Key takeaways
- Typically, the longer you hold on to your home, the better you will fare financially when it comes time to sell.
- Five years is generally considered a good rule of thumb in the industry, but it’s not mandatory.
- It’s important to consider the broader economy, as well as tax implications and closing costs, when deciding whether to sell.
When you bought your home, you probably paid loads of money to make it happen. But now, for whatever reason, it feels like time to move on. Naturally, you want to make a profit on the sale — or not lose money, at the very least. So, is there an optimal amount of time you should keep living there before you list it? How long do you have to own a house before selling?
There’s no simple answer. To figure out what works in your case, you first need to crunch some numbers. Estimating the costs to close a sale and to move, analyzing local real estate market conditions and — most of all — figuring the amount of equity you have in your current home are all important factors to consider before selling your house.
Reasons you may need to sell your home
According to research from the National Association of Realtors, the most common reason that people sell their homes is because they want to be closer to friends and family — a great motivation to move. Here are some other common factors that can lead a homeowner to sell:
- Your finances have changed: People often opt to move for financial reasons. Perhaps you’ve lost your job, your income has dwindled or you’ve experienced a divorce or change in your living situation. Of course, there can be happier reasons too. Maybe your income has grown significantly, or you’ve gotten married and now have a bigger shared budget to start fresh together with a new property.
- You need more space: The second most-common reason for selling a home, according to the NAR study, is because it’s too small. Whether you’re expanding your family, need a dedicated home office for remote work or simply longing for a bigger backyard, selling for more square footage is totally understandable.
- You need less space: On the opposite end, perhaps you’re an empty-nester and a four-bedroom property is simply too much to take care of now. Downsizing can make life more manageable.
- It’s a seller’s market: While you should think of your home as a home first and an investment second, sometimes the housing market seems so advantageous for sellers that you can’t resist the opportunity to make a big profit. This is especially true if your property’s value has appreciated significantly since you purchased it.
How long should you own a house before selling it?
There is no hard-and-fast answer to the “how soon can I sell?” question. But on the whole, the longer you hold on to your home, the better you fare financially when it is time to sell. This relates to the concept of building equity in your home.
Home equity is, on a basic level, the difference between your home’s market value and the amount you still owe on your mortgage. So, if you put a 20 percent down payment on a $300,000 house when you buy it, your initial equity stake is 20 percent of that, or $60,000. With each payment made toward the principal, you increase your equity a little bit, which adds up over time. The longer you wait to sell, the less you’ll owe on your mortgage, which means you’ll be able to hold on to more of the profits from the sale.
The dollar amount of your equity also increases as your home’s value increases. That’s another reason why it behooves you to wait: Home prices tend to rise over time, and the recent pandemic-fueled housing craze made them rise even faster: Between January 2020 and August 2023, the typical home in the U.S. gained 19 percent in value, adjusting for inflation, according to data from the Federal Reserve Bank of Chicago. That equates to an appreciation rate of about 5 percent per year.
The five-year rule
When it comes to timing, the real estate industry refers to the “five-year rule” as a good rule of thumb when deciding how soon to sell your home. This has to do with the amount of equity the average homeowner has built in their home after five years of possession, and it also takes into account the costs associated with selling a home (and, if applicable, with purchasing a new one).
“Five years is a good, comfortable mark,” says Lawrence Yun, chief economist at NAR. “If the price of your home appreciates considerably, then even three years would be fine.”
It’s also important to think about what the broader economy looks like whenever the five-year mark arrives. For example, if you bought your home in 2019, the average 30-year mortgage rate was around 4.13 percent. At the beginning of 2024, average rates have hovered near the 7 percent mark, which means that if you need to buy a new house after you sell, you’ll pay a significantly larger amount of interest.
What to consider before selling
Initial costs
Your net proceeds are not the same as your home’s purchase price, even if a buyer pays above ask. For one thing, you have to take into consideration how much you paid for the property in the first place, and how much you owe if you are still paying off a mortgage. Beyond that, there are all sorts of expenses associated with selling your home. All this needs to be figured into whether it makes financial sense for you to sell now — crunch the numbers to see if you will walk away from the sale with enough profit to make it worth your while.
Closing costs
A seller’s closing costs generally come out of the home’s purchase price (they aren’t usually paid out of pocket). The amount will vary depending on many factors — your property’s final sale price, what state you’re located in, local property tax rates, whether you hire a real estate attorney and more.
Real estate commission fees are also traditionally paid for by the seller and typically range between 5 and 6 percent of the sale price. This can be a significant chunk of change: On a $300,000 sale, 5.5 percent comes to $16,500 taken out of your proceeds.
Capital gains taxes
If you stand to make a large profit on your home sale, you’ll want to think about one more thing before you sell: capital gains taxes. Residential real estate counts as a taxable asset, just like a stock. However, there’s a loophole, so to speak: The IRS generally allows homeowners a profit of up to $250,000, or $500,000 if married and filing jointly, before the capital gains tax kicks in.
But there are two big conditions: You have to have owned the property for at least two years, and it has to be your primary residence for at least two out of the five years immediately preceding the sale. So if property values in your area have skyrocketed and you want to cash in, two years is the amount of time you’ll want to wait to avoid paying the IRS.
Find a local real estate agent
Choosing a real estate agent is one of the most important stages of the home-selling process. You want someone who is well-versed in your local market. This person will be responsible for helping you set your listing price, hosting open houses, scheduling showings, negotiating with buyers and ushering you through the closing process. It’s a lot, and it’s much easier if you’re doing it with someone experienced, knowledgeable, trustworthy and pleasant to work with.
FAQs
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Generally, yes. Even if your home has appreciated speedily, you likely stand to lose money if you sell before the one-year mark. You aren’t likely to have built up enough equity after such a short time to make up for the closing costs you paid when you bought it, as well as the closing costs and commissions you’ll have to pay when you sell. In addition, capital gains tax is high on assets owned so short a time.
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Yes. You can buy another house while you’re selling your old one, and many people do. However, this does complicate your financing. You may wish to consider a mortgage contingency as a part of your real estate contract on the newer home. You might also consider back-to-back escrow, which facilitates the simultaneous selling and buying of properties.
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Once you have lived in a home for two years as your primary residence, the IRS will allow you to realize a profit of $250,000 before applying the capital gains tax to your earnings.
In this do-it-yourself digital age, home sellers and buyers alike might wonder if they need Realtors — or, more precisely, to pay Realtor fees. Just how crucial are these agents to a successful real estate transaction?
Well, a good agent is really pretty useful. It makes sense to work with one, especially if you’re buying a home: Agents have access to information you don’t, and it takes time and expertise to research properties, find the best ones for you and put in a strong offer. But sellers see many benefits, too, especially when figuring out the best asking price. Your home will still need to be staged, listed on the market and shown, too.
Here, we’ll take an in-depth look at how real estate agent fees work. One important note first: There is an ongoing legal battle right now relating to Realtor commissions and how agents get paid. Until that’s resolved (more on the lawsuit below), we’ll share how commission structures currently work, so both homebuyers and sellers know what to expect.
How much are Realtor commissions?
Only a very small portion of Realtors work on salary — the commission model is much more common. For years, the going rate was a firm 6 percent, split down the middle between the buyer’s agent and seller’s agent. But it began to fluctuate with the advent of discount brokers and the rise of online, publicly accessible listings.
Nowadays, real estate commissions can be negotiated, and they typically run somewhere between 5 and 6 percent of a home’s sale price. The exact terms of an agent’s commission vary from sale to sale, and can depend on the region and which firm they work for.
Let’s look at an example. According to Redfin data, the median home sale price in Cincinnati in December 2023 was $259,500. A 5 percent real estate commission on that price would come to $12,975. But in San Francisco, where the median was a considerably higher $1.17 million, a 5 percent commission would come to $58,500.
Here’s roughly what you can expect to pay assuming a 5 percent total commission, based on the price your home sells for:
Home’s sale price | Seller’s agent commission (2.5%) | Buyer’s agent commission (2.5%) | Total commission (5%) |
---|---|---|---|
$250,000 | $6,250 | $6,250 | $12,500 |
$500,000 | $12,500 | $12,500 | $25,000 |
$750,000 | $18,750 | $18,750 | $37,500 |
$1,000,000 | $25,000 | $25,000 | $50,000 |
Seller vs. buyer commission
Sellers sign a listing agreement with a Realtor in which they agree to pay a commission fee after the transaction closes. If it’s an ”exclusive right to sell” arrangement, they pay the fee even if they found the buyer on their own.
Commissions for both Realtors in the transaction are typically paid by the home seller: Both the buying and selling agents are paid with proceeds from the sale of the home. These two agents typically split the total commission — so for a 6 percent commission, the selling agent would receive 3 percent and the buying agent would receive the other 3 percent.
That changes in the case of dual agency, when one agent represents both the buyer and seller in a transaction. Laws about this vary by state; in some states, dual agency is not permitted. In this type of scenario, pay particular attention to the home appraisal to ensure you’re getting a fair price. While agents have a fiduciary duty to their clients, with dual agency, the lines can get blurred.
As Samantha Fish, an agent with Wesely & Associates in Grass Valley, California, points out, agents are required to act in their clients’ best interest. “It’s in our ethics; it’s in our contract,” she says. “If someone comes into my open house and they like it, but they don’t have an agent, at that point I can say, ‘let me get you an agent from my office’ so they feel like they’re being represented 100 percent as well.” Still, buyers working directly with a listing agent may have more room for negotiation because the seller may agree to a lower selling price if the agent agrees to lower their fee.
If you’re working with a buyer’s agent, “you have to sign a buyer’s agency agreement,” says Tim Noland, broker/owner of Great Mountain Properties in Murphy, North Carolina. “A true buyer’s agent works for the buyer. They protect the buyer’s investment, as opposed to the listing agent, who’s working for the seller.”
The broker’s cut
Real estate brokerages may get a cut of the commission as well. The brokerage RE/MAX, for example, has a split commission setup by which its agents receive 95 percent of the full commission from the sale, and 5 percent goes back to the company.
“The broker has to set the policy and oversee, monitor and supervise everything the agent does,” says Patrick Duffy, broker/owner of Duffy Realty in Miami. “And if the agent does something fraudulent or unprofessional, the broker gets sued.”
What do real estate agent fees cover?
You might wonder, what services does this fee buy me? One of the biggest ways buyers benefit from working with a Realtor is gaining access to the multiple listing service (MLS), the database Realtors use to see and list properties for sale.
The fee compensates the agent for time spent answering questions and helping you through the process. An agent is also able to utilize their skills and contacts to negotiate, find properties and take you on tours of multiple homes.
A Realtor’s fee covers a wide range of costs for sellers as well, including marketing materials, staging and showing the property, coordinating open houses and contacting agents of potential buyers. When an offer comes in, the listing agent negotiates on behalf of the seller, often presenting one or more counteroffers.
Though home sellers may feel that Realtor fees are too high, a lot goes into listing a home, such as:
- Creating a comparative market analysis to establish a competitive price
- Arranging for photo shoots, sometimes including aerial shots via drone
- Writing descriptive listing copy to attract interest from other Realtors and potential buyers
- Providing staging guidance
- Showing the property multiple times to prospective buyers
- Hosting open houses, often on weekends
- Providing yard signage
- Making sure listings are populated on all major property search websites
- Helping the seller review and negotiate buyer offers
As with most of the other expenses related to real estate transactions, a Realtor’s fee isn’t paid until the sale closes.
Average real estate commissions by state
Overall, the national average Realtor commission in 2023 was 5.49 percent, according to data from Clever. In all but a few states, the average commission ranged between 5 and 6 percent.
Keep in mind, though, that Realtors may accept a lower commission for high-priced homes to earn a higher amount overall: Their piece of the pie may be smaller, but it’s a richer slice. “In situations where there’s a competitive environment for a prime or trophy listing, Realtors sometimes will negotiate the commission upfront,” Duffy says. “For example, if I’m listing a $4 million home at 6 percent, that’s a lot of money. In a situation like that there is greater flexibility to negotiate the commission — if you get $100,000 or $80,000 instead of $120,000, it’s still a good payday.”
Here are the average real estate commissions by state, according to Clever:
State | Average commission rate |
---|---|
SOURCE: Clever | |
Alabama | 5.45% |
Alaska | 6.00% |
Arizona | 5.44% |
Arkansas | 5.99% |
California | 5.11% |
Colorado | 5.62% |
Connecticut | 5.47% |
Delaware | 4.88% |
District of Columbia | 5.49% |
Florida | 5.37% |
Georgia | 5.81% |
Hawaii | 4.78% |
Idaho | 5.50% |
Illinois | 5.35% |
Indiana | 5.56% |
Iowa | 5.67% |
Kansas | 5.58% |
Kentucky | 6.00% |
Louisiana | 5.56% |
Maine | 5.17% |
Maryland | 5.34% |
Massachusetts | 5.45% |
Michigan | 5.92% |
Minnesota | 5.82% |
Mississippi | 6.07% |
Missouri | 5.58% |
Montana | 5.50% |
Nebraska | 5.25% |
Nevada | 5.80% |
New Hampshire | 5.25% |
New Jersey | 5.21% |
New Mexico | 5.90% |
New York | 5.39% |
North Carolina | 5.52% |
North Dakota | 5.00% |
Ohio | 5.99% |
Oklahoma | 5.95% |
Oregon | 5.03% |
Pennsylvania | 5.48% |
Rhode Island | 5.50% |
South Carolina | 5.62% |
South Dakota | 5.49% |
Tennessee | 5.58% |
Texas | 5.73% |
Utah | 4.90% |
Vermont | 5.49% |
Virginia | 5.45% |
Washington | 5.25% |
West Virginia | 6.67% |
Wisconsin | 5.15% |
Wyoming | 6.00% |
How to avoid paying Realtor fees
Selling your home without the help of a real estate agent — called “for sale by owner” or FSBO for short — is certainly possible. Between July 2022 and June 2023, 7 percent of home sales were sold by owners without the help of an agent, according to data from the National Association of Realtors. But selling without an agent’s help is a lot of work to do on your own, and it only saves you one agent’s commission — you’ll still have to pay your buyer’s agent.
If you don’t want to go it alone, ask agents from the outset what their commission is and compare the terms of each person you talk to. If you think the fee is too high, talk to them about lowering it. If the transaction is being handled on both sides by agents from the same brokerage, you might have more leverage to negotiate as well.
Alternatively, you could consider working with a low-commission real estate agent, who will likely charge much less than a traditional agent would (usually 1 to 1.5 percent of your home’s sale price). However, since they’re receiving a smaller commission on each property, these agents are typically focused on volume. As a result, you might not receive as much personal attention as you would with a traditional Realtor.
There are also brokerages and agents who work on a flat-fee basis. In other words, no matter how much your home sells for, they’ll receive a set amount rather than a percentage of the sale price.
If you want to avoid Realtor fees and sell your house quickly, another option could be selling to an iBuyer or a company that buys houses for cash. Both options will allow you to finalize your home sale fast, without paying any agent commissions. But the offers from these buyers will be less than you’d fetch in a traditional sale, and some charge service fees that are equivalent to what you’d pay in commission anyway.
Finally, remember that even if you’re not paying Realtor fees, there are still plenty of other closing costs associated with selling your home. For instance, you may be on the hook for things like title transfer fees, attorney fees, property taxes and more.
The lawsuit that could change everything
A lawsuit currently making its way through the courts has the potential to upend the entire real estate commission model that currently exists. (That is, sellers footing the bill for both their own agent and their buyer’s, typically totalling 5 to 6 percent of the home’s sale price.)
In October 2023, a federal jury found that the National Association of Realtors (NAR), along with several large brokerages, conspired to inflate Realtors’ commissions. A judge ordered these firms to pay $1.8 billion in damages to the home sellers that brought the lawsuit against them, but the figure has the potential to balloon up closer to $5 billion. If the verdict stands, it could mean that home sellers would no longer be required to pay the agent who represents their buyer.
However, things are far from final. NAR has announced plans to appeal the decision, and it might be years before we see the impacts of this ruling (if it holds).
FAQs
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The traditional standard commission is 6 percent of a home’s purchase price, which is then split evenly (3 percent each) between the agent representing the buyer and the agent representing the seller. However, the amount is negotiable and typically averages lower, somewhere between 5 and 6 percent.
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Typically, sellers are the ones who cover real estate agent commissions — both for their own agent and for the buyer’s. That may change if a lawsuit currently making its way through the courts is successful, but it will be quite some time before we see its impact (if any).
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It depends on the specific terms of your agent’s commission. Most commissions range between 5 and 6 percent of the home’s purchase price — on a $500,000 transaction, 5 percent comes out to $25,000 and 6 percent comes to $30,000.