The world would be a nicer, probably simpler place if a home sale involved just one number – the cost of house to close the deal. However, the reality of a home sale is a flurry of numbers from the actual sales price and agreed-upon repairs to taxes, permits and closing costs. The closing costs themselves are a basket of expenses, some necessary to make the transaction occur legally and some associated with assuring third parties that all is well with the sale. Who pays these costs depends on how the property sale is drawn up.
What Exactly are Closing Costs?
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Closing costs are predominantly fees. They are charged by a variety of parties involved with making a real estate sale happen and reach completion. When all the fees are addressed with all the requirements involved, then the title of the home to be sold is legally transferred from the seller to the new buyer. It’s important to note that the fees are not entirely paid for as a package; they can be negotiated and a mix of some of the fees can be shared between the parties in the sale.
The fees fall into a couple of categories. First there are any taxes that need to be prepaid for the period of time in the calendar year that the buyer will own the home once sold. This takes the tax burden off the seller for property that no longer belongs to him halfway through the year.
The second category involves financing/loan origination fees. These are fees charged when a home will be paid for with a mortgage or home loan. These are essentially interest charges paid for up front, in addition to the base interest on the loan. It’s pretty much impossible to get a loan without paying these fees as they are standard in the mortgage industry, so this is not an area for a buyer to plant a flag and battle on. They are predominantly paid for by the buyer. If the home is paid for with cash or an asset trade like a 1031 Exchange, then there are no origination fees.
The third category involves validation services. These include inspections, appraisal fees, city fees for permits, and similar. This area is a hodgepodge of expenses and they are entirely negotiable as to who carries the cost. The identity of the payer often goes with whether it is a buyer’s market or a seller’s market.
Comparative Expenses: California vs. the Nation
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California carries the unwanted reputation of being one of the most expensive states to buy real estate, including its closing costs. The average total for a first time buyer with all closing costs included can be as much as $8,000 to $10,000 in hot markets in addition to the home’s sales price agreed upon. This status was confirmed in a 2010 survey by finance industry watcher, bankrate.com. Comparing the golden state to various other markets across the nation, California was only beaten out by three other states: New York, Texas and Utah. Even the lowest level of a California sale at $200,000 is going to generate at least $4,500 in closing costs. It’s important to remember that every seller and lender is a unique situation; just because an average may exist doesn’t mean that a particular sale will match those numbers. As a result, buyers are often surprised when figures don’t match their expectations.
Further, averages don’t include discount points. These are the amount of loan interest a buyer decides to pay up front on a mortgage to reduce the interest cost over the life of the loan. The cost of points, or paying down the expected interest early will always be an additional cost outside the basket of what are closing costs.
The Actual Categories of Charges
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For most sales in California the following list of fees and costs are going to be included in closing costs and paid by either the buyer or the seller. Again, some of the fees are negotiable and some are traditionally carried by the buyer or the seller unless the market is extremely favoring one side. For example, when the market is really tight and lacking customers, both lenders and sellers will “eat” many of the closing costs to make a sale happen versus losing a buyer. On the other hand, if a seller’s market then the buyer will be stuck with almost all the costs. Awareness is key, and first time homebuyers often learn the hard way that they didn’t have to pay every expense in a sale. Charges to expect include:
- Loan origination fees (usually 1 or 2 percent of a loan total)
- Loan processing fees (flat fee, typically $400)
- Underwriting fee (flat fee, $500)
- Appraisal fee (flat fee, $450)
- Credit report check ($25-35)
- Flood area certification (flat fee, $50)
- Escrow account servicing for property taxes ($75)
- Title insurance ($175)
- Title fees (filing fees, $180)
- Governmental recording fees (flat fee, $125)
- Documentary transfer taxes (percent of final sale price)
- Homeowner’s insurance (varies on insurance provider, $1,000-$1,500 annually)
- Settlement company for escrow processing ($flat fee, $175)
- Wire and courier services for paying sale (flat fee, $175)
And, as mentioned earlier, discount points paid are on top of all the above. No surprise, the closing costs basket can end up adding a couple thousand dollars to the cost of buying a home pretty quickly.
In every sale involving a loan, federal law requires that all costs are clearly detailed for buyer and borrowers for full disclosure. And even where it is not required, it’s a good idea to make sure the selling documents are very clear what costs a buyer will bear. This avoids any confusion or hard feelings later on due to “surprises.”
