Selling costs and the buy vs rent decision

What selling a home costs

The main costs are the real estate commission, sales tax on that commission, legal fees to close the sale, and a mortgage prepayment penalty if you sell before the end of your mortgage term. There may also be costs to prepare the home for sale and overlap carrying costs if you buy before you sell.

The engine models four of these. Commission defaults to 4% of the sale price with 5% sales tax on the commission, legal fees of $1,500, other costs of $1,000, and a penalty of three months’ interest if the sale falls between mortgage renewals. These are planning inputs. Commissions and penalties are set by your listing agreement and your mortgage contract, so check both.

A worked example across time horizons

Suppose a $600,000 home in Alberta with 20% down, a 4.5% rate, a five-year term and a 25-year amortization, with rent of $2,300 a month and 3.5% yearly price growth. The engine sells the home at the end of each horizon and compares the buyer’s net worth, after selling costs, with the renter’s.

Why the five-year row looks lower

Selling costs are not a smooth curve in the table. At five years they are lower than at three, even though the home is worth more. The reason is the mortgage term. In this example the five-year term ends at year five, so no penalty applies. At two, three and seven years the sale falls inside a term and the model charges three months’ interest on the balance.

The penalty is large enough to notice. On a three-year sale, a penalty of zero months gives selling costs of $30,440 and a result of -$14,491. Three months gives $35,462 and -$19,514. Six months gives $40,484 and -$24,536. Real penalties depend on the contract; for fixed-rate mortgages they can be calculated differently and sometimes cost more. Read your mortgage terms, and see mortgage types and buy vs rent.

Commission rates

Commission is the biggest single selling cost. The table shows how a lower or higher rate changes the result for a five-year and a ten-year stay, with everything else at the defaults.

A one-percentage-point change in commission moves the five-year result by about $7,500 and the ten-year result by about $8,900. It also moves the break-even: about 4.7 years at 3%, 5.7 years at 4% and 6.7 years at 5%.

Selling costs as a share of the home’s value

At three years the model’s selling costs are about 5.3% of the sale price, at five years about 4.6% and at ten years about 4.5%. As a rule of thumb for planning, expect a share of this size to disappear when you sell, and compare it with the transaction cost of renting, which is the cost of a move.

That is why short stays favour renting in most examples. A household that moves in two or three years pays the entry costs of buying and the exit costs of selling, and has little time for equity and price growth to cover them. See buy vs rent time horizon and the selling costs tool.

How to reduce the effect

You cannot avoid selling costs, but you can plan around them. Time a sale to coincide with a mortgage renewal where you can, ask whether your mortgage is portable, and check how the penalty would be calculated. Be realistic about the likelihood of moving: a job change, a growing family or a relationship change can shorten a stay.

Then run the numbers at three horizons, such as 3, 7 and 15 years, in the break-even tool. If buying only wins at the long horizon and you doubt you will stay, renting may be the more flexible choice. Compare it with hidden costs of owning and closing costs for the full cost picture.