Are you at risk of losing a lot of money by selling your house? The five-year home sale rule is an essential industry guideline, but it’s become more uncertain in recent years as home prices have begun fluctuating more.
With that in mind, when can you sell a house after buying, and what happens if you sell your home before five years?
In this guide, you’ll learn more about the five-year rule, why people use it, what penalties might exist if you sell a home too quickly, and get some tips on selling a house after five years.
The 5 Year Home Sale Rule
The five-year home sale rule is a principle that says you should usually wait at least five years after buying a house before you sell it. The reason is that fees take up about 10% of a home’s sale price on average (although the actual number fluctuates from 7% to 15%), and many houses increase in value by about 2% per year.
Therefore, it takes about five years to break even and get enough growth in a home to cover the closing costs. This rule does not apply in markets that are significantly outside the average. If a home grows 20% in value in one year, you can sell in one year and still make a profit… although it may be better to hold onto an asset growing that fast unless you need to sell.
The best time to sell depends on the housing market. Most homes will break even on fees within five years, and seven years practically guarantees their market value.
You can also sell at a profit sooner if you can take advantage of other factors, such as instigating a bidding war that puts the sale price higher than your estimate. The crucial thing to remember about the five-year home sale rule is that it’s a guideline, not a requirement.
This rule is in place mainly because of realtors’ fees and similar costs. If you sell a house without a realtor, which is challenging but possible, you can significantly reduce the amount of time you should wait before selling.
Selling at Other Times
What happens if you sell your house before two years? Can you sell your home after three years? Can you sell a house after one year? What is the time frame?
We hear these kinds of questions regularly. The answer is yes, you can, as long as the seller’s market conditions are right for it.
The fundamental principle here is that you should try to avoid taking a loss when selling real estate. That means waiting however long is necessary before selling the house. It might be one year, and it might be ten years.
The only reason to sell at a loss is when you can take advantage of a better option elsewhere. For example, if you can sell a slow-growth property at a bit of a loss and pick up a fast-growth one, that’s often a better deal than waiting for the slow-growth property to break even.
It’s often worth accepting cash offer benefits, as these can outweigh other offers if you sell at the right time.
Do You Have an Upside-Down Mortgage?
An upside-down mortgage is when you owe more on your mortgage than your property is worth. This can come about in one of two ways.
The first is that property values decrease too much, too quickly. This happens occasionally, but most properties only go up in value, so it doesn’t happen much outside of exceptional circumstances.
The other time when this can happen is when you miss mortgage payments and have to pay off more interest on your mortgage balance. This can lead to a cycle where your loan grows faster than your home’s value.
It’s vital to get out from an upside-down mortgage as quickly as possible, even if you have to sell your primary residence at a loss. You can try holding onto the property if you expect home values to go up significantly, but this is much riskier than selling and buying a property you can truly afford.
Are There Penalties When Selling a House After 5 Years?
In most cases, there are no particular penalties for selling a house after the 5-year rule. There can be penalties if you’re selling a house in less than two years, as the government tries to discourage flipping and selling too quickly unless you’re adding a lot of value to the property.
Tips for Selling a House After 5 Years
Can you sell a house after five years and still benefit? In short, yes. Here are some things to consider if you’re selling a house after waiting for five years.
Know Any Fees You May Incur
Fees you may face include the realtor’s fees, home repairs, a home inspection, staging costs, utility payments, property taxes, title transfer, escrow fees, brokerage fees, and courier fees. If you’re selling too quickly, you may also owe capital gains tax or property taxes.
Real estate agents can help you understand exactly how much you’re likely to pay for selling a home in your market. We buy homes Virginia residents want, and as stated above, most sellers end up paying between 7% and 15% total, not counting any capital gains taxes from a short-term sale.
Most home sales also require services from a professional photographer, though your realtor may include that as part of their services and cover the fee with their payment.
Great photography makes a huge difference when selling homes. Many photographers use drone shots these days, giving an aerial view of the property.
Optionally, you can set up a 3D walkthrough of the house so buyers can look through it online. This is moderately expensive, but it’s an excellent way to increase the opportunity for a home purchase and advertise to people who may find it hard to reach the property. Your realtor can tell you if this makes sense for your home.
Make Sure You’re Ready to Move
The next part is making sure you’re ready to move. Selling a home is always easier if you know how and when to leave your current property.
Getting ready for home selling can take months, but you can start early by getting rid of things you don’t need and performing maintenance and repairs to make your property more appealing.
Important things to fix before the sale of your home include electrical issues and wiring problems, leaky roofs, foundation problems, plumbing issues, and heating or air conditioning issues.
These are the kinds of things that potential buyers and lenders may notice on an inspection of the property, so fixing them early is important.
Make sure you line up your new home before you sell, too. Ideally, you’ll be able to move out and immediately head into your next home.
Depending on the timing of sales, though, you could be outside of a residence for several weeks. Be prepared to live with friends, camp out, or look for other solutions while you wait.
Done correctly, you can attract the kind of cash home buyers Virginia Beach homeowners want.
Do You Have Enough Equity?
Having enough home equity in your property is essential. The main thing is avoiding an upside-down mortgage as described above because that forces you to take a loss on the property.
More equity is always better when you want to sell your home, though, because that means you can keep more of your money from the purchase price.
Let’s say that you’re in a spot where you still owe 70% of the home’s cost on a mortgage after all the other fees. You have to pay that off first, so you’ll only get 30% of your home’s sale value to put towards your next property. It’s also essential to check with your mortgage lender that you won’t receive a prepayment penalty for paying your monthly payment too quickly.
The best position is owning your property outright. Remember, if you have equity and you’re a few years out from selling, you might be able to refinance your home and get more equity than you’d otherwise have. Talk to your realtor or mortgage provider for more information on refinancing.
Would a Short Sale Be Worth It?
A short sale is when you sell a property for less than the amount remaining on the mortgage. Short sales usually occur when you have an upside-down mortgage.
Companies that buy houses Norfolk residents want don’t like short sales, but they can be the best option when the current owner can’t afford to pay.
Sellers get essentially nothing out of a short sale, but it’s a way to get out of growing debt and start over. The sooner you can get out of hardship like this, the less of a loss you’ll take.
Can you sell a house after five years? In the most literal sense, yes, you can. However, the thing to remember here is that this rule only exists because most properties, in an average market, are profitable to resell after five years.
This doesn’t mean you should sell a property every five years exactly. Some families live in a home for decades; others only stay somewhere for two or three years before moving on. None of these are fundamentally wrong.
As a homeowner, the best thing to do is pay attention to property values in your area, including proposals for something that might increase or decrease its value.
Your realtor can provide reports on market conditions and give you personalized advice on when it makes sense to sell. It’s never too early to start researching the market, so talk to your realtor today for more information.