What are Closing Costs and Who Pays Them
In California, buying and selling real estate provides enough sticker shock in the current market, but the closing costs add another layer of expense for buyers and sellers. Can you know your closing costs ahead of time, and how do you know who pays what? Here’s what you need to know about what closings costs are and who’s responsible for them.
Are There Rules About Closing Costs?
California law does regulate closing costs overall, so you can be assured that any expenses you incur are legitimate. If you’re the buyer, you’ll get an estimate of closing costs when you apply for a mortgage, so there won’t be any surprises when you close.
Sellers should get an estimate of taxes and fees they will owe from their real estate agent, but this money typically comes out of the proceeds—sellers rarely need to come up with cash for the closing.
Market Conditions Dictate How Costs Are Shared
The rule of thumb for closing costs has typically been that the buyer usually pays the costs associated with getting the mortgage. The seller usually pays any costs associated with transferring the title.
In a typical real estate market where the supply and demand for homes are in balance, sellers may offer “concessions” to the buyer. That is, they’ll offer to pay some of the mortgage costs to sweeten the deal.
That’s not the case in most of the states now, though. It’s a highly competitive market, and sellers have no incentive to give away money.
The seller pays the real estate commission on both sides, usually 6% of the purchase price.
California Closing Requirements and Costs
The state, county, cities, and mortgage companies set the following conditions. Not all cities add transfer taxes to real estate transactions, but larger metro areas will tackle that extra fee.
A clean title is the linchpin for any real estate transfer, and the seller can’t transfer the deed to the buyer unless the deed or title is clear from any liens, mortgages, or other encumbrances.
A title company researches the property’s chain of ownership and issues a title report to the mortgage company. This way, if there are any issues to clear up, it can be done before closing.
Cost: $250 average
Owner’s title insurance
Even with a clear title, mortgage companies require title insurance. The title insurance protects you and them if there’s a defect on the title–someone claims ownership after the transaction is closed. Title companies do make mistakes, and this insurance covers any losses.
Cost: $ .0025 purchase price on average. On a $625,000 purchase, the title insurance will cost $1,562.50
Location in real estate matters in more than property values. It also contributes to your closing costs.
You’ll pay the state documentary transfer fees anywhere in California. Sellers also pay county and city transfer fees.
Cost: $0.55 per $500 in closing costs. For example, that $625,000 house likely has about $43,000 in closing costs, so about $47.30.
County taxes vary, either $0.55 or $1.10 per $1,000.
City transfer fees vary widely, from $0.55 in most cities to a percentage of the sales price for luxury real estate (over $1 million).
The county Recorder’s office must record the new deed for the seller to get paid and finalize the transaction. That’s another $75 that the seller pays for one deed recording. Other documents may be required in some transactions, but the state caps recording fees at $225 per transaction.
Unlike most other states, Californians pay property taxes twice a year, in April and December. The seller is responsible for paying the real estate taxes up to that date.
If the seller has already paid the taxes (as escrowed mortgages do), the buyer will pay a prorated portion of the taxes, and the seller will get the credit at closing.
Since the appraisal is a mortgage-related cost, the buyer pays this, usually when they apply for the loan. The mortgage company orders the appraisal for the buyer, and it’s a random, automated selection. You can’t choose your appraiser.
Mortgage companies don’t require a home inspection (unless it’s an FHA loan), but savvy home buyers get one done, so they know of any damages or defects to the home. Buyers use the inspection report to negotiate repairs or concessions from the seller.
Escrow companies hold the escrow (down payment) money, finalize the closing, and manage to disburse the funds to the seller and other parties (fees, courier, etc).
The fee structure is not regulated, so companies compete for your business. They may charge a flat fee or base it on a percentage of the sale price. Generally speaking, escrow fees are about $0.20, or 2%, per $1000, plus an additional $250 fee for both seller and buyer. Here’s the breakdown for that hypothetical $625K house.
Cost: $1,300 for both buyer and seller
Again, location matters. In Southern California, the seller usually pays escrow fees, but buyers and sellers split the costs in the northern part of the state.
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