Are you selling your house at a loss?

It’s easy to get caught up in the emotion and simply look at the selling price versus the buying price and believe that you’re making money.

But there’s more to it and it’s worth exploring.

THE SCENARIO

Joanne bought a house six years ago for R1 million and now sells it for R1.5 million (that’s about 7% growth each year).

Before buying, she was renting an apartment at R6 500/month which would probably have increased by 8% each year.

Is Joanne better off financially now?

PART 1: Home ownership costs and calculations

This first part of the calculation looks at the costs involved in buying and owning a home.

. Assumptions:

A 100% home loan over 20 years at a 10% interest rate. The instalment on a R1 million home loan would be R9 650/month (not taking additional insurances or fees into account).

. Instalments and interest

If Joanne paid the standard loan instalment each month for six years she would have paid:

R9 650 x 72 = R694 815

Of that, about R565 000 would be towards interest and the outstanding loan amount after six years is R870 799. So, of the R1.5 million she receives from the sale of the house, R695 000 is the amount she has been paying monthly; R870 000 is what she owes the bank and that leaves her with a R65 000 loss.

. Initial Costs

The costs in buying the home six years ago (2013) would have been:

– Transfer costs: R12 000

– Transferring attorney: R12 500

– Bond attorney: R12 500

– Bond initiation: R4 250

Thus R41 250 upfront fees.

Note: These fees are based on 2013 guidelines and change almost annually.

With this added knowledge, Joanne is looking at a loss of R106 865.

. Capital gains tax

Capital gains tax (CGT) is not applicable to your primary residence (where you live) if the gain is less than R2 million. You should, however, consider if this is applicable to your situation.

. Selling Costs

Unless Joanne sold her house privately, she would have paid either an online site fee or an estate agent fee. Anything from R20 000 to R100 000 depending on where she sold it and how good her negotiation skills were. This selling cost adds to her losses.

At what point would the sale result in a profit?

The answer is that by the end of year 11 you could potentially sell your house at a profit.

. Assumptions:

– A 20-year loan at 10% interest;

– Standard instalments are paid monthly (no additional monies);

– No CGT applicable;

– Property value increases at 7% a year;

– Selling costs capped at R20 000;

– Initial costs were R41 250 (six years ago); and

– Home maintenance, rates and taxes, and building insurances bundled together.

Note that this is just an example and you should try to apply the logic to your own circumstances. Play around with numbers to work things out for yourself.

The longer you own a property, the better chances you have of selling it at a profit.

PART 2: Adding in rental costs

Unless you’re able to live at your parents’ home for free, rental comes into play as we all need a roof over our heads.

This calculation will vary greatly depending on your own circumstances and rental costs. In Joanne’s case she was renting a unit at R6 500/month at the time that she bought her house and we’ll assume that the rental was increasing at 8% each year.

Looking at Part 1 of the calculations, Joanne would have made a loss of about R168 000 if she sold her home after six years.

But, had she not even bought property in the first place, she would have spent about R572 000 on rental for that period and thus be in a worse financial position.

In this case by buying and selling Joanne has, in fact, saved R404 000. She hasn’t made a profit off the sale of her home, but her overall financial position is better off by about R400 000.

FINAL THOUGHTS

The main point to take from this is the understanding that the profitability on the sale of a property is not simply the selling price less the purchase price.

The initial upfront fees, interest costs, maintenance and selling costs all play a major role and can easily make your “profit” disappear.

Buying a house instead of renting certainly makes sense but whether it’s the right decision or not will depend on your own circumstances and goals.

However, selling your home to upgrade to something bigger is an expensive process; one should carefully consider the overall effect on your financial wellbeing.

• Dale is a personal finance blogger.

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