A Cost Breakdown of Short-Term Buying

Purchasing and selling a house is a significant financial decision that involves various expenses. While real estate can be a lucrative investment in the long run, buying and selling a property within a short timeframe can add up to substantial expenses. A typical rule of thumb is it takes an average of 5 years to break even or make a profit on your home. In this article, we will explore the expenses associated with buying and selling a house within a relatively short period. We’ll see how our fictional homeowner, Alex, incurred expenses when buying and selling her home in less than 2 years.

Buying Costs

Down Payment: The down payment is typically the largest upfront expense when buying a house. It usually ranges from 3% to 20% of the property's purchase price, depending on the type of mortgage and the buyer's financial situation. When you sell your home, you’ll receive your down payment back in the form of proceeds. What you can consider is the amount of income your down payment would generate in interest.

For example, if Alex purchased a $300,000 home with a 20% down payment, Alex would pay $60,000 upfront. If Alex invested her $60,000 in a high-yield savings account with a 4% APY, she could have almost $65,000 at the end of 2 years.

• $5,000 in loss of interest.
• Total cost $5,000.

Closing Costs: Closing cost expenses include loan origination fees, appraisal fees, title search and insurance fees, attorney fees, and other associated charges. On average, closing costs can amount to 2% to 5% of the property's purchase price. Closing costs are sunk costs in your home; you won’t recuperate these costs when you sell your home as closing costs occur every time a home is sold.

If Alex purchased a $300,000 home with closing costs of 3%, she would pay $9,000 in closing costs.

• $9,000 in closing costs.
• Total cost $14,000.

Home Inspection: Hiring a professional home inspector is crucial to identify any underlying issues with the property. The inspection fees can range from a few hundred to a few thousand dollars, depending on the size and complexity of the house. All homes posted FSBO on Realtyless include a home inspection in the Home Facts. This can save buyers the cost of hiring an inspector.

Alex purchased a home inspection before buying her home.

• $500 for the home inspection.
• Total cost $14,500.

Loan Amortization Schedule: An amortized loan is a mortgage that requires you to make scheduled (typically monthly) payments that are applied to both the principal and interest. The payment first pays off the interest expense with any remaining payment put towards reducing the principal.

If Alex took out a $240,000 loan ($300,000 home - her $60,000 downpayment) and each month made her mortgage payments for two years, the remaining balance on her loan could be around $234,500. Over two years, Alex could have paid around $32,000 in interest towards her loan while only earning $5,500 in equity in her home.

• $32,000 in interest.
• Total cost $46,500.

Moving Expenses: Moving costs can vary based on factors such as distance, number of belongings, and the need for professional movers. This expense can include packing supplies, truck rentals, and potential storage fees. According to Forbes, the national average cost of moving is approximately $1,400.

Alex rented a moving truck and purchased supplies to pack her things.

• $500 in moving expenses.
• Total cost $47,000.

Selling Costs

Real Estate Agent Commission: When selling a house, homeowners can choose to enlist the services of a real estate agent. Agents typically charge a commission of 6% of the sale price to sell the home. Although, if sellers use Realtyless to sell their home, they can save 100% of the commission costs associated with selling.

If after two years, Alex listed her home for sale with an agent for $330,000, she would need to pay her agent a commission of $19,800.

• $19,800 in agent commission.
• Total cost $66,800.

Capital Gains Tax: If the property has appreciated in value since its purchase, you may be subject to capital gains tax. The tax rate depends on your income bracket and the length of time you owned the property. Short-term capital gains are typically taxed at the same rate as your ordinary income.

If for example, Alex purchased her home for $300,000 and sold it for $330,00 in less than 2 years, she could pay $6,600 in capital gains (with a 22% tax rate).

• $6,600 in capital gains tax.
• Total cost $73,400.

Closing Costs: Similar to the buyer's closing costs, sellers are responsible for certain closing costs, such as attorney fees, transfer taxes, and recording fees. These expenses typically range from 1% to 3% of the sale price.

A 1% closing cost on Alex’s $330,000 home would be $3,300.

• $3,300 in seller closing costs.
• Total cost $76,700.

Mortgage Payoff: If you still have an outstanding mortgage, the remaining loan balance must be paid off upon selling the property. This amount includes the remaining principal and any applicable prepayment penalties. Prepayment penalties can range from a fixed amount to a percentage.

If Alex still had $234,500 on her loan and has a 2% prepayment penalty, she would need to pay an additional $4,690.

• $4,690 in prepayment penalties.
• Total cost $81,390.

Moving Expenses: Moving costs are included in both moving in and out of your home.

Alex rented another moving truck and purchased supplies to move.

• $500 in moving expenses.
• Total cost $81,890.

Conclusion

Buying and selling a house within a relatively short period can incur significant costs. By carefully evaluating these costs and factoring them into your financial planning, you can make a more informed decision about whether buying and selling a house within a short timeframe aligns with your financial goals.

Our homeowner, Alex, incurred expenses of $81,890 while owning and living in her home for 2 years. She earned $5,500 of equity in her home and sold her home for $30,000 more than she had purchased it. Although it was a risk and largely depended on the state of the housing market, Alex gained $35,500 by purchasing her home. Alex’s gains compared to her incurred expenses left Alex with a loss of roughly $46,390 to own her home.

• $81,890 (loss) - $35,500 (gain) = $46,390 in total cost

She didn’t have to pay to rent a home but had to repair problems around the house, pay property tax and HOA fees, and had the stress of selling her home when she needed to move. She enjoyed living in her home and having the control and satisfaction of homeownership. At the end of the day, Alex was happy with her decision but will consider the costs of short-term buying when she purchases her next home.