Mistake Number Five
Most Homeowners Think They Need To “Pay Off” Their Mortgage: Do you have a mortgage on your house? If not, then Congratulations! You are truly in the minority of homeowners. Maybe you inherited a property from a relative, or you have just been extremely diligent in making extra payments to pay down your mortgage. Either way, when you decide to sell, you have even more options available to you since you own your home “free and clear.” If you fall into this category, we can help you (at no charge) decide the best strategy for maximizing the NET CASH Equity you receive from the sale of your house. Most of us, however, do have a mortgage. Usually a 1st mortgage, and maybe a 2nd mortgage as well. Or maybe it’s a HELOC (Home Equity Line of Credit). Either way, when you are deciding how much money to “ask” for your house, it’s important to make sure that you will receive enough proceeds to payoff all of the mortgage obligations. Otherwise, you will need to “bring money to the table” to closing.
When calculating your Gross Listing (or “Asking”) Price, you need to make sure you figure in the following: Realtor Commission, Taxes, Closing Costs, Listing Discount, Seller Subsidies, Repairs, etc. You can use 10-13% as a rough estimate for how much all of this will cost, but in some markets your NET profit from the sale of your home can be as much as 15% below the Listing Price.
In the following example, Tracy lives in a neighborhood where the Market Value (what average houses in the neighborhood are actually selling for) is $300K, and Tracy has lived there for 5 years. Tracy made an initial Down Payment of 20% of the original $225K purchase price, and has been making all the payments on time, so now the outstanding Mortgage is $175K. How much NET CASH Equity should Tracy expect to walk away with?
$300,000 [GROSS] Listing Price (Asking Price)
-18,000 Realtor Commission (6%)
-12,000 Closing Costs (4%)
-9,000 Listing Discount (3%)
-6,000 Limited Repairs / Professional Cleaning (2%)
$255,000 NET Sales Price
-175,000 Mortgage Payoff
$80,000 [NET] CASH Profits (Equity)
BOTTOM LINE: Assuming the house is in good condition (for the neighborhood), and is priced appropriately (based on recent sales in the neighborhood), Tracy can expect to walk away with $80K. However, it still might take 3 to 6 months to sell, during which time Tracy will still have to continue paying the Mortgage, Taxes, Utilities, Maintenance, etc. Of course, this assumes Tracy’s buyer is able to successfully obtain mortgage financing…which is not as easy as it was a couple of years ago, especially for first-time homebuyers. Over the next few pages, let’s go into depth on each of these items to gain a better understanding of the difference between Gross Listing Price and NET Cash Profits.
a) Realtor Commission. Is this negotiable? Of course it is…everything is negotiable, but you should expect to pay at least 6% for the marketing services a professional Realtor will provide. Realtors provide a valuable service – they match buyers with sellers. They typically have considerable resources at their disposal to help sell your house, and if you use their services, then your Realtor deserves to be paid for their efforts. But do you really need a Realtor to sell your house? That depends a lot on you, and how comfortable you are with the process of selling your house. After studying this free report, you will be even better equipped to navigate the house-selling process on your own terms!
b) Closing Costs. These will be discussed more in Mistake #6: “Most Homeowners Underestimate Closing Costs” but in general, 4% is a good estimate. The taxes due, and/or recordation fees will depend on your city/county/state. For example, in the Washington, DC Metropolitan area, these fees typically range from 2.2% to 3% of the Contract Sales Price. Then, you need to add an additional $1,500 – $2,000 for all the other miscellaneous closing costs that will be detailed on the HUD-1 settlement sheet you receive at closing. All together, this will probably be somewhere between 3.5% and 4%.
c) Listing Discount. In some markets, at certain times, this may not be required, but in most markets, right now, houses are selling “at a discount” not “at a premium” and this concept is very important to understand if you plan to sell or buy in the next 2 years. For instance, the first house I purchased was new construction from a builder who wanted to unload his inventory of vacant homes…so I was able to negotiate a modest discount on the purchase price. Then, the next house I bought was in a different geographical area, at the height of a “seller’s market” and I actually had to pay more than the Listing Price. This was about 5 years ago, when “escalation clauses” & “bidding wars” were common and sellers had tremendous power. Well, real estate is all cyclical, so now we’re back in a situation like when I bought my first home…there are many more houses for sale than there are qualified buyers. They key word there is “qualified” because we all know how stringent the mortgage approval and underwriting process has become as a result of the recent collapse of the “sub-prime” market. Yes, people are still buying houses, the process has just slowed down considerably. That’s why, as a Homeowner, it’s absolutely critical that you understand what is going on in your local market if you want to maximize the NET CASH Equity you receive from the sale of your house. If you want to sell fast, you should expect to offer a Listing Discount or Seller Subsidies (e.g., assistance with buyer’s closing costs) of 3% to 5% below market value.
So it’s all about figuring out how much NET CASH Equity you can expect to receive after you pay off your mortgage, right? Right, unless…
…you decide NOT to pay off your mortgage.
Huh? You may not be as familiar with this scenario, but I am here to tell you that there are plenty of buyers (many of them investors, like us) who will offer you NET CASH Equity for your house and simply “take over” your mortgage payments.
Never heard of this? It’s called purchasing a house “subject to” the seller’s existing financing, and it’s an option that more and more homeowners are taking advantage of because it solves their problem immediately. We provide this service to homeowners through our STEM program (Subject To Existing Mortgage).
When we purchase a home via our STEM program, there are significant advantages to the homeowner because they:
· Don’t have to keep paying the mortgage…we “take over” payments immediately
· Don’t have to put house on the market…no open houses, no lockbox
· Don’t have to make any repairs…we purchase the home “as is”
· Don’t have to wait for a bank to approve the loan…we pay CASH!
· Don’t have any prepayment penalties…we “take over” the mortgage, not pay it off
· Don’t have to pay any closing costs…we incur all of these expenses
· Receive NET CASH Equity in as little as 10 days!
So it’s still all about figuring out how much NET CASH Equity you can expect to receive…but your mortgage might not need to get paid off right away. Essentially, with our STEM program, the mortgage loan stays in your name, but you no longer have an obligation to make the payments.
If you’re interested in learning more about our STEM program and to see if it might be a good option for you, call us today to request your free consultation.
Most Homeowners Think They Need To “Pay Off” Their Mortgage: Do you have a mortgage on your house? If not, then Congratulations! You are truly in the minority of homeowners. Maybe you inherited a property from a relative, or you have just been extremely diligent in making extra payments to pay down your mortgage. Either way, when you decide to sell, you have even more options available to you since you own your home “free and clear.” If you fall into this category, we can help you (at no charge) decide the best strategy for maximizing the NET CASH Equity you receive from the sale of your house. Most of us, however, do have a mortgage. Usually a 1st mortgage, and maybe a 2nd mortgage as well. Or maybe it’s a HELOC (Home Equity Line of Credit). Either way, when you are deciding how much money to “ask” for your house, it’s important to make sure that you will receive enough proceeds to payoff all of the mortgage obligations. Otherwise, you will need to “bring money to the table” to closing.
When calculating your Gross Listing (or “Asking”) Price, you need to make sure you figure in the following: Realtor Commission, Taxes, Closing Costs, Listing Discount, Seller Subsidies, Repairs, etc. You can use 10-13% as a rough estimate for how much all of this will cost, but in some markets your NET profit from the sale of your home can be as much as 15% below the Listing Price.
In the following example, Tracy lives in a neighborhood where the Market Value (what average houses in the neighborhood are actually selling for) is $300K, and Tracy has lived there for 5 years. Tracy made an initial Down Payment of 20% of the original $225K purchase price, and has been making all the payments on time, so now the outstanding Mortgage is $175K. How much NET CASH Equity should Tracy expect to walk away with?
$300,000 [GROSS] Listing Price (Asking Price)
-18,000 Realtor Commission (6%)
-12,000 Closing Costs (4%)
-9,000 Listing Discount (3%)
-6,000 Limited Repairs / Professional Cleaning (2%)
$255,000 NET Sales Price
-175,000 Mortgage Payoff
$80,000 [NET] CASH Profits (Equity)
BOTTOM LINE: Assuming the house is in good condition (for the neighborhood), and is priced appropriately (based on recent sales in the neighborhood), Tracy can expect to walk away with $80K. However, it still might take 3 to 6 months to sell, during which time Tracy will still have to continue paying the Mortgage, Taxes, Utilities, Maintenance, etc. Of course, this assumes Tracy’s buyer is able to successfully obtain mortgage financing…which is not as easy as it was a couple of years ago, especially for first-time homebuyers. Over the next few pages, let’s go into depth on each of these items to gain a better understanding of the difference between Gross Listing Price and NET Cash Profits.
a) Realtor Commission. Is this negotiable? Of course it is…everything is negotiable, but you should expect to pay at least 6% for the marketing services a professional Realtor will provide. Realtors provide a valuable service – they match buyers with sellers. They typically have considerable resources at their disposal to help sell your house, and if you use their services, then your Realtor deserves to be paid for their efforts. But do you really need a Realtor to sell your house? That depends a lot on you, and how comfortable you are with the process of selling your house. After studying this free report, you will be even better equipped to navigate the house-selling process on your own terms!
b) Closing Costs. These will be discussed more in Mistake #6: “Most Homeowners Underestimate Closing Costs” but in general, 4% is a good estimate. The taxes due, and/or recordation fees will depend on your city/county/state. For example, in the Washington, DC Metropolitan area, these fees typically range from 2.2% to 3% of the Contract Sales Price. Then, you need to add an additional $1,500 – $2,000 for all the other miscellaneous closing costs that will be detailed on the HUD-1 settlement sheet you receive at closing. All together, this will probably be somewhere between 3.5% and 4%.
c) Listing Discount. In some markets, at certain times, this may not be required, but in most markets, right now, houses are selling “at a discount” not “at a premium” and this concept is very important to understand if you plan to sell or buy in the next 2 years. For instance, the first house I purchased was new construction from a builder who wanted to unload his inventory of vacant homes…so I was able to negotiate a modest discount on the purchase price. Then, the next house I bought was in a different geographical area, at the height of a “seller’s market” and I actually had to pay more than the Listing Price. This was about 5 years ago, when “escalation clauses” & “bidding wars” were common and sellers had tremendous power. Well, real estate is all cyclical, so now we’re back in a situation like when I bought my first home…there are many more houses for sale than there are qualified buyers. They key word there is “qualified” because we all know how stringent the mortgage approval and underwriting process has become as a result of the recent collapse of the “sub-prime” market. Yes, people are still buying houses, the process has just slowed down considerably. That’s why, as a Homeowner, it’s absolutely critical that you understand what is going on in your local market if you want to maximize the NET CASH Equity you receive from the sale of your house. If you want to sell fast, you should expect to offer a Listing Discount or Seller Subsidies (e.g., assistance with buyer’s closing costs) of 3% to 5% below market value.
So it’s all about figuring out how much NET CASH Equity you can expect to receive after you pay off your mortgage, right? Right, unless…
…you decide NOT to pay off your mortgage.
Huh? You may not be as familiar with this scenario, but I am here to tell you that there are plenty of buyers (many of them investors, like us) who will offer you NET CASH Equity for your house and simply “take over” your mortgage payments.
Never heard of this? It’s called purchasing a house “subject to” the seller’s existing financing, and it’s an option that more and more homeowners are taking advantage of because it solves their problem immediately. We provide this service to homeowners through our STEM program (Subject To Existing Mortgage).
When we purchase a home via our STEM program, there are significant advantages to the homeowner because they:
· Don’t have to keep paying the mortgage…we “take over” payments immediately
· Don’t have to put house on the market…no open houses, no lockbox
· Don’t have to make any repairs…we purchase the home “as is”
· Don’t have to wait for a bank to approve the loan…we pay CASH!
· Don’t have any prepayment penalties…we “take over” the mortgage, not pay it off
· Don’t have to pay any closing costs…we incur all of these expenses
· Receive NET CASH Equity in as little as 10 days!
So it’s still all about figuring out how much NET CASH Equity you can expect to receive…but your mortgage might not need to get paid off right away. Essentially, with our STEM program, the mortgage loan stays in your name, but you no longer have an obligation to make the payments.
If you’re interested in learning more about our STEM program and to see if it might be a good option for you, call us today to request your free consultation.
