Expert: Russel Ray - 10/30/2007

Question
In December 2007 it's going to be 1 year since we moved in to our house, but because of security reasons we would like to sell our house.  We were told by a realtor that came to look at our house, that we couldn't sell it because we haven't lived there for at least 3 years.  Now, I've heard that you have to live in your house for at least 2 years if the house is worth more that 200,000, but my house isn't worth that much.  I would like to know what the real truth about being able to sell my house is here in the state of Texas.


Answer
Hey, Wendy.

When I read your question, my first response was a very loud "HUH?"

You can sell your house whenever you want to sell your house. Whether someone else wants to buy it at the price you want to sell it at is the question.

I think where the confusion is coming in is with the capital gains deduction. Generally, if you've lived in your house as your main residence for two of the past five years, you can take a capital gains deduction of $250,000. That means that if you make $250,000 clear profit on your house, you don't pay any capital gains taxes on it. If you and a partner/spouse have lived there, then each of you can take a $250,000 capital gains deduction, up to a maximum of $500,000 cumulative total.

If what your Realtor is saying were true, then the property renovation business would be non-existent in Texas. However, I have bought many a house in Corpus Christi, Houston, Victoria, Bryan/College Station, Austin, San Antonio, and Beaumont, renovated them, and sold them weeks or months later. Some sold for more than $200,000, but most didn't. Notwithstanding the selling price, note that I sold them weeks/months later. In all cases, I did not live in them for the required two years of the past five, so I paid a capital gains tax on my profits.

Many, many Realtors don't like to work with houses that haven't been owned for at least two years because there's very little equity in the house. Little equity means that you have very little room to negotiate with selling prices, and very little room for the Realtor's commission.

Let's look at an example. Let's say that you have a house that is worth $100,000 right now. Let's say just for discussion that you bought it one year ago for $100,000, which might not be that far off considering the real estate market throughout the nation. And let's say that you took advantage of the loose credit a year ago to do 100% financing on your house. That would mean that 12 months later, you owe, say, about $98,000 on the house, meaning that you only have $2,000 equity in the house. That means that you have to sell the house for at least $98,000 in order to pay off the loan.

Now let's say that your Realtor lists the property for a 6% commission, to be split 50/50 with the buyer's Realtor. That means that you have to come up with $6,000 in order to sell your $100,000 house. How are you going to do that?

Let's continue by saying that you've found a willing buyer who will pay $100,000 for your house, and that the appraiser says it is worth $100,000. That's good because that's the price you listed it at, but the mortgage company is going to take $98,000. That leaves you with $2,000 to pay the $6,000 commission. Oooooooops. Now you're off to the bank to get a loan for $4,000 to pay the Realtors their commissions. Not a good situation to be in, but it's very common right now due to (1) the loose credit that existed a year ago and (2) the lower real estate market conditions that exist right now.

So you could try to clarify the conversation with the Realtor who came to look at your house. S/he might simply be inexperienced, or there might be simple miscommunication between the two of you. Whatever you do, make sure you don't sign a listing agreement with any Realtor that would force you to pay commissions out of your own pocket rather than from the sale of the house.

Also make sure that you don't pay any commission if you find a buyer for your own house, another common situation. But the great majority of Realtors have a little paragraph in their agreements that state you owe them a commission if the property sells during the period the agreement is in force, regardless of who finds the buyer. You don't want to go to the office party and tell someone that you are selling you house, only to have them come over a couple of days later to look at it and decide to buy it. Actually, you do want to do that, you just don't want to pay the Realtor thousands of dollars for you doing that simply because they have listed your house.

If you need further help, feel free to follow up with me.