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Sunday, March 2, 2008

A good rule of thumb...

I know that this looks like a thumbs-up, but it was the only thumb I could find quickly. I wanted to share a quick way for sellers to evaluate offers that they may get or maybe to aid in their planning for listing their houses. I almost called this post "the magic number", because there is a number that one can use for both of those things. It's not magic, just simple math that is based upon understanding of the real estate process.

The magic number is .925 and it is based upon the fact that we average about 7.5% as a cost of a home sale locally. That leaves 92.5% for the home seller to pay off his/her mortgage(s) and pocket what is left. The 7.5% number is based upon the fact that we've been averaging about 6% in real estate commissions locally - 3% to the listing agent and 3% to the buyer agent. The other 1.5% is just the cost that is made up of taxes and fees charged by the state and the title company involved in the sale. That covers the transfer taxes, the title insurance and processing fees.

So how would you use the magic number? Well if you get an offer on your house, just multiple that offer by .925 and the result will be what you’ll have, after the cost of selling, to pay off your mortgage(s) and hopefully to have something left over for you. If you are thinking of selling and need to understand what you need to get to be “whole” on the deal, take what you owe on the mortgage(s) and divide that number by .925 to find your “break-even” point. For instance, if you owe $200,000 on your home, your break-even point is $200,000 divided by .925 = $216,216. Anything that you get above that amount is going in your pocket. The $16,216 difference between what you owe and that number is what will pay the real estate commission and the taxes and title insurance and other costs to sell.

The math gets a bit more complicated if there are sellers concessions involved, but not all that much. In that case, you need to calculate the 1.5% on the original sale price and then the 6% of commission on the price after concessions. Say the offer is for $200,000 with 3% seller’s concession ($6,000 in concessions) the non-commission part of the magic number would yield costs totaling $3,000. and the commissions would normally be calculated on the net after the concessions ($194,000 in this example), so they would be $11,640. The total cost of the sale would be $14,640, leaving the seller with $185,360, before mortgage payoff(s).

If you want to be conservative, you can use 8% for a cost of sale and the magic number becomes .92, but I have found that the 7.5% works out to very close to what we end up with time after time. I hope this little bit of insight helps you with your planning or with your analysis of any offers that you might get. Normally your listing agent would do a seller’s net analysis of any offers and you’d get to see exactly where all of the money is going. That seller’s net analysis also usually includes an estimate of the tax prorating; which is actually going to add a little bit to what you’ll get on the sale, since you’ll be getting back some of the property taxes that you have paid.

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