A few months back, a friend asked me to help assist in the purchase in his very first house. This was a cool experience since I only work with a small number of buyers a year (I mostly represent sellers) and the house he was interested in purchasing was a For Sale By Owner or FSBO. It had been a very long time since I had last negotiated with a FSBO and it is very different dealing directly with a Seller than it is with another agent. Unfortunately, the transaction didn’t come together and the major obstacle was on the issue of closing costs.
Closing costs is a catch-all term that refers to all of the fees, aside from the price of the house, that it takes to either purchase or sell. There are closing costs for both the buyer and the seller. Closing costs may vary across the country with various fees and they do vary with each transaction. However, for our purposes, I will focus on explaining the closing costs for a Buyer and Seller in either North or South Carolina.
Closing Costs Paid By the Buyer
For Buyers paying cash for a home, the closing costs are limited to :
- Closing Attorney / Title Search
- Owners Title Insurance
- Recording of the deed
- Pro-rations of taxes and HOA fees (if applicable)
In most cases, aside from taxes, the total amount of these fees will be less than $1000, with the most substantial portion being the Title Insurance and Title Search (that determines if the property you are purchasing is clear of liens and that the person selling it has the ability to do so).
Since most transactions aren’t cash, there are typically additional fees that the Buyer’s lender will charge the Buyer in connection with acquiring the loan:
- Origination Fee
- Appraisal Fee
- Flood Certification
- Credit Report
- Interest paid on the loan from the day of closing until the first payment is due
- Escrow reserves for taxes and insurance (if the Buyer chooses to have their lender pay the annual real estate taxes and insurance payment)
- Lenders Title Insurance
- Recording of the Mortgage (Deed of Trust) with the county.
Depending on the sales price of the house, it is common for the total amount of the Buyer’s closing cost on a financed transaction to equal 3% or less of the sales price. Additionally, other fees associated with purchase of the property can be paid at closing as well including:
- Homeowners Insurance Policy (paid 1 year in advance)
- Home Inspection
- Home Warranty
- Points to buy down the interest rate.
In today’s real estate market, with low mortgage interest rates, many Buyers are choosing to pay more for a house and have the Seller give them the difference back in Seller Paid Closing Costs. This is a fixed amount, negotiated at the time of the Offer, in which a Seller will allow an additional concession to help cover some of the Buyer’s Closing Costs. For example (first without Seller Paid Closing Costs):
- Sales Price: $200,000
- Seller Paid Closing Costs (for the Buyer): $0
- Net to the Seller: $200,000
or with Seller Paid Closing Costs:
- Sales Price: $205,000
- Seller Paid Closing Costs (for the Buyer): $5,000
- Net to the Seller: $200,000
The Net to the Seller is the same in both examples but the Buyer chose to pay $5,000 more for the house and receive the difference back in Seller Paid Closing Costs. This has nothing to do with an ability to purchase the house but everything to do with where the Buyer’s money may be best spent. At a 4.5% interest rate on a 30-year fixed rate mortgage, the cost of borrowing an additional $1,000 is only $5.07 a month. In that example above, the Buyer would pay an additional $25.33 a month to avoid from spending an additional $5,000 today in acquiring the house. Most mortgages limit the amount of Seller Paid Closing Costs to just 3% of the sales price, which would be $6,000 in our example above.
Seller Closing Costs
The closing costs to sell a home are a lot more simple and straight forward than to purchase a home. The amount is simply deducted from the proceeds of the sale and if the amount is greater than the proceeds, you will be required to bring the difference to closing. Since not closing isn’t an option (unless you like the thought of a lawsuit), it is a good idea to know what your intended net proceeds will be before accepting an offer. The fees are:
- Attorney Closing Fee
- Tax Stamps (a transfer tax paid to the county for the privilege of selling your home. In North Carolina, it is .002% and in South Carolina, .0037%)
- Pro-ration of Taxes and HOA
- Payoff of any mortgages or additional liens associated with the property
- Any negotiated Seller Paid Closing Costs
- Real Estate Agent Commissions
Yes the real estate sales commissions are paid by the Seller for both the Buyer and the Seller. The agreement that the Seller signs to list their property hires the real estate firm at a set amount and from that amount, the Buyer’s agent is compensated. With For Sale By Owners, not represented by a real estate agent (whether discount or full-service), they can agree to pay the Buyer’s real estate agent with a compensation agreement. Not doing so would increase the amount the Buyer would pay in closing costs and may make the house uncompetitive in the market.
Any home offered for sale in the Multiple Listing Service (whether with a full service company, flat-fee, or discount firm) is required to offer compensation to the Buyer’s agent and the MLS listing serves as an agreement of compensation.