WRITTEN BY BENNY L. KASS
Question: I have recently become licensed as a Real Estate agent. The market is “hot”, and many of my selling clients are asking what they will be charged for closing and settlement costs. Can you summarize these various costs?
I have analyzed a number of 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. The broker should also make it clear that the commission is earned only if closing (settlement or escrow) takes place.
Mortgage payoff: Most sellers have at least one mortgage outstanding on the property. The seller’s lender will be able to assist you in obtaining 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 one percent of the loan. For a number of years, no one paid points, especially since interest rates were very low. However, I have recently seen a revival of points being paid, either by buyer or seller or both.
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, but the buyer must confirm this with his/her own attorney or financial advisor. 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.
Ask the seller if they have a current contract with a termite company. If so, that company should be willing to give the required letter for no cost or at most a nominal charge. Finally, when you make arrangements with the termite company to do their inspection, make sure 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 another company.
Water escrow: In Maryland and the District of Columbia, 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 or company 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: In the Washington metropolitan area, each jurisdiction imposes a tax (called Grantor’s tax in Virginia, and Recordation and Transfer tax in Maryland and the District of Columbia). In Virginia, the seller customarily pays the Grantor’s tax. In the other jurisdictions, payment of this tax is negotiable between buyer and seller, although often the tax is split between the parties.
Settlement charge: Some settlement offices will impose a nominal charge on the seller for “settlement.”
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. In my opinion, it is incumbent on you — as the seller’s agent — to advise your principal as accurately as possible what all of these miscellaneous charges will be.