to figure out how to bring money to the table when you expected to get a check, but there are a few ways sellers in this situation can make it work.
Tap Retirement Accounts or Borrow From Family
In some cases, you may be lucky enough to have friends or family who can help you bring cash to the table.
For example, one woman in Sacramento took out a home equity loan against her condo to help make the payments. When she could no longer afford to make the payments, she bought another home with 100% financing. Then she rented her condo and put it on the market. Her tenant was uncooperative, however, and made it difficult for the woman's agent to show the condo. The tenant had to go. Coupled with falling prices, this seller was going further into debt every month. This seller finally had to face the fact that if she wanted to sell her condo and not lose it through foreclosure, she would need to bring money to the table to close her sale. Fortunately, her parents gave her the cash.
Bite the Bullet
Sometimes you may be willing to sell even if it's not financially ideal at that moment. For example, one seller who was underwater insisted on selling because he no longer liked his neighborhood nor his neighbors. Out of all the homes in his subdivision, he was the only owner occupant. The rest of the homes were rentals, which pulled down the values. It was worth it to him to spend $30,000 to get out of that neighborhood and into a more desirable one. He withdrew the money from savings and bit the bullet.
Ask for a Short Sale
Not all lenders will agree to a short sale. There are specific requirements and conditions that will persuade a lender to forgive the debt. But, if the circumstances are bad enough and your lender will work with you, sometimes it's the best option.
A short sale occurs when the home lender agrees to accept less than the full amount due on the mortgage to close the deal. If you decide to apply for a short sale, make sure you're aware how it might negatively affect your credit score.
For example, one seller in North Sacramento had no assets, no income, and he had refinanced his home over market value. He owed more than the home was worth. For him, negotiating a short sale with the lender meant he could walk away from the property without a foreclosure on his record. He also had to pay taxes on the amount of debt that was forgiven, but that amount was taxed at a low tax bracket of 15%. Paying 15% of short sale taxes was preferable to bringing in the entire amount in cash, plus closing costs, to sell.
The Bottom Line
When you're underwater on your home—or barely have your head above it—there's no perfect solution. Every situation is different. At times, it may be better to hold out and wait for a better time to sell. If you find yourself in financially difficult circumstances trying to sell your home, talk to a financial advisor or CPA to help you weigh the pros and cons of bringing cash to close when you sell your home.