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Why Finances Come First for Home Sellers

Steve Flanagan August 31, 2023

Long before you hire a moving company or think about what color you’d paint the front door of that house you have your eye on, ask yourself two simple questions: Do I have enough equity in my home to support the idea of selling and moving elsewhere? Are my finances in order?

If your answer to either is “I don’t know,” dig deeper.

The Cost of Selling

The first piece of information you need is exactly how much you owe your lender on your current mortgage. (By the way, if the answer is zero or very little, skip directly to the Preparing phase). If you get a statement every month from your lender it should include your loan balance. If not, call your lender and find out what you owe.

Be sure to include any second mortgage or home equity loan or line of credit you have in your loan balance calculation. Also, if your primary mortgage loan or any secondary loans have prepayment penalties you will need to factor those in as well (check you loan documentation for that information).

Next, conduct your own comparative market analysis to get a good, preliminary idea of what your home is worth — the second critical piece of information you’ll need to accurately gauge your home-selling financial position.

To get a really solid idea of your home’s value, hire an appraiser. At this point, it may be well worth the $300 or so investment.

Once you feel you have a good idea of your home’s value, subtract what you owe from the estimated value and you will have a good idea of your gross equity. Note that there is a difference between gross equity and net equity. Gross equity is the difference between the market value of your home and the amount you owe to the lender, while net equity is the gross equity less the costs of selling the home.

Gross vs. Net Equity

To calculate net equity, make a list of closing costs you expect to incur and subtract that total amount from gross equity. Closing costs might include (but not necessarily be limited to):

o Agent’s commission
Full service agent: 6% of sale price
Discount agent: 1% – 3% of sale price
“By owner,” offering buyer’s agent commission: 2% – 3%
“By owner,” no agent; no commission owed

o Appraisal
o Home inspection
o Staging your home
o Repairs/touch-ups
o Paying for buyer’s points or closing costs, as negotiated
o Other negotiable concessions to buyer
o Municipal/state transfer taxes
o Real estate legal fees
o Title insurance
o Moving

As an example, let’s say you home is worth about $280,000 and you owe your lender $205,000. Your gross equity is approximately $75,000. If you estimate your closing costs at $30,000, including an agent’s 6 percent commission of almost $17,000, net equity is $45,000. Of course, if you sell by owner you retain the cash that would normally go to an agent (or approximately half of it if you list with MLS and pay a buyer’s agent).

Now, estimate how much cash you will need as a down payment for your next home, or how much cash you’d like to take out of the transaction to pay off debt or other expenses such as college tuition if you are not buying your next residence. These funds will come directly out of net equity.

What Your Net Equity Means

Once you have calculated your net equity and your financial goals, here are some markers to consider as you utilize that information to help you decide whether you are in good financial position to sell:

• If your net equity is at least 20 percent of your home value, most advisors would agree that you are in good financial shape to move forward with your plan to sell.
• Between 10 and 20 percent and things are tighter but should work out if you get an offer near your asking price and you are not looking to take a lot of cash out of the transaction.
• If your equity is under 10 percent, selling will be a challenge unless you are not planning to buy your next home and you don’t need to take much money out of the transaction. Saving the agent commission by selling your home on your own could very well be the key to making a sale happen in tight financial circumstances. If you move forward, crunch the numbers again to arrive at a figure that you absolutely can’t go below as a sales price.
• If you have negative equity – commonly called being “underwater” — you are going to have a tough time completing a sale unless you have an independent way of making up the difference between what you owe and your final sale price. If you need to sell for financial reasons, but you’re underwater, you may consider borrowing from other sources. Visit, or to learn more.

Selling and Buying at the Same Time?

Get a clear picture of mortgage interest rates locally — current rates and trends — so you have a better idea of what you can expect when you apply for a loan on a new home. Next, contact several of your local banks and talk to their mortgage lenders about their current rates and the lender’s view of the marketplace. Your local newspaper may also be a good source for mortgage rate information. At this point, check your credit report as well so you can determine if you’re in position to qualify for a loan on a new home, or if you need to improve your credit score.

Selling your home for sale by owner (also known as FSBO) is a cost-effective way to hold onto whatever equity you have and avoid paying agent commission fees. You control your listing; we help you navigate the by owner process. We’re so dedicated to helping you sell your home, we even offer a Home Selling Guarantee.