As most home sellers know, selling your home will come with costs to list, market, and secure an offer for the home.
It is the unknown and unanticipated add-on costs that often catch sellers by surprise. These hidden costs can cut into your actual realized take-home earnings from selling your home.
How can you best keep yourself informed and keep your selling costs as low as possible? Let’s go over the cost of selling a home, closing cost, and beyond.
What are the typical costs for selling your home? These costs are often fixed so it’s good to note them when evaluating the take-home value you’ll get from selling.
Standard Costs for Selling a Home
- Listing Commission
- Every brokerage will set a discretionary rate
- We charge 7% on the first $100,000 and 2.5% on the balance. This includes the buyer realtor’s commission.
- Taxes on your capital gains
- You will realize a capital gain if you sell your property at a higher price than you paid. 50% of this gain is taxable in Canada.
- If the property is your primary residence, then you will be exempt from the capital gains tax.
- Mortgage prepayment penalty
- If your house is under a mortgage, you may have to pay a prepayment penalty to settle your mortgage balance. This can happen if your bank doesn’t authorize an assignment of the mortgage, or the purchaser doesn’t want to carry the existing mortgage for the property.
The above are predictable costs that you can realistically calculate based on your expected selling price.
We will now review the incidental costs that you can avoid if you take the necessary precautions to prevent them.
Incidental and Preventable Costs for Selling a Home
For a standard purchase and sale agreement, often a buyer will sign a purchase agreement with subject clauses. These clauses allow them to back out of the contract. One main contingency clause is that the buyer will complete the home purchase subject to a satisfactory home inspection.
In a standard sales agreement where the buyer asks for an inspection contingency clause, you as the seller may find yourself unexpectedly hit with Hidden Cost #1.
Hidden Selling Cost #1 – Price reductions sought by a purchaser after a home inspection under a contingency clause
Homebuyers advised by their real estate agent will often know the true value of having a home inspection contingency clause. It isn’t just a clause to protect the buyer against purchasing a property with major underlying issues and defects.
The clause can also be used as further leverage against the purchase price.
A home inspection report can highlight underlying moisture issues and the expected lifespan of material parts such as the hot water boiler or electrical system. If there are noted deficiencies at the home, the buyer can negotiate for repair costs and reduce the purchase price they will be paying.
How to Prevent Price Negotiation by the Buyer After a Home Inspection
Arranging for an inspection before listing your home for sale can protect you from a buyer’s negotiating leverage. Before you put your home on the market, you can manage repair costs to bring the home to a satisfactory condition by addressing issues from a home inspection report. Likewise, this will prevent the buyer from negotiating higher repair compensation under a pending sales contract.
In addition to a buyer home inspection clause, here is another buyer clause that can affect the net take-home value for your home.
Hidden Selling Cost #2 – Buyer Vacancy Clause for a Rental or Tenant-Occupied Property
A buyer vacancy clause requests that the buyer gets vacant possession of the home upon completion of the sale. A buyer will include this clause when they would like to move into a tenant-occupied home after purchase.
Under this subject clause, the seller will ensure the home is vacant before passing the property to the buyer.
Under tenancy regulations, the tenancy runs with the home. A landlord can ask a tenant to leave the property under a landlord notice for owner occupancy. A landlord needs to provide notice to their tenant two months in advance of the effective date and cannot terminate the tenancy earlier than the end of the tenancy’s fixed term. The landlord notice also entitles the tenant to compensation of 1 month’s rent.
Under a buyer’s vacancy clause, you as the seller and current landlord will need to provide notice to the tenant. As a result, you will be responsible for paying the compensation to the tenant.
It may seem unfair that you will shoulder the cost when the purchaser specifically requests the tenancy to be terminated at the home.
How to Avoid the Costs Under a Buyer Vacancy Clause
It will be a serious consideration whether you can pass the cost of the landlord notice onto the buyer.
You will be in a good bargaining position if it’s a seller’s market, and there is lots of buyer interest in the property.
If it’s a seller’s market, you can negotiate and require the buyer to cover the cost of the landlord’s notice.
A final cost that can seriously affect your cash returns arises when selling a rental or tenant-occupied home.
Hidden Selling Cost #3 – Early Tenant Vacancy or Dispute with a 2-Month Landlord Notice for Owner Occupancy
Working with tenants during a home sale is a delicate process. As the homeowner, you hope to have the tenant’s cooperation to ensure your property’s successful listing and sale. An unhappy tenant can make it challenging to arrange for showings of the home or show the property in a clean and presentable condition.
If a tenant is unsure of the home being put on the market for sale, they can also choose to end their tenancy at the home. As a result, you can lose out on rent and be carrying a vacant home while listing it for sale.
Even if a sale contract is signed, a tenant can stop the property sale from completing if they refuse to recognize and dispute a 2-month landlord notice for owner occupancy.
How to Prevent Early Vacancy at a Rental Property
It may be in your best interest to maintain the tenancy at the home while you are selling it.
Explaining to the tenant the procedures for selling can help address some of the tenant’s uncertainty about how the home selling process will affect them.
Coordinating for showings of the home and explaining to the tenant the mechanics of a 2-month landlord notice can assure the tenant that:
- The home listing process won’t unnecessarily intrude into their private lives; and
- The tenant will be notified well in advance if the future homeowner would like to move into the property.
How to Avoid a Tenant Dispute and Refusal to Vacate a Property that is Sold
When a tenant disputes a 2-month landlord notice, this can almost certainly cause a sales deal to fall through. If a purchaser requests vacant possession of the property, the current tenant can refuse to vacate. In this case, the purchaser will have every right to back out of the sales contract.
To avoid this scenario, you can arrange a mutual agreement with the tenant that they will vacate the home on or before the sale completion date. Having a mutual agreement that addresses the interests of both yourself and the tenant can mean the difference between a tenant voluntarily or involuntarily leaving the home after it sells.
Also, helping to ease the tenant’s concerns about being displaced can mean a lot. By giving a good landlord reference and browsing rentals in the market, you can help your tenant to find alternate housing quicker. This can mean a faster and easier transition for the tenant once the home sells.
The Bottom Line
Planning for the sale of your home is just as if not more important as carrying out the home selling process itself.
If you are careful, you can prevent future selling costs that will affect your take-home amounts from selling.
By employing some of the above strategies, you can reduce or eliminate some of the costs of selling your rental home.
If you need help or have questions about selling your investment property, we are here to provide help and guidance.
Please feel free to email us or schedule a call with me through the link below.
We look forward to helping you strategize and successfully carry out the sale of your home.