New to Real Estate? Not sure who pays for what in the deal? Here’s a simple guide to help you understand the basics. Buying or selling property in today’s litigious world is a daunting task. With so much real estate jargon, buyers and sellers can be confused when trying to complete a transaction. I had an old Jewish diamond broker once tell me with a wink, “Everything’s negotiable.” That’s certainly true in real estate. So here’s a simple breakdown of some of the costs involved and who pays for what.
Your agent will provide you with a buyer’s sheet that lays out the closing costs, and by federal law you must receive what’s called a “good-faith” estimate of your closing costs from any lender you use.
As for who pays the closing costs, that’s where your negotiating skills (or your Realtor’s) come into play. There is no cut-and-dried rule about who—the seller or the buyer—pays the closing costs, but buyers usually cover the brunt of the costs (3% to 4% of the home’s price) compared with sellers (1% to 3%).
Real Estate Commission
By far the biggest expense in a real estate deal is the realtor’s commission. While there is not a set percentage in any market–and indeed is illegal for brokerages to try to fix these fees in their market–most agents charge between 5%-7%. Most of the time, this cost is paid by the seller, so buyer’s are off the hook for this one. All the more reason for buyers to sign a buyer’s rep agreement with a reputable real estate agent; they get all their expertise and negotiating skills for free. http://myfavoritebeachproperty.com/whychooseme/
The realtor fees are split between the buyer’s agent and the listing agent, with the brokers taking a percentage of each agent’s commission. In large franchises like Keller Williams and Coldwell Banker, a portion of the commission is paid to the franchise. If the deal was procured by another agent or referral company, then part of the commission is paid to them–as much as 25-35% as a referral fee.
So while the seller may chaff at the idea of lopping off a chunk of their net proceeds, they need to realize that their agent doesn’t normally walk off with a small fortune.
The title policy is a type of insurance that is normally paid by the seller to the title company to make sure that the property they are selling has a “clean title.” This is an important step to make sure no lawsuits are forthcoming. This usually costs about 1% and can be paid by either party. Always close deals with a reputable title company like Security Title http://www.ccsecuritytitle.com/?page_id=2 Courtney Hayden is who I normally close with–so professional and thorough! Another good one in this area is Bay Area Title Company http://www.bayareatitleservices.net/locations.php Heidi Martinez is so helpful and always answers my “dumb questions.”
Like death, TAXES are inevitable and you can be sure Uncle Sam will be at the title company with his hand out. The property taxes are prorated–that means the seller pays for the portion of the taxes incurred while they owned the property and the buyer pays for what portion of the year’s taxes that they will be owning the house. If they are financing the property, this prorated tax will be rolled into the mortgage. If the seller owes back taxes, they will have to get current, and their taxes, current and late, will be taken out of their proceeds at closing.
Unless the seller has a relatively current survey, a mortgage company will usually require a new survey to be done. Depending on the complexity of the property, existence of a pool and/or out buildings, the price is usually less than $500. Usually the prospective buyer will ask the seller to pay for this. Even if the buyer is paying cash, and there’s no lender involved, I recommend that buyers either get a recent existing survey from the seller or pay to have a new one done.
This a cost that the mortgage company charges for setting up the loan and usually runs between 0.5% – 1.0% Since the buyer is the one securing the mortgage, they pay this and any other fees required by their lender.
This one can be a sticky wicket! A licensed appraiser evaluates the house or land according to the condition, size, location and market condition. I have been pleased with the services of Mona Singleterry https://singleterryappraisalreconsultingllc.appraiserxsites.com/ContactUs
If the appraisal comes in less than the selling price, there’s a dilemma. Either the seller can lower the price to the appraised value or the buyer can fork over the difference in cash or the deal falls apart. If the real estate agent or the seller disagrees with the appraised value, they can pay for another one to be done. If they want, they can write a letter of appeal and hope to have the amount adjusted in their favor. The appraisal is done and paid for well before closing.
This is a special type of insurance policy that covers the major home systems like plumbing and air-conditioning and even appliances. This is sometimes offered by the seller as a concession to the buyer and costs about $400-$500+ depending on the coverage and deductibles. This is optional but recommended.
Some good ones are Chase McRoberts at First American https://homewarranty.firstam.com/ and Bethany Fawkes at Fidelity National http://reach150.com/fidelity-national-home-warranty/review/46331/bethany-fawkes but there are lots of other good ones to choose from.
In areas near the ocean like the South Texas Coastal Bend, lenders usually require windstorm and flood insurance in addition to a regular homeowner’s policy. These can cost about 3-4% of the total cost of the home and are rolled into the mortgage. If a buyer is paying cash, they can choose not get these additional policies and hope that Mother Nature shows mercy. Good luck with that!
Private Mortgage Insurance is charged when a buyer pays less than 20% down on the property when using a conventional loan. It can cost between .3-1.5% of the loan’s value. It can and should be cancelled when the buyer’s outstanding loan value drops below 78%.
For more information click here: http://www.bankrate.com/finance/mortgages/the-basics-of-private-mortgage-insurance-pmi.aspx
Even though most real estate agents check the “as is” box on the condition of the property, all buyers–even cash buyers—should do their due diligence when it comes to property condition. This means hiring a professional licensed home inspector to go over that place with a fine-toothed comb–even if it’s brand new. Depending on the size and age of the property, this can run $350-500+. Do not skip this step!
After checking the roof, the foundation, electrical, plumbing and a myriad of other items, some inspectors will recommend getting additional inspections. These might require the services of an HVAC technician, a foundation expert, a plumber (for hydrostatic test) or a structural engineer. These inspections are not cheap but could save a buyer thousands of dollars in the long run or prevent them from buying a bad property that’s not even fixable.
In addition to a basic home inspection, a buyer should hire a qualified pest inspector to check for the presence of or damage by wood-destroying insects like termites. This usually costs less than $100 and well worth the peace of mind.
In the event that major defects are discovered during the Option Period (time between the offer is accepted and the closing), the buyer can request that the seller pay for some of the needed repairs. Or they can reduce the price to cover the cost which I recommend because it is simpler to do and lenders usually prefer this option.
Sometimes the lender will require some repairs to be done as a stipulation for making the loan. This is especially true when buyers are financing through the Veteran’s Administration as their standards are more stringent than other types of loans. They will usually send their own inspectors and appraisers to evaluate the property.
If the buyer can not be satisfied with the solution offered by the seller, they have the right to kill the deal during the option period.
There are other charges incurred in a real estate transaction: recording fees, couriers, notary, document preparation fees and others. These vary and usually can be negotiated.
Other Lingo Defined
This is by no means an exhaustive list of terms related to a real estate transaction. Here’s a link to some other potentially confusing jargon: http://www.realestateabc.com/glossary/
Be Aware of the Costs
Even the Bible warns of the danger of failing to count the cost before embarking on a building project. https://www.biblegateway.com/passage/?search=Luke+14%3A28-30&version=ESV
There are lots of costs associated with buying or selling property and as in any situation, consumers need to educate themselves in advance, so that there’s no surprises at the closing table.
Who Can Help?
Always direct your question to the expert in their particular field. For example, when you have title or closing questions, ask your escrow agent. If you have mortgage issues or concerns, consult your lender. Your real estate agent can and will answer questions about the contract and related documents. If you are still unclear about the explanation, hire a qualified attorney to explain it further.
For most people, a real estate transaction is the biggest financial undertaking of their lives. It’s paramount to make sure you understand the language and terms of the deal before you sign anything.