Buying a house is one of the biggest investments in one’s life. Aside from accumulating funds for the down payment, legal fees, land transfer tax and other related expenses, it needs careful planning which include how long you will keep the house before you sell it.
In today’s real estate market house value does not practically increase in a year’s time. If it does it is very minimal and the increase in value is not enough to cover the cost of agent’s commission (up to 6% of the selling price), legal fees and other related disbursements.
Example: If you purchased a house for $200,000.00, and you invested $20,000.00 for your down payment of $12,000.00; land transfer tax, legal fees and disbursements for a total of $8,000.00. Your mortgage is about $195,000.00 (including insurance premium for high-ratio mortgage) and assuming your house value increases by 2% (which is abovenormal) in one year, which is $4,000.00 ($200,000.00 x 2%). If you will sell your house at $204,000.00 after one year in will cost you the following: agent’s commission of 6% of the selling price which is $12,240.00 ($204,000.00 x 6%); estimated legal fees and disbursements $1,000.00, for a total cost of $13,240.00.
On closing day your lawyer will receive a net amount of $190,760.00 ($204,000.00 – $13,240.00) from the buyer to pay for your existing mortgage of about $194,000 ($195,000 – $1,000.00) for your mortgage payments in one year only about $1,000.00 is applied towards the principal and the rest towards the interest.
As your lawyer will receive only $190,760.00 on closing day, the amount is not enough to pay off your existing mortgage of $194,000.00 to close the transaction. To close the deal you need to come up with anextra amount of $ 3,240.00 ($194,000.00- $190,760.00) for your lawyer to close the transactions.Otherwise,the buyer will sue you for a breach of contract.
You will note on the above transaction your $20,000.00 investment was wiped out and not only that you have to come up with extra $3,240.00 to close the transaction. You lost in total of $23,240.00 for selling your house early instead of holding it for more years to build up equity.
Buying a house is a long-term investment. If you want a healthy return of your investment under normal economic condition you need to keep your house for at least for five years before selling. Otherwise, you will lose all your down payment and even more as in the above example.