Typically, buyers are stretching to get all the money necessary for the down payment and closing costs when they purchase a home. Since buyers are unable to close the escrow without all the necessary funds, the real estate industry long ago structured the normal payment of closing costs as we see today.
Yes, it may seem like the seller is paying a lot of the closing costs… but when looking at your closing statement, just remember: Since most buyers obtain a loan with 20 to 30% down, these Buyers can pay more for your home if they pay less of the closing costs… the additional money available for the buyer to pay toward down payment allows them to “finance a larger” purchase price.
You as the seller benefit from the buyer having more money available for the down payment because every extra dollar the buyer has toward down payment allows them to finance five additional dollars (assuming 20% down) in purchase price.
Sellers wanted to net more for their home in the past just as they do today. Many years ago the residential real estate sales industry structured the closing costs as it did to please sellers and as necessary to satisfy lenders.
What do all these Closing Costs add up to for your home?
A quick rule-of-thumb for Orange County, CA: All of the closing costs (not including repairs, termite treatment, & commissions) will be about 6/10ths of one percent of the sale price (0.006). So, if you sell a home for $1,000,000, the closing costs (not including repairs, termite treatment, & commissions) will be about $6,000 (but these costs can vary depending on sale price and area). When I receive an offer on a home I have listed for a client, I typically provide an Excel Spreadsheet which estimates the closing costs much more precisely. Certainly properties sold near the bottom of the market and luxury homes will see some variation to the 6/10th rule-of-thumb.
- Title Insurance: Purchase escrows in California require a Title Insurance Company guarantee clear title to the buyer. It is customary for the seller to pay for title insurance.
- Documentary Transfer Tax: The Grant Deed is the document which transfers title to the buyer. This deed must be recorded at the County, and there is a fee charged by the recorder’s office for this service. It is customary for the seller to pay for the Documentary Transfer Tax.
- Escrow Fees: Typically, the buyer and seller each pay half of the base escrow fee. The seller will pay additional fees for the loan payoff, and the buyer will pay additional fees related to the loan origination.
- Natural Hazard Disclosure: Part of the disclosure process in California is for the seller to provide a Natural Hazard Disclosure Report (NHD). This highly informative report provides information on earthquake zones, flood zones, fire responsibility areas, and much more. The seller customarily pays the cost of the NHD report, and it is about $95.
- Home Warranty: In most transactions, the buyer will request a home warranty in the purchase offer. The base cost of the home warranty is about $750 and increases with size of home and coverage: pool/spa, roof, A/C, refrigerators, and other items. The seller usually pays for the Home Warranty.
- Termite Inspection, Repairs, & Treatment: It is customary for a Structural Pest Control Report to be issued by a State Licensed Contractor as part of the disclosures. Sometimes it is necessary to treat a home for active infestation of termites either locally (spray) or the whole structure (fumigation). And, sometimes there is termite or dry rot damaged wood that must be replaced. It is customary for the seller to pay for the inspection, repairs, & treatment required to obtain the Section One clearance.
- Termite Clearance Certificate: The lender will want to see a certification that the structure is free of an active infestation of termites & dry rot. This Section One clearance certificate is customarily paid by the seller.
- Real Estate Commissions: The brokerage commissions are customarily paid by the seller.
- Miscellaneous: There are occasionally anticipated and unanticipated seller paid costs associated with home sales including repairs, installation of smoke & CO detectors, strapping water heater, etc. There may be some electrical, plumbing, roof, window, and appliance repairs requested by the buyer during the escrow.
- HOA Transfer & Document Fee: The purchase agreement calls for the seller to provide copies of the association documents, minutes, budget, and reserve study as part of the disclosure process. The HOA Management company will provide these documents; however, they charge a service fee which is typically paid by the seller when escrow is opened. The cost of these documents and transfer fee can be as much as $700 to $950 per association (some homes are members of multiple associations).
- Accumulated Interest & Property Taxes: While it is not a cost of closing, real estate mortgages are structured such that interest is paid in arrears. As such, there will be accumulated interest unless the escrow closes on the first day of the month, and the mortgage payment is paid on that same day. The accumulated interest will be deducted by the escrow company from the seller’s proceeds. In Orange County, the property tax fiscal year runs from July 1st to June 30th. Property taxes will be prorated to the closing date, and there will either be a reimbursement to the seller of prepaid taxes or a deduction from the proceeds if taxes have accumulated, but not yet paid.