Negative Financial Impact of Quick House Sale
- Adam Garrett
- Jul 13, 2023
- 6 min read
Updated: May 31
Did you know that homeowners have a statistically significantly higher net worth than renters? Per CNBC, "In 2019, homeowners in the U.S. had a median net worth of $255,000, while renters had a net worth of just $6,300. That’s a difference of 40x between the two groups." One of the top reasons why that's possible is that the homeowners aren't constantly bouncing around from house to house typically. In a typical market, one of the best reasons to make a home purchase is because you want to stay put, and you want to grow financially with net worth from that home purchase on the basis of staying put in your new home. If you would break even on a sale hypothetically, you should still strongly consider staying put in order to be in a better equity and net worth position.
While for most, you are better off staying put for decades rather than reselling soon after purchase, there are some exceptions:
1. You Want to Buy Another Property & Keep Your Existing Property, & Are Willing to do What it Takes to Be a Good Landlord (My Exception)
Many would-be landlords fail because they think it's going to be too easy and they cut too many corners. For landlords committed to doing rentals well, there are some strong incentives for buying 1 house and then renting it out before buying another. By purchasing an additional property while keeping your existing property, all those net worth gains I mentioned can not only be maintained but can grow faster than they would if you remained in 1 home forever. I'm actually using this strategy myself to buy multiple properties. By purchasing as an owner occupant, you're able to get a lower interest rate and a lower down payment requirement than you can as a non-owner occupant. Also, some properties are unavailable to non-owner occupant investors, like the first home I purchased, a HUD home that is now rented out that was bought during the "Exclusive" period.
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2. Your Job or Another Life Change is Causing You to Relocate & You Don't Want to Rent Out Your Home From a Distant Location
Renting from a distant location makes renting things out harder and more risky. It's much more common for owners who are absent & distant for there to be significant damage than those that live next door, such as in a duplex, where regular monitoring is easy. If you do rent from a distant location, it's critical to get a thorough visual of the interior & exterior yourself at least once a year assuming that someone else is managing it for you, and more often if you're attempting to self manage. For more tips on renting out your home, go here.
3. You've Outgrown Your Home, & Have Ruled Out an Addition or Remodeling
Did your family go from 1 to 5 between now and when you initially purchased, and 5 makes your current home feel cramped? It may be time to buy something bigger if remodeling or an additional wouldn't be viable.
In many cases, those who have outgrown their homes could cost-effectively perform remodeling or (as long as they are not the biggest home in the neighborhood, the city/county would allow it, any HOA would allow it, and not an attached home) an addition rather than selling and moving to a bigger home.
If an addition would make you the biggest home in the neighborhood, you may want to consider reducing the scope of that addition due to the real estate principle of regression. I've seen where sellers I represented on a sale with the nicest home in the neighborhood that was very sizable were quite disappointed at what the appraiser came back with on their home sale. Even after the appraiser made it go higher than his initial number based on the case that I made, we still had to reduce the price from the contract price by $45,000 or the buyer was going to walk. If we had been in a neighborhood not too far away with larger homes, it wouldn't have had a problem appraising. If your addition would put you far above the quality/sq ft of any home in the area, highly consider purchasing elsewhere, whether you sell your existing home or rent it out.
4. You're Concerned About Increasing Flood Zone Costs & Are in x500 or AE Zone & a Hurricane Evacuation Zone
If you're concerned about increasing flood zone costs, you're not alone. The projections in SE VA are relatively grim when considering 2020 vs 2050 in some SE VA cities/counties:
5. You Don't Feel Safe in the Neighborhood & Have Exhausted Measures to Feel Safe
Before you throw in the towel on safety, be sure to do things that would enhance your safety, such as installing cameras at home, motion-sensitive security, lights, additional precautions on doors, etc. Consider hiring a private investigator or a reward for information that leads to an arrest if law enforcement isn't helping. If you've exhausted attempts, especially if you've had criminal activity perpetrated on your property or to you or your family directly, it may be time to move.
6. You Want to Buy a Home of Significantly Higher Value When Strong Appreciation is Projected
Did your family go from 1 to 5 between now and when you initially purchased, and 5 makes your current home feel cramped? It may be time to buy something bigger if remodeling or an additional wouldn't be viable.
7. You Want to Downsize In a Market That's Not Rapidly Appreciating & Wouldn't Consider Alternatives
Are your utility bills through the roof from a mostly empty house that you purchased before you were an empty nester? While you can do cost-effective insulation improvements and other energy-efficient improvements, those might only go so far. You may want to try those 1st before you sell or have a professional assess what the projected improved utility costs would be if you were to complete a project on energy efficiency. Before you throw in the towel, some owners even like to rent out rooms of their home like I did before I got married, though most wouldn't consider it & many who do it don't do it well and pay for it because of it. If all attempts fail, or you'd just prefer to sell to downsize, it's a viable option, especially if the appreciation projections for your area aren't high.
Related: How's the Market in Hampton Roads?
Here are some examples of reasons that are not good for selling:
1. You Want a Better Interest Rate
If rates have improved since the time of your purchase, you're typically much better off refinancing as long as you would otherwise like to remain in the home long-term. If you would sell a year later after a refinance, it's a different story, since a refinance may take a year to pay for itself depending on the refi.
2. You Want a House With Something That Would Cost <10% of Your Current Home to Add to Your House
If you want to add a fence to your house, for instance, you'll typically be a lot better off adding one to your existing house than you would be buying a different house with a fence.
3. You Want To Cash Out the Equity on Your Principal Residence to Buy Something for Leisure
Unless you have multiple homes, and would move into another one you already own, it's typically not a best practice to sell your existing home to buy a large boat for pleasure, for instance.
4. Someone You Don't Know is Offering You a Cash Offer for Your House
Resist the urge! These buyers must get homes at drastic discounts for the time and money spent reaching out to sellers who say "no". Otherwise, they'd quickly go out of business. See my article on the subject of off-market offers here:
Should You Sell to a Cash Offer Off-Market As Is? "Patterns of Parasitic Purchasing"
5. Someone Scared You About the Neighborhood Going Downhill Without the Data to Prove It
It's not uncommon for predatory buyers to intentionally scare sellers into submission to position them to sell their homes. In some cases, they'll be breaking the law in doing so (i.e. blockbusting).
See my article on the subject of off-market offers here:
Should You Sell to a Cash Offer Off-Market As Is? "Patterns of Parasitic Purchasing"
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