By: Revanche

Selling our home in California: Part 1

August 21, 2017

Do we rent out or do we sell?

I was sorely tempted to keep this home as a rental property but ultimately decided against it for several reasons:

1. Because of our refinance last year, our monthly costs are quite, relatively, low now. All told, our mortgage, HOA, insurance, and taxes run about $3350 per month. A home this size would probably be renting out for around $3500-3700 per month. That’s a cash flow of $179 to $379 per month. That’s not nearly enough to cover the maintenance and have a real profit margin. The two first years of cash flow would have to be banked against maintenance costs. That could work if I wasn’t so risk averse, we didn’t have any other drains on our income, and we had a comfortable savings cushion to cover our new home expenses. Which leads me to Reason number 2…
2. We’re comfortable right now but not once you subtract the new mortgage and reno costs. We need the profit from the sale to recoup that spending. Short term thinking, admittedly, but I’m ok with that given Reasons 3 and 4.
3. Both our CA properties are in the worst subduction zone possible. If and when the big one hits, both properties are highly likely to be completely destroyed. I’m not willing to bank my sense of stability on hoping there’s no major earthquake until we can easily afford the deductible on our earthquake insurance for two properties, and deal with the pain of rebuilding both. One will be painful enough.
4. I don’t want to be a hands on real estate investor. I’ll do the accounting and management from afar but if we owned a property as nearby as this, I would feel compelled to do much of the property management myself. At this stage in life, that’s not something I’m prepared to do. The other option, hiring a property manager who would take 10% off the top, means the cash flow would be even less. In fact, that expense would drop our cash flow down to nearly nothing.
5. After five years, we wouldn’t even qualify for the cap gains exclusion.

What’s the point, then?

I know that this is the right decision for us even if I am grumpy that the math doesn’t work.

Tax implications: Capital gains exclusion

I know, this may not be the first place your head goes to when we’re talking about getting ready to sell your home but this is a huge one in our state, given our market. Once I was sure that selling was the right way to go, I went straight to the IRS for the goods to make absolutely sure our sale qualified and that we were eligible for the exclusion.

How your sale qualifies. Your sale qualifies for exclusion of $250,000 gain ($500,000 if married filing jointly) if all of the following requirements are met.

• You owned the home and used it as your main home during at least 2 of the last 5 years before the date of sale.
• You didn’t acquire the home through a like-kind exchange (also known as a 1031 exchange), during the past 5 years.
• You didn’t claim any exclusion for the sale of a home that occurred during a 2-year period ending on the date of the sale of the home, the gain from which you now want to exclude.

All of these are true: PiC purchased this home long before we married, we’ve both lived here for much longer than the 2-year use requirement. We file jointly but I had to be sure that only one of us had to be an owner for the 2-year ownership requirement because we left the title in his name.

Marriage. Married individuals may exclude up to $500,000 of gain if they file a joint return and neither spouse excluded gain on the sale of another home within a previous 2-year period. If one spouse meets the ownership requirement, both are considered to have met the requirement.

I’m still working on whether or not we are exempt for CA state taxes but I’m reasonably certain that we should be.

Hiring an agent

I know most PF bloggers would say “go take a real estate course, and sell it yourself!” But I’m not (mostly) an idiot. That works for people who don’t have serious and severe limitations on their time and energy. I’m hiring someone to perform a service and to spare me the real pain of having to learn an entirely new skill in a compressed period of time.

I can take the real estate course when I’m not juggling fireballs and spinning ten plates in the air. Later.

We had a great agent referred to us by our friends who were really happy with her services, twice. After meeting with her and chatting by email, we determined that her rate and style were in line with our expectations.

Out of her fee, she would be paying for all marketing, the deep cleaning service, the photography. We’re paying her to advise us of regulations, the best way to market the sale, strategize pricing, do all the marketing legwork, and handling all our negotiations.

She’s the antidote for needing to sell while suffering from a fair amount of information overload, and serious decision fatigue. She’s been incredibly responsive and flexible, going to great lengths to minimize the disruption to our lives, which was highly appreciated considering how much we’re keeping moving at the same time between this sale and our renovations.

She’s even been helping with the seemingly endless packing and transporting furniture to get this place show ready. But that leads into a whole other story, for a whole other day.

Read Part 2 and Part 3!

:: Have you ever done a FSBO or been tempted to? Or did you go the agent route when it’s time to buy or sell? How was that experience?

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