by PJ Wade
Most property owners intend to enjoy their real estate as long as they want to, and then sell it for the greatest possible profit”ideally tax free”with the minimum amount of hassle, in the shortest possible time. Sometimes this works out. Sometimes it doesn’t. How can owners stack the deck in their favour?
Just before a real estate market shifts, make an informed decision to sell or not sell, instead of passively watching what’s going on, and possibly lamenting in hindsight. Current forecasts of price declines are warning signs for owners who want to sell and move in the next few years. The question to answerbefore dramatic changes happen is, “Will delaying the sale of the home for a few years cost money?”
Actively engage foresight to investigate options. Then you can make an informed decision to sell or not to sell which makes more sense”and more money”than lamenting in hindsight. The range of factors and personal choices in the decision make it complex enough that you must stop, gather details, and think, but simple enough that your reaction to accumulated information can reflect the best decision for you.
If you just watch as prices rise and dip, you’re a passive real estate spectator and may miss opportunities to move yourself ahead financially. When you get in the habit of making informed decisions as markets change, you’ll be an engaged real estate owner, always be ready to take advantage of opportunity whether that means selling or staying.
To decide if now is the best time to sell, there are a number of key issues to consider. Take time to explore the value in selling now versus later, instead of later whining “If only we’d…!”.
Seriously considering a sale does not commit you to moving until the property is actually on the market and sold. It does commit you to making a detailed comparison of financial and housing gains and losses in selling now versus selling in the lower-priced future markets many pundits are forecasting.
The Now Versus Later Decision
Current Local Real Estate Knowledge
Depending on the complexity of your housing and financial situation, you may need time with a real estate professional with extensive local experience. You need expert advice on the true real estate market which is the one happening on your street, or in your condominium building. Understanding what’s selling locally, and how quickly, is important. Projections of what may lie ahead will be based on how the neighbourhood is evolving. For instance, if this is first-time buyer territory, projected reductions in this market segment may be significant. Selling condominiums must include evaluation of new competing developments which may come on market as heavy competition. According to TD Economics’ July 13 report, Moderation in Store for the Canadian Housing Market, which explored market forecasts for 12 major centres, “Given their recent run-up in activity, new condo supply and only-subdued economic growth forecast, Toronto and Vancouver are expected to see a larger than-average correction in both sales and prices.” No guarantees here, so be ready to rely on your knowledge of the area. You have strong ideas and experience concerning what is happening now in your neighbourhood, and where things are headed.
The real estate professional can also identify specific repairs and upgrades which would increase value and speed of sale. A home inspection or an unbiased assessment from a contractor who understands your purpose may be worth a few hundred dollars. The key is to be sure you know how much has to be done to make the home sale-worthy, or that a buyer with a home inspection may expect to negotiate off the sale price. Calculations regarding a delayed sale must include additional out-of-pocket expenses like replacing the roof, painting, modernizing bathrooms, or repairing the deck that would be necessary in a few years.
If your home is designated your principal residence, as defined by the Canadian Revenue Agency (CRA), the profit you earn could be tax-free, so maximizing the gain makes sense. According to CRA, if the property was your principal residence for every year you owned it, you don’t have to report the sale on your tax return or pay income tax on the profit. As with most tax topics, principal residence designation is not a simple concept nor an easy one to interpret. Changes like renting out your home may mean the capital gain from a sale, or some of it, must be reported as income. When income tax is payable on this profit, the amount left after deducting the cost of increasing the value of the property (not maintaining it) and the cost of selling is added to your income tax and tax paid at your income tax rate. There is no fixed percentage of tax charged.
Many areas have already seen real estate sales slow and prices “level off” in spite of continued record growth in Toronto and Vancouver markets. Location will remain a significant factor. When prices were going up, they did not rise the same percent in every neighbourhood. Price declines will also be location specific. Forecasts project declines of from 10% to 25%, depending on the economists and markets involved. Economic shifts will also be significant local factors. What’s happening with jobs and development in your area? The aforementioned report, which explored market forecasts for 12 major centres, reported: “Over 2011-13, Calgary, Edmonton and Regina housing markets are set to lead the way. Still, the term “leader” is relative as no market is slated to experience a boom over our forecast. We simply have these regions doing better than the rest.”
Interest Rate Increases
When rates increase, buying power will be reduced and the pool of buyers who can afford your real estate will decline. Forecasts are regularly re-written, so timing can be difficult to pin down. Your real estate professional can project how significant a rate increase would be to potential buyers. Not all will be equally impacted by increases.
Hindsight may be more accurate than foresight, but foresight may be all that is necessary to end indecision about the “when” of selling, and gain the benefits of being a fully-engaged real estate owner.