Costs involved in selling a property

If you are planning to sell a house, you must go through the various stages of preparation. It begins with property valuation to determine the right price and concludes with an in-depth analysis of closing costs and tax implications and deciding the next investment plans. Closing costs refer to the expenditure incurred by sellers and buyers over and above the property price. While many people think the buyer bears all the expenses involved in any property transaction. However, there are certain expenses every seller must bear. Estimating the closing costs involved in selling a property is crucial, as the amount can be significant. This will help you plan your funds more effectively, avoiding any hassles later. In this article, we will discuss how sellers can estimate the closing costs for the property sale.

Stages involved in property sale and expenses involved

The journey before the actual property sale transaction can be categorised into the following stages:

• Hiring a real estate broker
• Property valuation
• Arranging documentation
• Home staging
• Foreclosure charges
• Lawyer and Notary fee
• Listing property for sale
• Tax implications

#1. Hiring a real estate broker

Many property sellers find it convenient to hire a real estate broker to help them find the right buyers. They charge a certain amount as a commission for the services provided. Typically, the brokerage charges are around one to two per cent of the sale value, that is, the price at which the buyer purchased by the buyer. For example, if a property is sold for a total price of Rs 60 lakh, the broker charges 2% of the sale value. The amount to be paid to the broker is Rs 1,20,000. The broker will levy the same charges from the buyer.

However, some brokers may charge a flat amount instead of a specified percentage. One should also note that the brokerage charges depend on factors such as the property’s location (city or locality), type of property (commercial properties may involve higher charges), etc. Charges may vary from broker to broker. So, this point should be considered when calculating the closing costs.

#2. Property valuation

Property valuation refers to the process of estimating the value of a property. It is required in several instances such as property selling, payment of property taxes, assessment for investment purposes and calculating insurance costs. If a seller decides to estimate a property’s value based on their own research, the results may not be effective. Moreover, buyers may negotiate to bring the price further down, which will not be beneficial for the seller. On the other hand, property valuation by hiring professional service is an effective way of arriving at the right value of a property. In this process, experts prepare a property valuation report based on a systematic process. Property valuation is also useful when a seller is planning for their next property investment.

Property valuation charges will depend on factors such as property’s location, size, age, valuation method, etc. Some property valuation service providers and banks follow a specific structure for calculating property valuers charge.

For example,

• First Rs 50,000 to one lakh of the property value: 0.5% to 1%
• Second one lakh: 0.25%
• Subsequent one lakh: 0.125%
• Maximum charge: 0.0625%

The property valuation charges in India may range from Rs 5,000 to Rs 50,000.

#3. Arranging documentation

The seller must arrange all the property documents, including the sale deed, building plan, encumbrance certificate,  completion certificate, occupancy certificate, payment receipts of property tax and utility bills, NOCs from various authorities, and bank approvals. These documents serve as proof of the seller’s rightful ownership of the property. Obtaining property-related documents from government authorities may involve a specified fee. Another factor a seller should consider is the transfer charges and processes in the housing society, if applicable. They must check with the housing society to know the charges. Further, every property seller must ensure all dues with respect to property taxes, utility bill payments, etc., are cleared. If not, they must settle all the dues before the sale transaction.

#4. Home staging

Home staging refers to the process of making the house ready for potential buyers. This involves a home inspection to identify any defects and get the necessary repairs. One can either adopt a DIY (do-it-yourself) approach or hire professionals. The costs may vary accordingly based on your choice.

When preparing the house for buyers, a seller should typically create a depersonalised and fresh look of the property. This requires giving the house a fresh coat of neutral paint and repairing the non-functional fixtures and fittings in the bathroom, kitchen, etc.

The costs involved at this stage will depend on the extent of the repair and renovation undertaken. One can estimate Rs 2 to 4 lakh while considering the property size, location, materials used and budget preference, among other factors.

#5. Foreclosure charges

While there is no problem in selling a property when there is an outstandinhome loan, some property sellers go for paying off their loan amount to make the sale process easier. The remaining home loan balance payment is known as home loan pre-payment or foreclosure. It involves paying more than initially agreed upon Equated Monthly Instalments (EMIs) or one single payment. In such cases, the lender will levy foreclosure charges. Usually, financial institutions charge 1% to 4% of the pre-payment amount for fixed-interest-rate loans. Borrowers who have opted for home loans with a floating interest rate are exempt from foreclosure charges. A property seller must check the loan documents carefully and confirm with the lender the exact amount to be paid.

#6. Lawyer and notary fee

Hiring a lawyer to sell a property can be beneficial for homeowners. A lawyer will guide you through the legal procedures involved in the home-selling journey, such as arranging and reviewing property documents, analysing taxation aspects and settling any disputes, if any. If you are hiring a legal professional, a specified fee must be paid, depending on the location, lawyer’s experience, etc. You can consider an estimate of Rs 5,000 to Rs 30,000. On the other hand, if a seller decides to get the property documents verified by a notary or an authorised official having legal authority to verify all the property documents, a specified fee must be paid to them. It is recommended that these costs be considered to arrive at the total expenses during the property sale.

#7. Listing property for sale

A seller may have to shell out a significant amount to advertise the property to prospective buyers. One chooses the traditional advertising methods, such as printing newspaper ads by paying a specified charge. Moreover, several property buyers start their home search online. Thus, listing the property on a popular real estate platform may help a seller find the right buyers. There are paid packages available for these consumers, which help give better visibility and come at a reasonable price.

#8. Tax implications

In India, a capital gains tax is levied on the profit (capital gains) made from the sale of assets such as property or stocks. The tax liability is based on the time till which the owner has held the asset. Long term capital gains tax (LTCG) is applicable when the asset is held for an extended period. That is, if the property was held for over two years (after the date of its purchase), the Long-term Capital Gains Tax (LTCG Tax) will be applicable. The rate of capital gains tax has been reduced from 20% to 12.5% with the benefit of removal of indexation benefit, according to the Union Budget 2024-25. After seeing the response in the sector, the government decided to provide two LTCG tax rates options for the taxpayer – one with 20% with indexation and another with 12.5% without indexation. The calculations show varying results depending on the option selected. This is a crucial step as it will directly impact the total costs for a homeowner. On the other hand, property held for less than two years before selling will be taxed under Short-term Capital Gains Tax.

Click to know the tax implications of 20% LTCG with indexation vs 12.5% without indexation

Tips to reduce property selling costs

• Adopt a DIY approach: There are many stages in the property selling process where the seller can take charge and be ready to do all the work by themselves. For example, listing the property on their own on property portals cuts down the commission paid to brokers.
• Keep track of market trends: If you are planning to sell your house, start by doing thorough market research to understand the price trends. You can use online property valuation tools.
• Prepare your house: You can incorporate minor cosmetic changes to your property instead of a major renovation. This can save costs to a great extent.

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Every property seller’s journey is unique. Thus, they must consider each step where they may incur expenses. This will help them arrive at the proper estimation of costs. Working with a real estate agent can be beneficial for first-time property sellers.

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