Even if you are a First Time Homebuyer, you should be keenly aware of the cost of selling a home. Often people think they can just sell their home if they pick the wrong one, or if they get a new job out of town. But the cost of selling is usually many Xs the cost of buying.
It is good to be mindful of the cost of leaving…the home you are buying…before you buy one.
The Closing Costs/Expenses associated with Selling a home are fairly simple, but in $ much more costly than a Buyer’s Closing Costs. Also a buyer can pay ALL of their costs without “hard dollars” in most cases. A Seller is not afforded that “convenience”. Sometimes homebuyers call financing their closing costs “seller paid them”…but in reality the seller is not paying them…you are financing them in whole or in part, unless you are a cash buyer.
The three BIG costs for sellers are”
1) Paying off your existing mortgage(s) and other lienable utilities (Usually water sewer and trash) Not a “Closing Cost”, but likely the largest expense nonetheless. Be sure to add one month’s interest to your principal when estimating your payoffs, which you should do before you list your house to avoid surprises at closing.
2) Paying the Real Estate Agents, both your agent and the buyer’s agent, will be deducted on the seller side of the Closing Statement from the Sale Price and Net Proceeds.
3) State Excise Tax at the rate of 1.78% of the sold price.
RE Commissions & Excise Tax = the big bulk of true “costs” associated with selling a house. These on a combined basis usually range from 6% to 8% of the Sold Price depending on what services you use.
Note: The buyer determines what service and/or representation they will use when purchasing a home, and who will provide them with that representation/service. But the cost of the Buyer’s representation will still be deducted from the Seller’s Net Proceeds IN FULL, even if the cost is less than the Seller anticipated. Generally the rule is the Seller can negotiate the cost for the Seller Services, but any savings on the Buyer side commission goes to the Buyer…even though that commission shows and is deducted on the Seller side.
Other Seller Costs:
Owner’s Title Insurance – price dependent, but not a %. The Agent for the Seller usually orders Preliminary Title before listing the house. So you can get a quote. About $1,000 give or take? Depends on price of home within a few ranges of price. The cost doesn’t go up by each $ of price. Here’s a Title Cost Calculator but you have to sign in. Maybe a Title Rep will pop in the comments and give more info on that. I’m seeing a range from $850 to $1200, even though the price difference on the two houses is HUGE! So plan on $1,000 or so, and get a quote as soon as you pick a listing agent/service.
Seller’s “half” of the Escrow Fees – usually quoted as half…so don’t take the quote and half it again. About the same as Title Insurance, give or take, with the same method of calculation. DO NOT take the election for the $50 discount if YOU use the same place for Title and Escrow! You pick Title and let the BUYER choose escrow. (my soapbox…buyer should choose escrow!)
A couple of misc fees like notary or courier and what not. Throw $500 in misc and that should be more than enough.
Summary of Seller costs =
RE commissions for BOTH agents/services. Usually 4% to 6% +
Excise Tax 1.78% +
Title Insurance , Escrow Service and Misc – total $2,500 or so
…and paying off your mortgages and lienable utilities and any other liens needed to be cleared from the property. Usually there aren’t others, but there could be unrelated liens like Income Tax, or Judgments. That is why the Agent for the Seller runs Title before the home is listed, to avoid surprises at closing.
Add to that your prorated Real Estate Taxes for the time you live in the house since the last tax bill was paid. That varies depending on the month you close. Conversely you will get a credit from the buyer if you paid those taxes in advance.
HOME INSPECTION REPAIR COSTS – DO NOT list your house without setting aside an amount for the Home Inspection Negotiation. How much you should set aside differs from one house to the next, and your agent should be able to give you a rough estimate. It depends on the age of your roof, heater, hot water tank, etc. It does NOT depend on whether or not those things function well!
AGE! Age of item is now the issue…not merely it’s condition. I do not recommend that the seller do an inspection before listing the home. But that’s another topic.
In a nutshell…if a seller is selling a home for $400,000 and has NO mortgage to pay off, their total costs will be about $30,000 – $40,000! Lots of costs for the seller.
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HOME BUYER CLOSING COSTS and EXPENSES
If you are paying cash for your house…the only real costs are:
Escrow Closing Fee plus some misc charges like Recording Fee. $1,000 give or take. You still have to or should get Insurance (fire insurance, etc)…but escrow will not be requiring that in order for you to close, and may not handle it for you if you are a cash buyer. You will HAVE Owner’s Title Insurance…but that is paid for by the seller.
The closing costs jump up from $1,000 CONSIDERABLY when you are using financing to purchase…and many if not most people are.
The largest cost for a Homebuyer, potentially, are the Lender Fees. That said, more and more people are electing to NOT have Lender Fees. That creates a “higher” rate…but when that higher rate is 3.875%…it doesn’t seem high. So negating the lender costs is more common during a period of low rates than it is during a period of higher rates. No good reason for that, as the increase to rate as a % is the same…just is what it is.
Lender Fees can be anywhere from almost nothing to 1.50% or so. So shopping for costs AND rate is a big job for the homebuyer.
I’ll let the lenders jump in the comments and explain that better. Often you will see lender costs of $4,500 and then a Lender Credit against those costs of $4,200 reducing the actual cost to $300. That is a means to the almost no lender cost solution. You still have to sign disclosures for the actual costs, even though the net impact will be much lower. Again…I’ll leave that to lenders to explain, I can only tell you that is what I see, but not the why of it.
You need Lender’s Title Insurance. The Seller paid for Owner’s Title, which is all you need if you pay cash for a house. But if you have financing you need to purchase Lender’s Title which is based on the Loan Amount vs the Purchase Price. About $1,000 give or take.
Home Inspection and Appraisal Fees ($450 or so) and other misc loan associated costs I include in “lender fees” above. Though if you don’t buy the house…you still have to pay the Appraiser. So Home Inspection Fee and Appraisal Fee of $1000 or so usually have to be paid even if you don’t end up closing, after those are completed.
NOTE: You may need MORE than “a home inspector” depending on the house. Sewer Scope by a different contractor…Structural Engineer Evaluation depending on the house…drain inspection if there are cement drain systems, which many have. I’m not going to run the gamut of extra inspections that may be needed, as this is a house to house issue. But DO KNOW that most Home Inspections do not do all of the inspections you may need for a particular home. It depends on the home.
Half the Escrow Fee…same as Seller…again what you are quoted IS half…so don’t half it again.
One Year Paid up Fire Insurance Policy = paid at closing. I am calling it Fire Insurance so you don’t get it confused with Owner’s Title Insurance. It covers more than fire, but in my experience if I don’t call it Fire Insurance, people do not totally “get” what I mean when I say Hazard Insurance or Homeowner’s Insurance. Fire Insurance everyone understands…even though that insurance covers more than damage from a fire.
Note: Cost of Homeowner’s/Hazard/Fire Insurance is whacky right now. Be sure to get a few quotes and make sure they are running your history of previous claims. People with previous claims on the homes they have owned in the past are paying through the nose lately. So don’t only go by the house itself…get a REAL quote and early. Usually right after the Home Inspection.
Recording Fees about $150 to $200 depending on how many loan instruments you are recording. Just throw in $500 for misc, same as the seller.
TOTAL ACTUAL COSTS FOR A HOME BUYER
Lender Fees+ Home Inspection and Appraisal Fees + Fire Insurance (one year paid in advance) + Lender’s Title Insurance + Escrow Closing Fee + Recording Fees + $500 misc. I can’t even give you a total number, as these vary greatly due to the Lender Fee issue. But let’s say it’s usually around $7,500 or so, depending on the Price of the Home. I’m only putting a number so you know it’s not a few bucks, and something you need to prepare for with your Agent before you make an offer.
Notice I said prepare for with your AGENT and not your LENDER! I know it is customary around these parts for The Lender to “do that”. But why? Really? The biggest buyer side closing cost on the HUD 1 to evaluate is the Lender’s Fees. Your agent needs to help you with that…not your lender, because you need to do that BEFORE choosing a lender, and as part of the basis for choosing a lender.
A note about Real Estate Commissions…it’s a tough issue on the buyer side because it was already negotiated with the seller and often not discussed with the buyer. MAKE your agent talk to you about what they will being paid to represent you. You must have that talk…and often you need to initiate that discussion.
CLUE: “The seller pays it” is NOT the answer to How much is your agent charging for the service to YOU. “I don’t know yet” could be the answer to the question, as what the seller is offering to pay your agent varies from one house to the next. You and YOUR agent should determine the cost…and then later compare that to what the seller is offering, so you can “settle up” if there is a difference.
FREE is NOT the answer…in fact if the agent says FREE…go find another agent and fast.
That is usually done via an Agent Credit toward closing costs and absolutely needs to be addressed at time of Offer, to avoid your losing any “excess” credits to the Agent or to the Seller of the home.
No one wants to hear that the answer to Total Buyer’s Closing Costs is “it varies greatly” depending on which agent…which lender, etc. So here are some real numbers.
On a $250,000 VA purchase, $11,500 dollars reduced to zero paid…Up Front VA funding fee financed and the balance of about $6,000 paid with seller and Agent Credits. The Seller credit is the buyer financing it. The Agent Credit = a “true” reduction of cost…kind of. 🙂
On a $400,000 house purchase with Conventional Loan $9,000 with low Lender Fees.
OK…time to talk about why that one is $9,000…as a $400,000 home with low lender fees should not COST $9,000.
PREPAIDS! Prepaids vary a LOT depending on when you close. This time of year the amount you have to pay to your lender in Real Estate Tax Impounds is HUGE because the taxes are due in April and if you close in Jan your first mortgage payment is not until March. So they have to pay 6 months of Taxes in April and will only have one payment from you to do that with. So they will collect 5 or 6 months of RE taxes from you at closing…even though they are not due until April. They may pay them in March for an early payment discount. Not sure. But the impounds for RE Taxes can be a Big Chunk of Change, for sure.
You pay your one year policy for Fire Insurance up front. You are “Pre-paying” that. The cost of that is going up, from what I can see. YOUR insurance can vary greatly from your friend’s and neighbors based on previous claims, how much jewelry or expensive artwork or very expensive furniture you have in your home. Even the value of your cars, as some mishaps that damage your car are covered, like a tree falling on it or your roof shingles blowing down on your car and scratching the paint.
OK…enough talk about costs. The Seller’s costs are many times more than the Buyer’s costs, and there are many ways to reduce the costs from the “max”.
My best advice…Do not DECIDE to buy or sell a home…until you get a real estimate of your costs to do so, in advance. You may just decide the cost isn’t worth it. 🙂
Traditionally, the idea is that it’s the buyer who needs to be more careful and more critical of the home buying or home acquisition process but this post only proves that the risks are equal for both the home buyer and the seller. Sellers also bear a certain degree of burden before they can fully let go and profit from their properties. I would like to thank you for taking the time to provide a very detailed take on the whole process. As a constant player in the home selling business, it pays to have something as resourceful and helpful as this. This should further help me get properly organized. Home buying and home selling are both costly – to a certain extent, it’s safe to say it is a fair game.
You are very welcome, Precious.
A few notes:
If a move up buyer uses the same agent to sell and buy, they usually can shave off quite a bit from the max cost.
Spot-Spec Builders who are going to buy an old house, tear it down, put up a new house and sell it, usually don’t pay any RE commissions on the purchase, but do use that same agent to sell the finished product. That has been customary in every market I have worked in.
That’s laying it all on the line, Ardell.
To your credit, reader benefit. Bravo!
Jerry-
Costs are often examined under a microscope in a weak market with less equity. When a seller is making a huge profit, vs scraping every penny to “clear the table”, and everyone is making money except the seller…whole new ballgame.
Excellent run down. I do home loans and it is amazing at times that a home owner who is listing their property and wants to get preapproved for their subsequent purchase has no earthly idea the costs they’ll incur with their sale or what their net proceeds will be. And sadly, their listing agent hasn’t bothered to provide that information to them. I intend to use this with permission to provide to all my borrowers as an excellent resource. Thank you in advance, Gary
Thanks Gary.
You, and anyone else, are free to use anything I write at any time, if you feel it will help someone to read it.
It’s all “Open Source” to be used by anyone who might benefit.
Agreed Gary — both on the excellent run down and on the lack of info agents give.
excellent info for any one wanting to sell their home. Look forward to reading more.
That is so true! First time on the site…love the design, keep up the great work!
Excellent in-depth and no-BS reality check Ardell! Just the kind of blog post I like. And yes, I agree, the buyer should get to choose the escrow company.
Keep up the good writing
Conor
Thanks Conor! I do note my choice of escrow in the Agent Only comments, along with who I pre-ordered Title with. But it amazes me how many times the Agent for the Buyer just goes along with that, and doesn’t note the Buyer’s Choice of escrow when they write the offer.
Nice Post. Great run down of all the info your sharing. It is important for agents to be clear and educate all this information
Thanks for the information your sharing for both buyers and sellers. this was a great post — enjoyed reading it.
Why do REO sales often show $0 as the sold price under KC assessment history page? There seems to be no record of excise tax paid, either. Actually, I should say these are FME not REO. (just checking on recent foreclosure sales in my neighborhood, Aug and Oct 2011) Any idea?
I don’t know what FME means, so I can’t answer that question.
FME = Fannie Mae. Fannie and Freddie are exempt from state transfer taxes.
Thanks Marc! I never represent bank sellers. I checked the HUDs on the closings where my buyer client bought an REO and they do have the Transfer Tax being paid by the “bank seller”.
From the standpoint of this post, which addresses people and not corporate entities, the transfer tax of 1.78% would always apply for a seller client…of mine. 🙂
I am assuming Fannie and Freddie are not reading my blog posts to determine their cost of sale… LOL!
Great post Ardell! Nice to see both perspectives brought to the table.
Overall the costs of selling are borne by the seller. But what is interesting is that the seller made the decision to be “on the hook” for those costs when they signed on the dotted line to buy the house. Once you buy that house, whether with your own money or with a bank’s, you can’t get rid of it without paying those costs, one way or another.
In one sense almost all costs are (or can be) paid by the seller. But in another sense, all costs are paid in the end by the buyer, the one who is bringing the money and/or ongoing claims on their income to the table.
Interesting that you note lien payoff as cost #1 and RE agent fees as cost #2. The mortgage is, obviously, the biggest dollar amount that comes out of your sellers proceeds, however, it’s arguably not a cost, rather shifting money from one place to another for a net zero change. Though it depends on how you look at it. The agent commissions and onerous Washington state excise tax (transfer tax) are the #1 and #2 costs on all but the cheapest of houses.
Steve,
The reason the payoffs are #1 is that a lot of sellers can’t clear the table as to those payoffs. If they can’t sell because their debt load exceeds the sold price…you never get to commission and excise tax. The house can’t be listed at all, or it has to be listed as a short sale.
That is often the case when someone wants to sell quickly after buying, especially if they used VA or FHA financing, or bought during the bubble.
As the agent for the seller, you have to go to payoffs as Cost #1, as if that cost exceeds the anticipated sold price…then you are talking short sale.
In a short sale the seller doesn’t pay the commissions OR the Excise Tax.
That is why mortgages and liens have become the #1 consideration at a listing appointment…and not the costs. Unless the seller has tons of equity…which most do not. For the purposes of this post none would have considerable equity, since we are addressing the considerations at time of purchase.
Hope that makes sense…if not…ask away.
You do not fail to amaze me with your very useful posts, Ardell! This post of yours made me realize that I need to take precautions and be more vigilant if ever I will think about selling my home. Prior to reading this, I am just limited to knowing that I need to be careful when buying a home. Thanks for sharing this reality!
Ardell makes plenty of good points here. I have bought and sold three homes in my life and it is not an easy task. Selling usually does present more costs so really know what you are getting into.
I am very impressed that all of the underlying costs in home buying and selling. Wow! It makes me feel that I might just rent a place instead. Thank you for this awesome and very informative post Ardell. I will also share this to friend I know who are looking into selling and buying.
My husband and I are looking into home buying pretty soon and bumping into your posts makes me fully aware of the financial responsibility that comes with it. Of course that is inevitable. But I was wondering and trying to weight things out whether home buying is more affordable compared to building. Maybe you can share it in your future posts too. Will be looking forward.
Those points you have shared is very helpful especially to first time buyers. In my opinion buying a house takes a lot of research and understanding on which house to buy but selling a house takes a lot of effort and costs on how to transfer or closed all the necessary bills. So it is better to choose wisely which house you really want to buy.
Thank you all for the comments.
Jessica, I would not do a post on the average home buyer building instead of buying a home that is already built. It sounds like an interesting proposition, but I have never seen it be a doable reality, except for large custom homes. Even then, it tends to be a nightmare before completed.
Not generally recommended. Unless you are in a very high price range, new homes tend to be tract homes in a larger development due to the economies of scale. Also the builders that build in quantity have an easier time of getting all of the needed approvals. The process is too difficult for one modest home.
There days it is easier to find a lot to build on…but doing it is easier said than done.
I was actually researching for different home buying expenses and I was brought to this blog post. Great article, by the way. 🙂 Well, home buying is REALLY expensive, so for first time home buyers, it is very important to understand first the various fees and payments you have to shoulder once you start the investing process. Being financially prepared matters a lot in an investment as huge as this.
Expenses, expenses, expenses! You better be prepared with all of them once you start buying a new house. And be ready with all the stress that might come along during the process, as well.
I am currently doing as a real estate work and i have great idea of buying and selling homes .It is really really is very expensive and costly work to buy and sell houses .Your posting in this regard is very good and nice information and focused in very well manner.
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Great post! Thank you for breaking down this often confusing information.