If you sell your house, you will pay closing costs. Sometimes what sellers pay
- Real estate commission
- Lawyer’s fees
Sometimes you will also pay the buyer’s closing costs. Don’t worry, though, because you will receive the same amount of money. Later on, we’ll examine how no cost closings really work.
Fees Paid by Sellers
Property sellers pay significant closing costs. Real estate transactions are complicated, and they require several professionals to make sure that everything goes smoothly. There are taxes, real estate commissions, and lawyer fees.
Real Estate Commission
The real estate broker’s commission is the largest single expense for a seller. While the industry standard is 6% it can vary from 3% to 7%, depending on what you negotiate with your agent. The listing (or seller’s broker) receives the commission check at closing.
- The listing broker keeps half the commission and pays your listing agent and their other expenses with that money.
- The listing broker gives half the commission to the buyer’s broker to pay the buyer’s agent and their other expenses.
A listing broker will ask you to pay 6% for a commission, but you can negotiate. Also, in some cases, you should. If you are in a seller’s market (there is a low housing inventory in your area) then you probably don’t need to pay as much. However, if houses aren’t selling quickly where you live you may want to pay a higher commission. Knowing the market and having a realistic idea of what your home is worth will help you negotiate a fair commission with your agent.1
Uncle Sam wants his cut of the deal, too; and these expenses come in the form of transfer and prorated taxes.
- Transfer taxes, or title fees, are paid for the transfer of title to the new owner
- Prorated property taxes are the percentage taxes that you must pay for amount of you lived in the house for that year.
The lawyers will divide the amount of the tax bill by the days you lived in the house and come up with a percentage of the taxes you must pay. Or if you have already paid property taxes the buyer will reimburse you for a percentage of the taxes you paid already.1
Your lawyer has fees for his services as well, and there are many legal issues with transactions this big and complicated.
- Title insurance
- Escrow fees
- Attorney’s fees
Even a deal that seems simple always has complications, and a good lawyer will anticipate problems and guide you through the process smoothly. So, make sure you find a competent lawyer to help you.1
How Much are Closing Costs
How much are your closing costs going to be? That depends on a few factors, but it mostly depends on the value of your property. We can divide these into two main categories: variable and fixed.
While some costs vary with each transaction, you should be able to find exactly how much each of these payments will be. These include:
Taxes and mortgage payoff amounts are unique to your home and loan. Because of this, these costs vary from deal to deal.
Other factors are fixed. The price is set by the professional that you hire, but you can even negotiate most of these. Also, you can shop around for better prices. These typically include:
- Title search
- Attorney’s fees
Your biggest expense for selling a house will be the real estate broker’s commission. Often, it can be 6%. When you add the other fees, the total can be as much as 10% of the price of the house. On the other hand, if you are savvy and negotiate well you may be able to reduce those payments to around 7%.2
Seller Pays Buyer’s Closing Costs
When a seller pays the buyer’s closing costs, they will still receive the same amount. You may ask, how can this be?
- The seller increases the price of the house by the amount the buyer wants them to pay
- The buyer rolls their costs into the mortgage loan
- The buyer still pays for their own fees at the close
The idea of the seller paying buyer’s costs is a myth created by the accounting spreadsheets. Because money is debited from the seller’s side of the ledger and credited to the buyer’s side it looks like the seller is paying the buyer’s fees. However, the seller increases the price of the house to cover the debit.
Is It Common
It is common, but it may not always be a good idea. On the other hand, there are also advantages
- It may raise the price of the house past what the house will appraise for
- It makes the contract less desirable than another one that doesn’t have that clause
- If you are short cash it is a way to get into your house quicker than saving more money
- It is one of the few ways that banks allow to roll money into your mortgage
You must decide if this approach is right for you. Generally, I do not recommend taking on debt than you can avoid. Sometimes, though, timing and budget dictate this strategy. Just remember that the buyer still pays their own fees.3
What happens to earnest money if the seller pays the buyer’s fees depends on the terms of the contract. Earnest money is attached to the contract to show the buyer is serious (earnest) about buying.
- The funds go to the seller if you fail to follow through on the contract
- The funds are returned to the buyer if certain criteria are not met (such as home inspection failing, or the house under-appraising)
- The funds are held by a third party (usually the title company or attorney)
These funds generally go toward the down payment. However, they can go toward closing costs if your contract allows that. So, it is important to speak with your attorney and ask him how the earnest money will be used for your purchase.4
Property Taxes at Closing
Sellers don’t usually pay property taxes at closing, because they pay taxes in advance. This is usually paid twice per year. The closing day usually falls some time before the next payment.
- The seller is liable for taxes up to closing
- The buyer is liable for taxes after closing
Don’t worry about figuring out the exact reimbursement amount. Your attorney will do that, but make sure they explain the equation to you. Its always your responsibility to make sure the numbers are accurate.5