Topics on this page:
- How to use this article
- Hiring a real estate agent or broker
- Signing a "Listing Agreement"
- The Agreement of Sale
- Do I need an attorney to represent me at the closing?
- Do I have to pay taxes on the money I receive for my home?
- If buyers do not complete the purchase
Your home is probably your most valuable single asset. When you decide to sell your home it is important to be sure that you have all of the information you need to make wise decisions. This article provides answers to some basic questions which come up when you decide to sell your home. However, it is not designed as a substitute for the services of a licensed real estate broker and an attorney who handles real estate matters. Don’t be "penny wise and pound-foolish." A lot is at stake when you sell your home. It is not simply a matter of finding a buyer. Legal documents describing the responsibilities of the buyer and the seller must be prepared. State and local laws and rules must be satisfied. Some people may be knowledgeable enough to handle these details on their own, but most of us need help.
Most people hire a real estate agent to find a buyer and guide them through the sale process. If this is your choice, make certain that you hire an agent who is reputable and is licensed in your state as a real estate broker. It is best to interview several agents before hiring one. In addition to talking about the amount of the commission and length of the agreement, ask the broker about how much they think you should ask for your home, and what, if anything, you might need to do to improve the appearance of the property. A good broker will want all the information about your taxes, utility costs and other maintenance issues. Failure to disclose defects in the structure of the home which you know about but would not be obvious to a buyer, or covering up a defect, could result in a lawsuit against you when the buyer discovers the problem. You should not hide such problems from the agent.
What if I don’t want to use a broker?
Maybe you have a buyer, or your home is in a "hot" area and you think you can find one yourself. It is essential to consult an attorney before showing your home to a prospective buyer. You will need to have important information on issues such as disclosure of defects, anti-discrimination laws, and zoning provisions. Ignorance of these as well as other matters could result in a costly mistake. And, most important, what happens when a buyer says, "I’ll take it!" A lot more than just accepting a check and signing over a deed is involved.
The agent will require you to sign a "listing agreement." This is a contract describing what the agent is supposed to do and what you must do. Consider the following:
How long is the term? Most brokers will want an "exclusive" listing for a period of time, such as 6 months or a year. Exclusive means that you cannot deal with another agent during the term of the contract. The length of time is negotiable. Try to get a shorter period, perhaps 2 or 3 months to allow more flexibility to fire the broker if you are dissatisfied. Even if you find your own buyer during the period that the sales agreement is in effect, you will be responsible to pay the commission.
How much is the commission? Brokers are paid a percentage of the sale price of the home. Amounts of 6% to 8% are typical. These amounts can vary widely in different areas, and they are also negotiable. Don’t hesitate to bargain. Most brokers participate in multi-list plans where your home is included on a list available to many agents. They commonly share the commissions, that is, the agent you list with will pay another agent who finds the buyer a portion of the commission. This does not affect the total amount you pay. Commissions are deducted from the amount you receive for your home at the final settlement (closing) of the sale. You do not pay commissions in advance.
The Agreement of Sale is the most important document in a real estate sale. This is the contract that specifies all of the terms of the deal. The agent, if you are using one, will prepare and present the agreement to you after you have decided to accept an offer. It is wise to have an attorney review the agreement before you sign. Even though your broker represents you as the seller and the party paying the commission, you should never forget that brokers make their living selling real estate and have an interest in selling as many properties as they can as fast as they can. Your attorney has no independent interest, and will be able to advise you if there is a problem with the agreement before you sign it.
If you are not using a broker, it is very important to have your attorney prepare the agreement. In addition to the names of the parties, a description of the property (taken from the deed) and the sale price, many other provisions are contained in the agreement of sale. A few standard ones are:
- How much is the deposit or "earnest money"?
- What other items, such as appliances, window treatments or lighting fixtures are included?
- What inspections will be necessary, e.g. roof, wiring, plumbing, termites, etc.?
- Who pays the cost of needed repairs if the inspection turns up problems?
- What if the buyer can’t get a mortgage?
- What if you want to back out?
- Who pays the costs of any state or local deed transfer taxes or fees?
Additional provisions may have to be added if the home is a condominium or located in a planned community with special rules and restrictions. Other provisions may need to be added to meet specific needs of one or both parties. It is easy to make a mistake or leave out crucial information when trying to prepare the agreement on your own, even if you use a pre-printed form. The failure to have all of the details spelled out in the agreement of sale often leads to serious problems which can cause delays and lead to extra expenses before the sale can be closed.
The "closing" is the formal proceeding where you sign over the deed to the buyer and receive your check for the sale. The information provided above should make it clear that the legal details of selling a home can be complicated. A closing can be quite confusing. There are details such as allocating each party’s portion of expenses such as real estate taxes or water and sewer assessments. These issues can vary depending on location, but problems can and often do arise at the closing. If that happens, it is best to have an attorney present to advise you. Otherwise, you risk being pushed to make a decision or to accept some compromise you may not fully understand. Even if you have an agent, (s)he might be influenced by the desire to get the deal closed. There is too much involved, financially, and sometimes emotionally, to risk proceeding without having an attorney at every critical stage of the sale, including the closing.
You may not have to pay any tax at all on the sale of your home. You can find a clear explanation of the rule on this on the IRS web site under "Sale of Home - Real Estate Tax Tips." Generally, if you owned the home at least two years before the sale and lived in it as your main residence for at least two years in the last five, you do not owe income tax on the proceeds unless you had a "gain" of more that $250,000 on the sale (or $500,000 if you file a joint return with your spouse.) You need IRS Publication 523, Selling Your Home, and the worksheets in it to calculate whether you have a "capital gain" on the sale, and whether you will owe federal income taxes.
I signed a contract to sell my home, and now the buyers are not going through with the purchase. May I keep the deposit they gave me?
It is common practice for a buyer to give the seller a deposit at the time the agreement of sale is signed. This is sometimes called "earnest money" and is intended to give the seller some insurance against the buyer defaulting on the agreement.
Some standard terms in agreements of sale allow the seller to keep the deposit if the buyer does not go through with the deal and buy the house. For example, when a buyer is not able to obtain financing (unless financing has been made a condition of the agreement). If a broker is involved in the sale, he or she may have rights concerning the deposit money as well.
The rights of all parties are controlled by the terms of the written agreement. If you have questions, you should ask an attorney to review the agreement and advise you. See our Get Help page. Free legal services programs, such as the Legal Aid Bureau and the Senior Citizens Legal Services Programs do not provide this kind of assistance. You will need to hire a lawyer to help with this.