Selling Tutorial

Profitability: Knowing Your Limits

Ok, it's time to see how much you can make from selling your home, or at least how much you need to break-even. However, determining how much you can profit from your sale will be governed by a number of factors. You should consider some of the following questions before trying to determine your asking price:

• What is the minimum offer you are willing to accept?
• Do you need to use the proceeds from this sale towards a down payment on your next home?
• Do you need cash or would you be willing to finance some of the sale yourself?
• Have you paid for any extensive repairs or improvements?

These are just a few examples to consider, your personal situation will certainly be different. The purpose of this section is to aid you in determining what your absolute minimum is, as well as identifying the strengths and weaknesses, or margin you have when negotiating the sale with potential buyers.

This process will be much easier and smoother if you've gathered all your documents together. If you haven't done so already, then we suggest you do. Otherwise you will be doing two things at the same time - this and digging through your files.

Equity

The first place to start is by determining how much equity you have in the property. Basically, equity is the difference in the sale price (fair market value) and what you still owe on the mortgage. Since we haven't discussed pricing as of yet, we recommend simply estimating the value of your property for this exercise.

Write down how much you paid for your property and what your down payment was, and then go through those mortgage payments and look to see how much of your payment actually went towards equity (principal) rather than interest. This may be on your statement, but most likely it's not.

Your mortgage company sends you a statement every year for tax purposes (Form 1098), this will have the amount of interest paid, beginning balance, principal, and ending balance for the calender year - this may be the best way for you to gather the information. Ok, let's calculate.

To determine the equity in your property let's take your estimated value and subtract the price you paid for the property. Now add your down payment and the amount of principal you have paid on the loan - this is your total equity.

Here's a quick example. Suppose you bought your home for $165,000 and you have determined that its estimated value is $210,000, your down payment was $16,500, and to date, you have paid $6,500 of principal with your monthly mortgage payments, then your total equity would be:

Keep in mind that $23,000 of the $68,000 is your money, so the gain, or margin, is $45,000 - this is what you'll want to protect.

What's The Cost

Everything you do to prepare your property to sell it is going to be a direct cost to you and will greatly affect your margin - negotiation room.

Some costs may be estimates for now, and others may have already been paid. These costs could be anything from a new doorknob to closing. Basically, the costs are the out-of-pocket cash expenses you've put into the property. Here's a short list of some of the costs to consider:

• cleaning, repairs, and improvements
• marketing and advertising
• closing

Some of these haven't occurred yet, so do the best you can estimating them. Perhaps you may want to consider creating a budget for each of these so that you don't spend too much as to whittle away at your margin. Of course, some of these costs are out of your control such as many closing costs. One way to estimate your closing costs is to look at your Settlement Statement and consider what the previous seller paid when you bought the property.

Determining What You Need

Ok, it's time to put all the pieces of the puzzle together. Take your margin and subtract from it your total cost of sale, this will give you your negotiation room. Let's continue using the above example.

Let's say you had the following costs:

• repairs and cleaning - $2,500
• improvements - $10,000
• marketing and advertising - $500
• closing - $5,000

This means that your total cost of sale is: $18,000. Since the margin is $45,000, we subtract our costs from that, and we have $27,000 worth of negotiating room. Therefore, if the property sold for $183,000 you would break-even, over that is pure profit. Please note, this is a very simplified example. Your exact scenario may be very different.

A quick note about real estate agents. If you were to use a real estate agent, that's a direct cost to you. You wouldn't have the marketing and advertising cost but the agents would be getting around 6%, which could be over $12,000. Agents greatly reduce your negotiation room. If you had less margin to start with, then with an agent, your negotiation room could be very slim. In fact, it could be so slim, you couldn't adequately negotiate with buyers because there would be very little room for you to move on the sale price.

Kudos! You now have an idea of your absolute minimum sales price, you're well on your way to real estate freedom!

Seller Financing

Now that you know what you need, there are a few things that you may want to consider regarding financing. Typically, a buyer will obtain new financing through a lender and the proceeds will go to your balance on the mortgage first and then whatever is left over you will receive in cash. Pretty basic, but there are some other options you may want to consider.

We will not go into great detail here, seeing that there are many books covering these very topics, one very good one is How to Sell Your Home Without a Broker. We at least want to present a few options to you, as they may help you negotiate with a buyer and make your property more appealing as well as sell quicker.

• Loan your profit to the buyer for the down payment.
• Pay the points on the buyer's mortgage.
• Let the buyer assume your mortgage.

As with anything, these financing options have varying levels of pros and cons. So make sure you carefully investigate these before deciding to negotiate it into your sale. Also, if you decide to have the buyer take over your existing mortgage or you have a promissory note on money lent, be sure to include a "Due-On-Sale Clause" - this accelerates your payback in the event the buyer sells the property.

Ok, you know the minimum, let's determine an asking price -->