Closing costs are fees charged and paid at the end of a real estate transaction when the buyer receives the property title from the seller.
Both the seller and the buyer pay different closing costs which include a list of pre-payments and services that ensure a smooth transaction.
A Sellers’s closing costs can be up to 8-10% of the sale price of the home, which includes realtors’ commissions, title insurance, transfer tax, prorated property taxes, escrow fees, HOA fees, and attorney’s fees.
Real Estate Agent Commission
A real estate agent’s commission is usually the most significant fee that a seller pays.
Typically, the total commission costs about 5-6% of the sale price and is shared between the seller’s realtor and the buyer’s realtor.
Some real estate agents are open to negotiations that could land the seller a lower rate, albeit with fewer services.
Most experienced realtors do not negotiate commission because there is quite a bit that goes into selling a house. Some homeowners avoid a portion of this fee by listing their home for-sale-by-owner (FSBO).
They are, however, still responsible for the commission paid to the buyer’s agent if the person choosing to buy their home is represented by a real estate agent.
If you decide to take the FSBO route, be ready to assume the duties of a real estate agent which include showing the property to prospective buyers, negotiating, getting a lawyer to draft a contract, marketing the property, and handling the transfer of title.
Title Insurance for the Buyer
Title insurance protects the buyer in case any issues arise with the title to the home.
This means protection from someone else claiming to own the property either because of property disputes or outstanding liens from creditors, contractors, or the government.
The title company contracts a third party company to carry out a title search for any issues before closing, but they may miss things such as forged signatures, tax liens or other financial obligations that are owed.
The cost of title insurance ranges from $1,000-$4,000. This price may sound like a lot, but if you have lived in your home for less than ten years, you can ask for a reissue rate.
The policy reissue rate may be lower since it is covering a smaller period of time.
Related: Selling a Home in San Mateo, CA
An escrow account is a financial account that holds both the buyer’s and seller’s money related to the transaction.
An escrow representative manages the account until the transaction is complete and the property is ready to change hands.
Escrow accounts make sure nobody runs off with another’s money or property.
Escrow charges about 1% of the sale price or a flat fee of between $500 -$2,000 and the account fees are usually split in half between the buyer and the seller.
There are also additional charges like copying of documents, office expenses, funds transferring fee and notary charges.
Real Estate Transfer Taxes
These are fees charged for the transfer of the title from one owner to another at closing.
The amount paid widely varies and is dictated by the state you live in. For instance, transfer tax when selling a house in California ranges from $375 – $1085 based on the median home value and considering the 6% agent commission.
Several states require that an attorney is present during a transaction, to oversee some aspects of the transaction.
If the seller hires their own real estate lawyer, they will be subject to their fees. Even in places where an attorney is not required, sellers may prefer to hire one.
This may be especially necessary if you are dealing with distressed properties, complex transactions or inherited real estate holdings.
Attorney fees range anywhere between a few hundred dollars and a couple of thousand dollars.
Suggested Reading: 4 Questions you should ask when thinking of selling your home!
Prorated Property Taxes
Property taxes also vary in different states. In most states, you can remit the taxes twice a year either directly or from an escrow account linked to your mortgage.
When selling a house in California, you will have to pay prorated property taxes due up to the date of the sale.
From there, the new homeowner takes over. Depending on your timing of the sale, bringing yourself up to date might require you to pay money at the closing.
If you live in a neighborhood that is subject to a homeowner’s association (HOA), you likely remit monthly, quarterly or yearly payments.
At the closing of your house sale, you may have to come up with a sum of cash to bring yourself up to date.
Some HOAs may also charge extra for the transfer of the property to the new owner.
If you have listed your home in a buyer’s market, you may have offered your buyer a credit to make the purchase of your home more attractive. This is also known as a seller concession or seller assist.
The credit you offer them covers some of their closing fees, therefore reducing the amount of money they will pay when the deal is finalized.
Most loans also allow the seller to handle between 3-6% of the buyer’s closing costs. Buyers would request this in the original real estate agreement.
Ways to reduce closing costs
Avoiding closing costs is impossible, but there are a few ways to reduce the total amount you are required to pay. These include:
• Shopping around for settlement/ escrow and title companies that have more attractive offers.
• Using a discount broker or listing your property as for-sale-by-owner (FSBO)
• Requesting a reissue rate for the title insurance if you have lived in your home for only a few years.
Selling a home can be exciting. You may see a great return on investment, but the deductions at closing will factor into that amount.
Before going into a sale, do your research and stay aware of the total amount it will cost to sell.
That way, the costs will not catch you off guard. In addition to the closing costs mentioned above, remember you may also end up paying additional charges including home improvements, loan repayment fee, and moving costs.
📞 Have Questions? Ask The Chris Eckert Real Estate Team
Give The Chris Eckert Real Estate Team a call today at 650.627.3799 to learn more about local areas, discuss selling a house, or tour available homes for sale.