A Crash Course in Net Proceeds

For many, buying a house is emotional, but selling one is all about the money. So it’s expected that you’ll want to command the highest possible price point for your house. But before you turn your nose at a “lowball” offer—be sure to do the math on net proceeds, rather than get starry-eyed over a price marked by hidden asterisks.

Selling a house isn’t like putting your couch up for sale on Craigslist where you set a price of $200, and pocket a full $200 in return.

With an asset as big as your home, you have to account for a number of associated costs—such as agent commissions, taxes, home prep, and title fees—before you can realistically grasp your take-home money from the sale. In fact, the average seller can expect to shell out between 7%-12% of their home’s value to sell a house.

To put that in perspective, a recent Zillow analysis estimates that it costs nearly $21,000 to sell a home in 2019. Moreover, while many sellers budget for those 5%-6% agent commissions, they often forget to account for extra fees that can bring the actual cost up to around 10% of the sale price, according to Opendoor.

This boils down to the difference between two key figures for sellers: sale price (the total amount of money paid for the house) versus net proceeds (the money you’ll actually see in your bank account).

When you make a decision on which offer to go for, you need to look at your net proceeds first and foremost. From there, you’ll be able to see whether the cash offer is more competitive than you originally thought (or if it’s just not worth the sacrifice).

We’ll break down the costs and walk through a helpful case study to tie it all together. First, let’s review the various expenses you can expect to be on the hook for—get that checkbook ready!

Market preparations (~1%)

Your average buyer isn’t going to put an offer on a house based on its “potential.” To book showings and generate strong offers, you’ll need to whip the house into presentable condition. At a bare minimum this requires decluttering the house to make each area feel spacious and organized, and then deep cleaning like the queen is coming over.

Depending on what your agent recommends, you also might need to paint the walls, replace dated flooring, and make any repairs around the house that would cause buyers pause (like leaky faucets or sticky doors).

Agent commissions (~5%-6%)

Agent commissions are by far the biggest line item on a seller’s list of expenses, totaling 5%-6% of the total sale price.

Commission rates are agreed to when you sign the listing agreement with your agent. Then, at closing, a portion of that commission (usually half, or about 3% of the sale price) goes to the buyer’s agent as a result of them bringing a buyer to the sale.

Closing costs (~1%-3%)

Sellers should expect to pay an additional 1%-3% in closing costs, depending on the price of the home, state and local rates for taxes and recording fees, and customary charges for your individual region, all of which you won’t have too much control over.

Additional costs for renovations, home repairs from the inspection, or seller’s concessions (varies)

Every home sale is different, but you should budget for extra expenses if you plan to do any renovations to improve home value, need to pay for repairs that crop up in the home inspection, or make a concession like agreeing to cover the buyer’s title search costs or home warranty.

Case study: How do the numbers shake out on a cash vs. market value offer?

In the chart below, you can see a breakdown of net proceeds on two different offers: one from a cash buyer, and another as an estimation of what the seller could likely fetch with an agent-assisted sale.

The cash offer comes in at 90.8% of what the house would likely sell for on the open market—a $20,700 price difference. But your calculations shouldn’t stop there.

When you subtract the cost of market prep, agent commissions, and closing fees from the traditional sale, the difference in net proceeds from a cash offer is a mere $4,950.

You also have to factor in the sweat equity and hassles involved in the market process. Things like:

• Saturday afternoons spent painting the living room when you could be relaxing.
• The stress of always having to clean up and keep the house tidy.
• Rushing to get out the door to accommodate a spontaneous showing when you have kids and pets.

That’s not to mention the time it takes to sell a house the conventional way. In 2019, properties have typically spent 49 days on the market. Once you get an offer, it takes about 45 days for the buyer to close on their purchase loan. From start to finish, that’s a total of around 94 days, or 3 months. Cash buyers, on the other hand, can offer you a closing timeline as short as one week or even a few days.

The question then becomes: What price are you willing to pay for speed, convenience, and certainty?

In this example, if it’s up to $5,000, then the cash offer becomes an attractive option.

Header Image Source: (Sharon McCutcheon / Unsplash)