You should never buy a house with the intentions to sell
Real estate is a long-term investment meaning that the sooner you sell your house, the fewer financial benefits you will gain. If you are buying a property with the intention of selling, chances are your timeline is too short. The market typically appreciates 5% per year and your disposition costs on the asset to close and sell are about 10% of the price. You would need to keep the asset for a minimum of two years to break even. It is recommended that you do not buy with the intention to sell at a specific time because the market may not be opportune when that chosen time comes, and you are putting yourself at risk.
RELATED: HIDDEN OR UNEXPECTED COSTS – FINANCIALLY PLANNING AS A FIRST-TIME HOME BUYER
When does it make sense to sell your house early?
There are a few circumstances that could potentially turn a profit. One possibility is that you’ve made renovations to your house and it has significantly increased the value of your home. Keep in mind that even though your property value has increased there are still costs associated with selling. Having an experienced Real Estate agent to properly appraise your property is extremely important in this scenario. If your neighbourhood has seen a sudden increase and the market has become hot, this could also be another reason to sell quickly. It is possible that your neighbourhood could see a sudden increase or the market could go up far more than the normal yearly expected rate of increase but these circumstances cannot be predicted so it is not recommended to purchase a property with the assumption that the market will change because it is always fluctuating.
Transaction costs associated with selling a home
One of the biggest benefits in Canada is that there are no capital gains when you are selling your principal residence. This is not true with an investment property but applies when it is your own home. When you are selling your home the typical Real Estate fees are 5% plus tax. A common practice in Toronto is that the seller will already have a home inspection prepared which is anywhere between $500-$1,500. Getting your property ready to market will be an additional cost to plan for as well (landscaping, cleaning, painting etc.).
Mortgage prepayment penalty
Your lender may also charge a prepayment penalty if you are thinking about selling your home before the term of your mortgage expires. This is a fee that some lenders charge if you pay off some or all of your mortgage early. Usually the prepayment penalty is agreed upon when you have closed on your home and is typically either 3 months of interest or interest rate differential (IRD) which is a calculation that the lender will make based on the amount left on the term of your mortgage, your interest rate, and the amount of your outstanding loan. Each lenders prepayment penalty is calculated differently so it is important to contact your lender to figure out exact costs if you are looking to sell.
Make sure you have an experienced agent
How soon you sell your house after buying comes down to factors unique to your property. Using an experienced agent is crucial for understanding all costs and risks associated with selling your property too soon. Contact us today if you are looking to sell your home.
