Closing costs are a necessary expense when selling a home, and they can add up quickly. The exact amount of closing costs can vary depending on a number of factors, such as the location of the home, the sale price, and the type of transaction.
In this article, we’ll take a closer look at what closing costs are, who pays them, and why sellers should be aware of them.
1. What Are Closing Costs?
Closing costs are real estate transaction fees. At the closing table, the buyer and seller usually pay them. Closing expenses may include an appraisal, attorney, escrow, title search, title insurance, transfer taxes, and real estate commissions.
Attorneys collect legal fees, whereas qualified appraisers evaluate the property. Title search and escrow costs keep monies and documents until the transaction is complete. Title insurance protects purchasers and lenders against post-sale title difficulties. Governments tax property transfers. Finally, realtors receive commissions for selling properties.
Not all of these costs apply to every transaction, and they may vary based on the property’s location and selling conditions. However, sellers should account for these fees when selling their houses. Sellers might prevent unpleasant surprises at closing by understanding closing fees.
2. Who Pays Closing Costs?
In a real estate transaction, both the buyer and the seller may be responsible for paying closing costs, although the specific allocation of these costs can vary depending on the terms of the sale and local regulations.
Typically, buyers are responsible for the majority of closing costs, as they usually have to pay for fees related to obtaining a mortgage, such as loan origination fees, application fees, and appraisal fees. However, sellers may also be responsible for certain closing costs, such as real estate commissions, transfer taxes, and fees associated with clearing the title.
Sellers must understand their closing cost obligations since they might affect their net profits from selling their house. For instance, a seller who pays a real estate commission may lose several thousand dollars after closing. If the seller is unaware of their closing cost duties, it might delay the deal or even cause it to fail.
3. How Much Are Closing Costs?
Location, selling price, and transaction conditions might affect closing expenses. Seller closing expenses often include real estate commissions, transfer taxes, title search fees, title insurance, attorney fees, appraisal fees, and escrow fees.
The seller’s agent receives 5%–6% of the home’s selling price as commission. State or municipal property transfer taxes might vary from 0.5% to 2% of the transaction amount. Title searches, which check public documents to verify the seller’s legal right to sell, cost $200 to $400. Title insurance, which protects buyers and lenders against title flaws, costs 0.5% to 1% of the transaction price.
Attorney fees, which are charged for legal services related to the transaction, typically range from $500 to $1,500, while the cost of a professional appraisal can range from $300 to $500. Finally, the cost of escrow services provided by a third party can range from $300 to $800.
4. Negotiating Closing Costs
Sellers may be able to negotiate some of the closing costs associated with their real estate transaction or ask the buyer to cover certain fees.
One way that sellers can negotiate closing costs is by offering to pay a portion of the fees themselves while asking the buyer to cover the rest. For example, a seller may agree to pay for the title search and title insurance, while asking the buyer to cover the cost of the appraisal and transfer taxes. This can help to reduce the overall financial burden for both parties.
Another approach is to negotiate with the buyer to cover all or a portion of the closing costs in exchange for other concessions. For example, a seller may be willing to cover a portion of the closing costs if the buyer agrees to close the deal within a certain timeframe or agrees to waive certain contingencies.
5. Common Closing Costs for Sellers
Sellers may be responsible for paying a range of closing costs when they sell their homes. Some of the most common closing costs for sellers include:
- Real estate commission: This is the fee paid to the seller’s real estate agent, typically ranging from 5% to 6% of the sale price of the home.
- Transfer taxes: These are taxes charged by the state or local government for transferring ownership of the property. Transfer taxes can range from 0.5% to 2% of the sale price.
- Title search and title insurance: Title search fees are charged to search public records to confirm that the seller has the legal right to sell the property. Title insurance protects the buyer and lender against any defects or issues with the title. The cost of title search fees can range from $200 to $400, while title insurance can range from 0.5% to 1% of the sale price.
- Attorney fees: These are fees charged for legal services related to the transaction, such as reviewing contracts and preparing legal documents. Attorney fees typically range from $500 to $1,500.
- Appraisal fees: These are fees charged for a professional appraisal of the property, which may be required by the lender. Appraisal fees typically range from $300 to $500.
- Escrow fees: These are fees charged by a third-party escrow company for holding and distributing funds during the transaction. Escrow fees can range from $300 to $800.
Sellers should remember that closing expenses might vary based on the property’s location and selling conditions. Sellers should consult with their real estate agent and attorney to determine their closing fees and budget.
6. Preparing for Closing Costs
Preparing for closing costs is an essential part of selling a home. Sellers need to be aware of the fees they may incur, so they can budget for them accordingly. To start, sellers should work closely with their real estate agent and attorney to develop a list of the closing costs associated with their transaction. This list will help them to estimate the costs and develop a realistic budget.
The seller should study the closing disclosure document after estimating closing expenses. The closing disclosure form details all transaction expenses. Sellers should verify all fees in this document. Sellers should discuss closing cost disparities with their real estate agent or attorney.
Sellers may also be able to negotiate some of the closing costs with the buyer, which can help reduce the overall financial burden. Sellers should discuss these options with the buyer during the negotiation phase of the transaction.
7. Closing Costs vs. Selling Price
The amount of closing costs sellers can expect to pay depends on several factors, including the selling price of the home. In general, sellers can expect to pay between 1% and 3% of the selling price in closing costs. For example, if a home sells for $300,000, the closing costs could range from $3,000 to $9,000.
Some of the most common closing costs sellers may be responsible for include transfer taxes, title insurance, and real estate commissions. Transfer taxes are fees charged by the state or local government for transferring ownership of the property. The amount of transfer taxes varies by location and can range from a few hundred dollars to several thousand dollars.
Attorneys collect legal fees, whereas qualified appraisers evaluate the property. Title search and escrow costs keep monies and documents until the transaction is complete. Title insurance protects purchasers and lenders against post-sale title difficulties. Governments tax property transfers. Finally, realtors receive commissions for selling properties.
Conclusion
Closing costs are an essential consideration for sellers in a real estate transaction. It’s crucial for sellers to understand the different types of closing costs, who is responsible for paying them, and how much they can expect to pay. By preparing for closing costs, sellers can ensure that they have a clear understanding of their financial obligations and avoid surprises at the closing table.
Key takeaways from this article include the importance of negotiating closing costs, reviewing the closing disclosure form, and budgeting for fees. Additionally, sellers should be aware of the common closing costs they may be responsible for paying, including transfer taxes, title insurance, and real estate commissions.