Buying or selling a home is a major financial decision, and understanding the associated costs is crucial. While the purchase price is the most significant expense, there are many other fees and expenses that add up during the transaction. This blog post will break down the traditional distribution of expenses in a real estate transaction, clarifying who typically pays for what.
Buyer's Expenses
Buyers typically bear the responsibility for a wide range of expenses, including:
- Real Estate Commission: Due to recent changes, buyers are now typically responsible for negotiating and paying their agent’s commission directly, either through an agreed payment method with the agent or as part of closing costs, instead of relying on sellers to cover this fee as part of the sale​.
- Escrow Fees: Escrow fees cover the services of an escrow company, which handles the financial aspects of the transaction, such as holding funds and ensuring that all necessary documents are in order.
- Document Preparation: This fee covers the preparation of legal documents, such as the purchase agreement and deed, which are required for the transfer of ownership.
- Notary Fees: Notary fees are charged for the notarization of documents, which verifies the authenticity of signatures.
- Recording Charges: These fees cover the recording of the deed and other documents with the county, which officially registers the transfer of ownership.
- Termite Inspection: The cost of a termite inspection, which is typically required by the lender, is usually borne by the buyer.
- Tax Proration: The buyer is responsible for paying property taxes from the date of acquisition.
- Homeowner's Transfer Fee: Some jurisdictions charge a transfer fee for new homeowners.
- New Loan Charges: These fees cover the costs associated with obtaining a new mortgage loan, such as origination fees, appraisal fees, and title insurance.
- Interest on New Loan: The buyer is responsible for paying interest on the new mortgage loan from the date of funding until the first payment date.
- Assumption/Change of Records Fees: If the buyer is assuming an existing loan, they may need to pay fees for the transfer of the loan.
- Inspection Fees: Inspection fees cover the costs of various inspections, such as roofing, property, geological, and environmental inspections.
- Home Warranty: The buyer may choose to purchase a home warranty to protect against unexpected repairs.
- Lender's Policy: A lender's policy is a type of title insurance that protects the lender's interest in the property.
- Fire Insurance Premium: The buyer is responsible for obtaining fire insurance for the property.
Seller's Expenses
Sellers typically pay for a different set of expenses, including:
- Real Estate Commission: The seller typically pays the commission to the real estate agent representing the seller, as outlined in the listing agreement or sales contract.
- Escrow Fees: The seller usually contributes to the escrow fees, as they are shared between the buyer and seller.
- County Documentary Transfer Tax: This tax is levied on the sale of real estate and is typically paid by the seller.
- City Transfer/Conveyance Tax: Some cities also charge a transfer tax, which is typically paid by the seller.
- Document Preparation Fee: The seller may pay a fee for preparing the deed for the property.
- Loan Payoff: The seller is responsible for paying off any outstanding loans on the property.
- Interest Accrued to Lender: The seller needs to pay any accrued interest on the mortgage loan being paid off.
- Statement Fees: The seller may be charged fees for obtaining statements from lenders.
- Reconveyance Fees: These fees are charged for the release of a mortgage lien on the property.
- Prepayment Penalties: If the seller has a mortgage with a prepayment penalty, they may have to pay a penalty for paying off the loan early.
- Termite Inspection and Work: If a termite inspection reveals the need for repairs, the seller is typically responsible for the costs.
- Home Warranty: The seller may provide a home warranty to the buyer, which covers certain repairs and replacements.
- Judgments, Liens, and Taxes: The seller is responsible for clearing any judgments, liens, or unpaid taxes against the property.
- Tax Proration: The seller typically pays property taxes up to the date of closing.
- Homeowner Dues: The seller needs to pay any outstanding homeowner association dues.
- Recording Charges: The seller may be responsible for recording charges to clear any documents against the property.
- Bonds and Assessments: The seller may be responsible for paying any outstanding bonds or assessments.
- Delinquent Taxes: The seller needs to pay any delinquent property taxes.
- Notary Fees: The seller may contribute to notary fees, which are shared between the buyer and seller.
- Title Insurance Premium: The seller typically pays for the owner's policy of title insurance, which protects the buyer's ownership rights.
Understanding the distribution of expenses in a real estate transaction is essential for both buyers and sellers. While this guide provides a general overview of who typically pays what, it's important to remember that the specific details can vary depending on the terms of the purchase agreement, local laws, and lender requirements. Consult with your real estate agent and legal counsel to ensure you fully understand the financial obligations associated with your real estate transaction.
