Real Estate 101 (Buying and selling costs)
When it comes to selling real estate there are certain costs that will not be avoided. They are often referred to as “closing costs” and probably belong in the same breath as “death and taxes”. Through the years certain costs have been assigned to either the Buyer or Seller but not both. To aid in the discussion of who pays what it helps to look at the minimum transaction. The buyer brings a stack of $100 bills and the seller brings the land and they trade.
Really the seller does not bring the land. He or she brings the deed that represents the land. Because the seller needs a deed he will pay someone to prepare one — Seller’s cost … Now let’s go through the whole thing:
|Offer or contract||$70||Buyer||Buyer makes the initial offer|
|Acceptance||-0-||Seller||Seller signs contract - free|
|Abstract of Title||$300 to 700 +||Seller||Seller establishes ownership|
|Abstract Exam||$150-200||Buyer||Buyer wants to know, is the title good?|
|Deed||$65||Seller||Seller prepares necessary documents|
|Real Estate Taxes||$$whatever||Seller||Tax for period of ownership|
|Transfer Tax||$1.60 / $1000 of price||Seller||Statutory … aka Deed Stamps|
|Closing or Escrow||$150 to $300||Split||Both split cost of Attorney or Escrow Agent’s supervision|
|Recording||$17||Buyer||Recording proves ownership|
|Abstracting (again)||$200-350 +||Buyer||If buyer borrows money|
|Final Title Op||$100-150||Buyer||Banks want a final opinion|
The second abstracting and final title opinion come in to play when the buyer needs to borrow money. Depending upon where one is borrowing money the costs of doing so vary wildly. It is best to “shop” the loan carefully.
All sorts of pressures are put on the seller to “help” the buyer to reduce the cost to make the deal. Consider the lender, the lender’s agents, and the real estate agent are all commission oriented. Even though the Realtor is suppose to be on the seller’s ’side’ a commission today is always better than one tomorrow. Three common “help the buyer” terms come in to play: Buyer’s closing costs, points, and prepaids (some times followed by the words “not to exceed”). Sellers need to understand what these are and be prepared to negotiate just how much they are going to pay. Also sellers should be aware the common form of the agreements put the seller paying as much as $7000 for the buyer and the Realtor will still claim a commission on the agreed purchase price before deductions. Before you decide to “Help the buyer to close the deal.” Remember: “Just say no.” is an option.
“Closing costs” See the chart above for starters. Next if buyer is borrowing money there maybe several fees all measured as a percentage of the total loan, then appraisals, inspections, and so on.
“Points” refer to the buyers loan costs that are measured by a percentage of the amount borrowed.
“Pre-paids” Seller’s costs but really open ended. Recently I have seen half a year’s insurance paid in advance, real estate taxes beginning after the date of possession paid in advance, loan interest paid in advance (also called Odd day’s interest) and mortgage insurance all listed as “prepaids”. These are nothing more than the buyer’s costs of ownership being prepaid. In one case where the lender’s agent wrote closing costs and prepaids “not to exceed $5000″ the costs added up to $5,128 so the closing statement then had an adjustment of minus 128. So if you see the term “prepaids” and “not to exceed” that should be read “You WILL pay this amount.”
Best advice … get legal advice at all phases of the sale.