Most people who don’t know how to sell or buy a house
want to know how quickly they can sell their house after purchasing it. Most people can legally sell their home anytime after they purchase it, however, there might be financial consequences for selling your house quickly.
In this article, we will discuss the different time frames you can sell a house, starting from the time you sign the purchase agreement to 30 years down the road when your mortgage is paid off. We will go through the pros and cons of selling at certain times and what you need to be aware of when thinking about when to sell a house.
Why Do People Sell Their Houses Quickly After Buying?
There are many reasons why someone wants to know how to sell a house soon after they purchased it.
- New Job - a new employer or position might require one to relocate or to shorten a commute.
- Change in the Family - Loss of a family member, divorce, addition of a family member, or children leaving for college can spark changes in the housing needs for a family.
- Medical Emergency - Medical bills and living expenses may need to be paid with the established equity in a house.
- Buyer’s Remorse - The house may not be a good fit for the family’s lifestyle or needs.
- Financial Woes of Homeownership - Mortgage payments, property taxes, and necessary home repairs may be too much of a burden.
- Hot Sellers Market - A house’s value may have increased quickly and one might want to take advantage of the extra equity that’s built up.
Wholesaling: How to Sell Your House Before You Buy It.
Most people don’t realize that rights to the property begin when a purchase agreement (contract to buy a house) is signed by the buyer and seller, AND the buyer pays the earnest money (a good faith payment to the seller that says the buyer will hold up their end of the agreement). Real estate wholesaling
is when a person transfers their rights in a house purchase and sale agreement to another person or party, usually for a fee.
Let’s use real estate investor, Kevin, as an example. Kevin signs an agreement to buy a house from Liz for $50,000 knowing that it’s worth $75,000. Real estate investor, James, wants the property and agrees to pay Kevin $10,000 to have the right to purchase the home from Liz for $50,000. Kevin get’s $10,000, James saves $15,000, and Liz gets the $50,000 she wanted for the house. Kevin will most likely need to pay capital gains tax on the $10,000 James paid him.
HUD Homes and Homes Sold by Government Agencies
Several government agencies have houses to sell, however, the Department of Housing & Urban Development (HUD) has by far the most to sell. These are houses that were once on FHA (Federal Housing Authority) loans and are now foreclosures. In order to purchase these homes, you must live in the property as an owner-occupant for 12 months. Selling before the 12 months is over is considered fraud by HUD, and there could be financial consequences and the barring from using government programs in the future. Check out the homes for sale with HUD and other government agencies.
Capital Gains Tax Avoidance
When you make a profit when you sell a house, you must pay capital gains tax unless you qualify for an exemption. To qualify, your home must be your primary residence and you must have resided there for at least two of the last 5 years. The 2 years do not need to be consecutive, however, they must be within those 5 years.
This exemption allows for single individuals to exclude up to $250,000 of their gains, and married individuals up to $500,000. Let’s say Jean and Joe sell a house for $700,000 when they paid $100,000 for it originally. If they qualify for this exemption, they would only need to pay capital gains tax on $100,000 of the $600,000 profit they made on the house.
The breakeven horizon is the point at which homeownership financially outweighs the cost of renting. The idea is that, in a normal market, your house will increase in value, and this growth in equity will outweigh the costs of ownership (transaction costs for when you buy or sell a house, moving expenses, etc.). Take the increase in equity and compare it to what you could have made if you invested the money to buy a house into other profitable ventures. This could be different from person to person, however, most people refer to historical savings and traditional investment returns (stocks, bonds, mutual funds, exchange-traded funds, etc.).
House breakeven horizons vary depending on the real estate market you’re in and current mortgage interest rates. Typically, the faster house values and rents in your area increase, the shorter your breakeven horizon is. For instance, here in Charleston, SC, the average breakeven horizon is 1.9 years (check out your market’s breakeven horizon).
Mortgage Prepayment Penalty
Mortgage prepayment penalties are fees that lenders charge you for paying off your mortgage early. Most first-time house buyers are shocked when they find this out while learning how to sell a house. The majority of people you take loans from want the money back as soon as possible, however, mortgage lenders are different, here’s why.
The riskiest time frame for a lender is in the first few years of your mortgage. When you factor in that most house buyers use most of their savings on top of borrowing money for such a large purchase, anything could cause the new house owner to default on their loan. When you add that to insufficient equity in the house to cover transaction costs if the lender needs to foreclose and sell the house. More of your payment in the beginning of the mortgage term goes toward interest rather than the principal (actual amount you borrowed) to compensate for the extra risks associated with a new mortgage. Lenders lose out on these interest fees when you refinance or sell a house.
Mortgage lenders use prepayment penalties as a way to make sure they collect those interest-heavy payments at the beginning of the loan. They will offer lower interest rates knowing that they will make up for it over the life of the mortgage. This can be viewed as deceptive and is illegal for some loans, such as FHA loans, VA loans, and USDA loans.
How Soon Can You Sell a House After Buying It? Anytime!
If you want to sell a house
right after you purchase it, go right ahead. We covered some of the major consequences of selling your house soon after buying it, including; being banned from government programs, fines, capital gains tax, insufficient equity to cover the costs of selling, and mortgage prepayment penalties. If someone is unsure whether they should sell a house now or wait, it’s best to consult with a Realtor
who can help identify all the pros and cons when determining if and how to sell a house quickly.