Net proceeds: What they are and what they mean for home sellers

Selling your home is a significant undertaking, and one of the top concerns for any homeowner is the amount of money they’ll ultimately pocket from the sale. This crucial figure is known as “net proceeds.” Net proceeds represent the sum a homeowner receives after accounting for all fees, commissions, closing costs, and other expenses associated with selling a property.

Calculating net proceeds can be somewhat complex, and the exact amount may not be determined until an offer has been accepted. However, it’s possible to get a general estimate of what you might stand to make.

What are Net Proceeds in Real Estate?

Net proceeds are essentially the money a homeowner takes away after the sale of their property. This amount is typically less than the actual sale price due to the various expenses involved in the selling process, especially if there’s an outstanding mortgage.

Ralph DiBugnara, president of Home Qualified, a real estate resource and web series, explains, “Net proceeds is the amount of money a home seller will receive after deducting all of the costs of a sale.”

Expenses linked to a home sale encompass agent commissions, title insurance, attorney fees, and escrow fees. Depending on the property’s location, property taxes and transfer taxes may also apply. Additionally, the payoff balance on the mortgage plays a significant role in determining net proceeds, as any remaining balance is typically settled using funds from the sale.

It’s important to note that net proceeds are not synonymous with profit. Greg McBride, Bankrate Chief Financial Analyst, emphasizes, “The proceeds include your down payment and any principal repaid, which do not represent profit.”

How to Calculate Net Proceeds

The simplest way to calculate net proceeds is to deduct all of the seller’s closing costs, expenses, and the mortgage balance from the final sale price of the home. Generally, you can anticipate paying between 7 percent and 10 percent of your home’s value in fees.

For a more accurate estimate, consider factoring in additional expenses related to selling your home, such as the cost of repairs or improvements made before listing, as well as the expenses of staging your home. These costs will impact the net proceeds earned from the sale.

Net Proceeds Example

To illustrate, consider this example from DiBugnara:

Let’s say a home is sold for $500,000. The seller’s costs to sell that home include a mortgage payoff balance of $300,000, real estate agent fees of $15,000, attorney fees of $1,000, and other sales taxes and closing costs of $4,000. That leaves the seller with net proceeds of $180,000.

Net Proceeds and Taxes

Depending on the type of property you sold and your plans for the money earned, your net proceeds may trigger a tax event. The impact on your taxes will depend on various factors, including your tax bracket, marital status, duration of ownership, and whether it was your primary residence.

Current laws allow the first $250,000 in profit for single filers, or the first $500,000 for those married and filing taxes jointly, to be excluded from impacting your tax liabilities, provided you meet certain IRS stipulations.

If you reinvest the profit from the sale into another home within a specific timeframe, you may potentially avoid capital gains tax.

Does the Manner of Sale Affect Net Proceeds?

The net proceeds from a home sale can vary significantly based on how you choose to sell the property. Options include working with a traditional real estate agent, selling on your own through a “for sale by owner” transaction, or selling to a company that buys houses for cash or an iBuyer.

While a for sale by owner transaction eliminates the need for a listing agent’s commission, it also requires taking on all the work of showing and selling the home. Additionally, FSBO homes typically sell for less money compared to listings with an agent.

iBuyer sales may result in fewer net proceeds for the seller, as these companies typically offer less than market value for homes and may charge substantial fees.

In a traditional sale with an agent, you can expect to pay a commission, which is typically the most significant expense associated with this approach.

In conclusion

understanding net proceeds is crucial for any homeowner looking to sell their property. By factoring in all associated costs and expenses, you can get a clearer picture of what to expect from the sale. Keep in mind that seeking professional advice from a real estate expert can help you navigate this process more effectively.