Are you wondering how to sell a house with low equity? One of the most difficult things for homeowners is when they have low equity in their homes. They are stuck because they don’t want to come up short on cash at closing, end up underwater, and potentially not sell their home. how to sell a house with low equity
There are usually two common options that people try when faced with this dilemma: selling the house themselves or listing it on the market. The first option can be tough if you’re not really sure what you’re doing and the second option doesn’t always work either because 5% – 6% will go toward commissions alone!
There’s one other solution that should be considered–a “subject-to” purchase agreement. This last option could even have you walking away with money in your pocket. Read on to learn more about your options for selling your home with low equity.
What Exactly Is Home Equity?
If you used a loan to purchase your home, your lender has an interest in the property until that loan is paid off. The difference between how much your home is worth and how much is still left on your loan is the amount of equity you currently have.
For example, if you purchased a house for $200,000 and made a 15% down payment, the remaining balance of $170,000 was covered by a conventional financial institution, so in this scenario, your equity is 15%. Typically, anything below 20% would be considered low equity.
Home loans created by a bank is called a mortgage. The mortgage will define the terms of the loan, from the amount you will pay on a monthly basis, the length of the loan term, as well as your interest rate. It is important to know that a mortgage consists of principal, interest, taxes, and insurance.
When you purchase a home most conventional lenders will require the borrower to obtain private mortgage insurance if their down payment is less than 20%. This is a safety measure lenders use to protect their interest in the case of borrower default.
How Much Equity Should You Have Before Selling?
The reason it is useful to know how a mortgage breaks down is that when you are making mortgage payments, the amount that you are paying doesn’t all go toward the principal balance. Or in other words, the part of the loan that is actually paying down the amount you owe.
The largest portion of your payment will go towards the interest first, which is the amount you pay your lender for borrowing the loan.
As you make payments towards your loan, you will start to build equity in your home, but it will not be fast, especially not at first. Early into your loan payments, the majority will go towards interest. It takes several years for the bulk of your mortgage payment to switch over from mostly paying down the interest to actually being applied to mostly the principal balance.
How far along you are in your loan term and how much down payment you initially gave will play a huge role in the amount of equity you have. Knowing how much home equity you have built up would be important to know when you are trying to sell your home because you need to keep in mind that when you sell, you will have various fees to account for.
Option 1: Selling With A Real Estate Agent
It’s common for the first choice of many homeowners with low equity to consider listing with a real estate professional. A real estate agent will help you choose the right list price, negotiate with potential buyers and deal with the dreaded paperwork. In exchange for their service, the listing does come with a price. On average you would need to factor out 5%-6% of the sales price, which would be deducted out of your net proceeds, for realtor commissions alone. On top of that, there are closing costs, which would be another 2%-5% of the sales price.
Common Cost Factors When Selling A House:
If your home equity is very low, you can see how these fees can easily eat into your net proceeds and possibly leave you with no cash to your name. If you are bordering on negative equity or underwater, meaning you owe more than your house is worth. Then you might find yourself having to bring money to the closing table in order to sell your house or speaking to your lender to see if you qualify for a short sale.
What Happens If You Sell A House With No Equity In It?
The goal when you sell your house is to walk away with money in your pocket. Now, unfortunately, this isn’t always what happens. If you are attempting to sell your house with low equity or even worse, negative equity, you may have to pay to sell your home. This is because the price that the home sold for is not enough for the closing expenses to be deducted from. As you may or may not know, all the fees are normally deducted from the proceeds of the home sale.
For example, if you were attempting to sell your house for $150,000 but you still owned $140,000 on the mortgage balance, in this case, you have $10,000 of home equity. Now, if you sell with a realtor you would need to factor in those commissions and of course your closing costs.
Also, wanted to note that we have not talked about buyer concessions, this is something that may come up during the negotiation process, adding to additional expenses. Now, going back to the example, closing costs and commissions on a $150,000 home sale would be anywhere from $12,000- $15,000. After paying off your underlying home loan, you would find you owe a couple of thousand dollars to make up the difference on the balance. how to sell a house with low equity
Option 2: Selling FSBO (For Sale By Owner)
There are many reasons why it is a good option to sell your home FSBO. One of the most common ones would be that you do not have to pay any commissions. Avoiding these extra costs, especially when you have low home equity, will help you walk away with more money in your pocket and potentially help you avoid needing to bring cash to the closing table.
The FSBO route can, however, be a lengthy process. You will need to take the time to market your home on social media sites like Facebook. It may also take some extra work in terms of finding potential buyers for your home so that you are able to avoid having too much downtime between showings.
Essentially, you will be taking on the roles that a real estate professional would if you listed your home on the open market. For some homeowners, doing this is a no-brainer, especially if you’re doing everything you can to save money and keep more cash in your pocket.
A Few Tips To Sell Your House FSBO
With all things, if you want to get something done effectively, you have to have a plan. When you need to sell a house with low equity there are a few factors to consider.
The first step towards being able to sell your home is knowing your home’s value.
2 Ways To Find The Value Of A Home:
1. Use a free online valuation tool
This one should be fairly easy to do. If you type in “how to find out what my home is worth?” in any online search bar, you will probably get several free real estate-related tools to choose from. how to sell a house with low equity
Be sure to cross-reference your property amongst several sites to get a good feeling of your home’s value.
2. Get a comparative market analysis on your home
If you want to get the most accurate value of your home, you could ask a local real estate agent to run a comparative market analysis or CMA.
With access to more market data and sale information than the average consumer, a realtor could give you better insight into market prices and home values in your area.
Keep in mind, that while you may be able to get this comparative market analysis done for free you may be soft pitched on listing the home.
Why Some Homeowners With Low Equity Pay To Sell
Now that you have a market value for your property you still need to determine what you will list it for sale for while considering what you still owe on your mortgage.
After this, you can budget for the amount of profit you are hoping to walk away with once the house is sold and you can pay off your lender and any other loans and encumbrances attached to the property.
Once you put on your “seller hat” and put the house on the market, list it a little higher value to leave some wiggle room for all the offers you’ll be getting from buyers. It’s pretty common to receive offers lower than the market value you anticipate. If you do not get prices high enough to cover what you still owe less any expenses and fees you may end up having to pay to sell your property.
At this stage, you will need to prepare your place for showings. This may involve doing repairs and updates to get it presentable. Once you do that, it will then be time to start marketing.
After all this, you’d need to wait for the right buyer to come along who will offer you a price that will pay off your principal balance and have you walking away with some profit.
Option 3: Selling Your House “Subject-To”
What is “subject to” and why should this be an option you consider if you need to sell your house with low equity. This term stands for the process of buying a house “subject to” its existing loans.
In this case, the seller will transfer the title to the property to the buyer (the deed) without paying off the existing mortgage (the deed of trust). They will then continue to make payments on the loan on the seller’s behalf.
This type of solution works well when a seller has little to no equity, a pending foreclosure (i.e needs to sell quickly), or is determined to get a certain value for the home.
The benefit for the seller when doing this type of transaction is that they will not have to wait as long as they would if they sold the traditional way, they can get the value that they want (even if it’s a little over retail value), payments made toward the loan will help build credit and last but not least there’s a chance to walk away with cash.
Is A “Subject-To” Transaction Legal?
In virtually all residential transactions, you will find that these mortgage loans will have what is called a due-on-sale clause that gives the lender the option-but, not the obligation- to accelerate the note and call the loan due if the property is sold without the loan being paid off. However, this does not mean that “subject to” transactions are illegal. This clause is just a way for the lender to protect themselves. how to sell a house with low equity
In the event of this happening, there are ways to resolve the issue. Especially if you are working with experienced home buyers like Millennial Home Solutions. Working with a reputable company will give you peace of mind knowing that your payments will be made on time and that your transaction will be protected. how to sell a house with low equity