We have all heard about the high costs imposed on homebuyers -- ranging from lender points, title insurance and settlement fees. However, if you are selling your house, you should understand you will be hit for some closing costs also.
When a seller signs a listing agreement with a Real Estate Broker, authorizing that person to sell the house, in addition to all the other forms which sellers receive, the seller should be given an estimated settlement statement. This statement will project the bottom line to the seller, based on the listing price. When an offer is later presented to the seller, the settlement statement should be updated, to reflect the actual terms of the proposed contract.
I have analyzed many real estate transactions, and the following charges are generally made to the seller:
-Real estate commission: The seller should be informed of the dollar amount to be paid out of settlement for the commission.
-Mortgage payoff: Most sellers have at least one mortgage outstanding on the property. Your lender will be able to give you an approximate payoff figure, if you give them a tentative settlement date. Don't forget to add a daily interest charge until the lender receives the full mortgage payout. You should also inquire whether there will be any prepayment penalty. Some older loans still require the borrower (in this case the seller) to pay a percentage of the loan if it is paid off in full prior to the full expiration of the mortgage term. In some instances, the prepayment penalty can be avoided, or waived by the lender, and you should inquire as to the policy of the particular lending institution.
-Points: This is perhaps one of the least understood areas of real estate financing. Sellers often question why they have to pay points to enable the buyer to get their loan. A point is equal to one percent of the loan.
Some loans, such an FHA or VA, put limitations on the amount which the buyer can pay for closing costs. Many buyers who will be obtaining conventional financing also want the seller to pick up some of these settlement charges -- including points paid to the lender.
Seller paid points are still deductible for tax purposes by the buyer. Thus, while sellers want to get the most dollars from their house, there are often negotiation advantages if a seller offers to split points with the buyer. Such an arrangement may be the clue to closing the deal.
-Termite: Most buyers require that a termite inspection be performed, at the seller's expense. Normally, the fee for this service runs between $50 to $75. But I have seen too many instances where the seller is "hit" with a sizeable repair bill, due to termites and damage being discovered by the termite company.
If the seller has a current contract with a termite company, that company should be willing to give the required letter for no cost or a nominal charge. Finally, when you make arrangements with the termite company to do their inspection, make sure they understand they will not do any repair work without informing you in advance. Since the seller is paying for these charges, the seller should have the option to shop around for the best price.
-Water escrow: In many jurisdictions, water is the only utility that creates a lien on the property. In order for the title attorney to give free and clear title to the buyer, all liens must be paid and satisfied. Thus, it is standard practice for the settlement attorney to escrow some money to cover the final water bill. Usually, the office conducting settlement will make arrangements to obtain a final water reading, pay the bill, and refund the balance of the escrowed funds, if any, to the seller.
-Release charges: When the seller obtained mortgage financing, it usually was in the form of a deed of trust. This is similar to a mortgage, but the property is deeded "in trust" to independent trustees who are authorized to sell the property if a default occurs. When the mortgage is paid in full, the trustees are entitled to a nominal "trustee's fee" and there is a small governmental charge to record the trustee's release. These items are always withheld at settlement and deducted from the seller's funds.
-Other government charges: Many jurisdictions impose a tax on the transfer of real estate. Some call it a "Grantor's tax", which others call it a "Recordation and Transfer" tax. Unless your state law mandates who is to pay this fee, it is a negotiable item which should be on the bargaining table when seller and potential buyer are hammering out the terms of the purchase and sale.
Settlement charge: Some settlement offices will impose a nominal charge on the seller for "settlement services."
Many sellers are often surprised when they learn, for the first time at the settlement office, that they will not be getting as much from the sale of their house as they had anticipated.
And don't forget to (1) cancel your home insurance policy as soon as you get the sales proceeds, and (2) if you are making automatic mortgage payments, cancel that also. Too many clients have called me over the years telling me they were so excited to sell their house that they forgot to cancel their payments.