Nov. 8, 2021
How Soon is "Too Soon" to Sell a House
You buy a house, move in, and then… life happens. You get pregnant, get a new job, or maybe the neighbors have all-night parties, or you discover a factory is being built down the road.
Or if you're like most property owners right now in today’s hot seller's market, you decide it may be the right time to cash in on the rapid equity growth by selling your home. But there is such a thing as too soon to sell a house. No matter the reason for thinking about selling, you need to consider your legal and financial implications before listing. Read on to find out just how soon you are able to sell and what factors can significantly impact your decision so that you aren't faced with more unexpected surprises.
How soon can you sell a house legally?
Technically, you can sell your house the day you close. It's called a double closing or concurrent closing, and wholesalers use this approach on a regular basis. But -- and that's a big but -- just because you can doesn't mean you should. Wholesalers are professionals who have a full understanding of the legal and financial implications and have accounted for them ahead of time so that they stay out of trouble and still turn a profit. For most homeowners, it will take between six months and two years before it makes sense to sell a house, depending on price appreciation and your financing approach.
Three reasons not to sell too quickly
1. Capital gains
If there is equity in the home and you will be generating a profit, you will get taxed on that amount as income. If you are selling after you have been in a property for two years (not necessarily consecutive), you will pay considerably lower capital gains taxes than you would if it were less because it is considered your primary residence. You can potentially avoid this by doing a 1031 exchange. How much you are taxed will depend on your IRS income tax bracket.
2. Prepayment penalty
If you are carrying a mortgage on the property, there is more than likely a clause in the contract that states there's a fee you must pay in order to terminate the loan early. This helps the mortgage broker recoup their costs and some of their anticipated profits that would otherwise be lost by paying off a loan early. The penalty can vary greatly, or you may not have one at all. Penalties may require you to pay just a few months' interest or potentially a percentage of the entire balance, depending on your specific terms.
3. The break-even point
If your house has equity based on what you paid for it and what it's now worth, it doesn't mean you will actually turn a profit by selling. You need to consider all of the additional expenses associated with buying and selling a house to determine the real profits. You will need to account for buyer's closing costs you initially paid (typically between 2% and 5%) and the seller's closing costs (typically between 8% and 11%) for getting out of the home, as well as any repairs or improvements that have been made to the property since you have lived in it. This is in addition to the first two expenses mentioned above.
Alternatives to selling before it makes sense
If you're in a bad spot or the grass just seems greener on the other side or selling now doesn't make sense financially, you can consider alternative solutions that will get you out of the house without losing your tail. You might run numbers on renting the property to cover the mortgage until it does make sense to sell.
If you're close to break-even but aren't quite there yet and don't want to commit to a full one-year lease, doing short-term vacation rentals could potentially fill the gap in the meantime, but this will come with extra time and financial commitments in most scenarios and may not be feasible depending on your local zoning laws. Keep in mind that either of these options still leaves you without the equity or down payment money tied up in the first house. So you will either need more savings to finance the next house purchase, or you may need to end up renting yourself.
No matter the why, the how is important. Making sure that you are able to afford the cost of selling is critical with so many factors that come into play during the first few years of homeownership. It will be important to consult with your tax preparation professional and likely a real estate attorney in addition to a real estate agent before making any moves to sell your house. They will be able to guide you to a realistic, ideal scenario based on your income bracket, governing laws, and local market comparables. This is a situation where you want to play offense, not defense, or you could be stuck with a bill you just can't pay.
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