Financial Considerations in the Sale of a Home

by : Seb Frey

After you sell your home, you will need to live somewhere (presumably!). Do you plan to buy another home, or will you be renting?

If you intend to buy another home, you ought to be talking to a lender to arrange for the financing. The loan officer will help you figure out how much you can afford to buy, and can alert you to trouble spots in your credit report that may cause you grief, result in higher payments, or worse.

You may be looking for just a straight home loan, or you may want to consider getting bridge financing, which will allow you to purchase your next home before you have sold your current home.

Bridge financing can be more expensive, but if you've already identified your dream home and need to move quickly, this may be the best route for you to go - talk to your lender! If you don't have a lender, please contact me, as I can put you in touch with one.

It may be that you are selling a property that is held for investment purposes (e.g. it's a property which you rent out, or it's vacant land, etc.). If this is the case, you may want to do a 1031 tax-deferred exchange.

This is a legal mechanism to avoid (well, delay) paying the tax on the capital gains you receive from the sale of non-owner-occupied property. If you would like a referral to a certified 1031 exchange specialist, please contact me.

You may also want to talk to a financial planner. You may end up with quite a lot of cash when you sell your home - is it a wise investment to put all that cash into your next home? Or might it be better to invest some of that cash?

This depends on the return on your investments, as well as the cost of a home loan, so you will want to coordinate between your loan officer and the financial planner, each feeding information to the other to come up with the best financial scenario for you going forward.

When talking to your loan officer and/or financial planner, there are a few important numbers to bring with you: the amount you owe on your current residence, and the amount of cash you realistically expect to net after the sale of your home. To determine the outstanding balance owed on your home, contact your current lender.

To determine your net proceeds after sale, you should first ask your Realtor to prepare the aforementioned Comparative Market Analysis (CMA) for your home. From this estimated sales price, subtract the sale preparation and closing costs to arrive at your net earnings.

If you intend to buy another home after the sale of your present home, you should also calculate the costs involved in the purchase of that home. If you don't yet know which home you'll be buying subsequently, this is difficult to calculate; some homes will need a fair amount of work to get them to the point with which you are happy with them, whereas others will be "turnkey" - nothing needs to be done, you can just move right in, and the only costs you will have to incur are the seller's closing costs (somewhere under 1% of the purchase price).