The bundle of fees associated with the buying or selling of property are called closing costs. Certain fees are automatically assigned to either the buyer or the seller; other costs are either negotiable or directed by local custom.
Buyer Closing Costs:
When a buyer applies for a loan, lenders are required to provide them with a good-faith estimate of their closing costs. The fees vary according to several factors, including the type of loan they applied for and the terms of the purchase agreement. Likewise, some of the closing costs, especially those associated with the loan application, are actually paid in advance. Some typical buyer closing costs include:
- The down payment
- Loan fees (application fee, credit report)
- Origination fee
- Prepaid interest
- Inspection fee (optional)
- Survey (if required)
- Appraisal
- Mortgage insurance (if required)
- Hazard insurance
- Mortgagee title insurance
- Documentary stamps on the note
- Intangible tax on the note
- Association dues (prorated) if any
- Recording of the deed and note
Seller Closing Costs:
If the seller has not yet paid for the property in full, the seller’s most important closing cost is satisfying the remaining balance of their loan. Before the date of closing, the escrow officer will contact the seller’s lender to vertify the amount needed to close out the loan. Then, along with any other fees, the original loan will be paid for at the closing before the seller receives any proceeds fron the sale. Other seller closing costs can include:
- Brokers commission
- Documentary stamps on the deed
- Owners title insurance
- Association dues (prorated) if any
- Property taxes (prorated)
Negotiating Closing Costs:
In addition to the sales price, buyers and sellers frequently include closing costs in their negotiations. This can be for both major and minor fees. For example, if a buyer is particularly nervous about the condition of the plumbing or electrical system, the seller may agree to pay for the property inspection.
Likewise, a buyer may want to save on the up-front expenditures, and so agree to pay the seller’s full asking price in return for the seller paying all the allowable closing costs. There’s no right or wrong way to negotiate closing costs; just be sure all the terms are written down on the purchase agreement and executed by both parties.
Prorations:
At the closing, certain costs are often prorated (or distributed) between buyer and seller. The most common prorations are for property taxes. This is because property taxes are typically paid at the end of the year for which they are assessed.
Thus, if a property is sold in June, the sellers will have had ownership of the property for half the year, but the bill for the taxes won’t come due until the following year! To make this situation more equitable, the taxes are prorated. In this example, the sellers will credit the buyers for half the taxes at closing.
NOTE: When purchasing “preconstruction” it is typical for the developer (seller) to pay only the Owners Title Insurance and Sales Commission. All other closing costs are paid by the buyer.
