What Are Home Sellers Closing Costs and what do they include?
This article is a tutorial for home sellers. Most homeowners have purchased a home and know what is involved in the buying process, but many are unaware of what is involved in selling their home. In this tutorial, I will break down the costs the home seller pays when selling their home.
Let’s Start with a Net Sheet
When a Real estate Agent comes to list your home, along with a killer listing presentation, the agent should have a net sheet with them. A net sheet is a breakdown of seller costs. It’s called a net sheet; because it shows approximately how much the seller will be netting or receiving from the sale of the home.
Let’s start by telling you that to sell your home using a Real Estate Agent; in much of LA County and Ventura County, The home seller will pay between 6-7% of the purchase price of the home in total fees and commissions.
So what do these include? Well they are as follows….
2. Real Estate Brokerage Processing Fees
3. Title Fees
4. Escrow Fees
5. Governmental Retrofit
6. HOA Transfer and Document Fees
7. Termite Inspection
8. Flood Certification/Where applicable
9. Home Warrantee
10. Request for Repairs
11. Natural Hazard Disclosure Statement
12. County Transfer Taxes
13. Paying off Mortgages and Liens
In order to demonstrate, we will use a $ 500,000 home as an example.
The Listing Broker‘s/Real Estate Agent’s , commission varies as to geographical location but for most transactions in LA and Ventura County, 5-6 % is the most common commission charged. This translates in the case of a 5% commission to 2 ½ % to the Listing Broker, that is the agent the seller hires to sell the home, and then 2 ½% to the selling broker, or the agent who represents the home buyer. It is a little confusing but the selling agent is the one who brings the buyer.
In some cases, the listing agent will make a deal with the home seller by offering a reduced commission if they can find and represent the buyer and well as representing the Home seller. This situation is called dual agency and as I said, dual agency can sometimes save the home seller as much as ½%-1%. This type of arrangement for a discount is negotiated at the signing of the listing agreement. Dual Agency has its advantages as well as its disadvantages. We will discuss this in another article.
Now let’s take that $500,000 property. If the commission is agreed upon to be 5%, that will come to $25,000, $12,500.00 to each side of the transaction. I will talk in another episode of the Real Estate Answer Man about what exactly the Realtor does to earn that commission, so look for that episode and download it when you get the chance.
Brokerage Processing Fees
Most Real Estate offices have a processing fee which will set you back from $300-$500. This is the cost of running the transaction through the Real Estate Office.
The home seller’s portion of Title Insurance will cost approximately $ 1,320.00 on that $500,000 home. Title insurance is an insurance policy the seller buys to insure a clear title with no liens from individuals, government entities or claims of ownership by others. Included in Title Fees, you will also see a wire fee and other Title fees totaling an additional $100.
Both sellers and buyers pay their own escrow fees. On that $500,000 home, Escrow fees will cost $1,500. That figure is arrived at by taking a base fee of $ 250.00, and adding a charge of $2.50 per thousand of the sale price of the home.
In addition to that fee, you will be paying a documentation fee of $75.00, and the seller also pays a loan payoff fee of $50.00 per loan payoff. Also be prepared to pay a wire fee of $25.00 and an archive fee of $50.00. If you need a primer on what escrow is all about, check out my interview with Keith Parnell of All Valley Escrow.
Governmental Retrofit/LA County
The seller will be required to pay for a Retrofit certification to be performed, on homes sold in Los Angeles County. There are companies you can hire to do the certification, and the costs to the seller depend on what needs to be done. The city wants to make sure you have water saving toilets and shower heads; they want make sure the water heater is properly installed and strapped in for those earthquakes we get to enjoy from time to time and speaking of earthquakes, an emergency shut off valve needs to be installed at your gas meter. The seller needs to have a CO detector installed when selling a home in California as well as required well-placed smoke detectors, included in the certification.
Retrofit can get expensive for the seller as you can see. If you need to install new low flush toilets or if you have to strap a water heater or install a new earthquake Gas shut-off valve, those could cost you a pretty penny. I have had retrofit costs of as low as $95.00, but as I have just explained, that could go south fast and run into lots more money if major items need to be taken care of. For example, an earthquake gas shut-off valve installed can cost $300-$400
HOA Transfer Fees
HOA transfer fees and HOA Document Transfer Fees only apply when you have HOA’s involved. These documents will vary but some HOA Docs can run as much as $300-$400. The buyers are going to be eager to get these so they can review them to determine what will be expected of them by the Home Owners Association, and in turn, decide if they want to buy the home with the particular HOA regulations.
A termite inspection and work needed to be performed for Termite clearance is the sellers’ responsibility. We will talk about the Wood Pest Addendum, found as a part of the California Purchase Agreement, but a termite inspection will generally set the seller back about $85.00-$100. If work needs to be done, for instance if the house has dry wood termites, the home will most likely need to be tented and fumigated. Termite work is usually a cost incurred by the home seller. Other wood pest related conditions like dry rot, subterranean termites and fungus are items that are generally handled by the seller as well. Now I know what you are saying sellers, you are saying, I thought you can sell the home as is! Well that’s true and in fact, if the buyer of your home is buying in cash, then a wood pest can be skipped. However, if there is a loan involved, the bank or their lender is going to want to see a clear Termite report before they will fund a loan. The buyer isn’t going to do those repairs before owning the property, hence, the seller usually pays for the most costly part of the termite repair. That repair work includes the cost of tenting or drilling into a slab and pumping in gas for the subterranean variety of termite, replacing damaged wood and so on. I’m going to bring on a real Pest Control expert to talk termites and other varmints in another episode of the Real Estate Answer Man so stay tuned for that.
In many parts of Simi Valley and recently in many parts of Ventura and Los Angeles County, there are 100 year flood zones, and F.E.M.A. is expanding their reach, causing insurance companies to charge outrageous premiums for this 100 year flood zone. F.E.M.A. seems to be attempting to prop themselves up by using California money to take care of others who live in hurricane areas and along the Mississippi and Missouri rivers where floods actually occur more than every 100 years. Okay just don’t get me started. There is new law on the books where the home seller has to have his home certified so as to show how much it will cost the home buyer to buy flood insurance. This is only necessary if indeed flood insurance is called for on the particular property for sale. This flood certification can end up costing the seller $500 for the certificate. The bad news is that this situation can end up causing headaches for a seller trying to sell their home. Stay tuned for flood insurance updates.
There is a line in the Residential Purchase agreement that gives the buyer the option to ask for a Home Warranty. You as the home seller will be asked by the buyer to purchase a home warranty plan. This policy is not required, but generally speaking, paying for a home warranty is a good faith gesture by the seller to home buyer. The seller will be asked to purchase a home warranty plan for one year. These warranties generally cost from $350-$550. This warranty is paid through escrow out of the proceeds from the sale of the home. Some sellers ask me if they have to pay for the warranty, and the answer is no, in fact a buyer can ask for whatever they want, but if you read the Residential Purchase Agreement, it plainly states that the property for sale is as is… but as I said, when the seller purchases a home warranty, they are showing some good faith to the buyer.
Home sellers will be paying State and local Transfer Taxes. In LA County as well as Ventura County, these transfer taxes will generally set the seller of a $500,000 home back approximately $ 550.00.
Natural Hazard Disclosure
In the state of California, a Natural Hazard Report is required to be commissioned for the buyer. NHD reporting companies charge approximately $85-$125 for these reports .These reports are very detailed and are interesting to read. They include information regarding flood zones, earthquake faults, Toxic Mold information, Megan’s Law, Airport influence and their proximity and so on. We will be talking with a representative from an NHD firm in an upcoming episode of the Real Estate Answer Man, so stay tuned.
Requests for Repair
The California Residential Purchase Agreement says plainly on page 4 paragraph 9 that unless otherwise agreed: the Property is sold (a) in its PRESENT physical (“as-is”) condition as of the date of acceptance. That is all well and good, but the buyer has the opportunity to perform inspections and request repairs or credit from the seller to compensate for repairs needed on the property. The seller has the right to refuse to repair or compensate for repairs, but sellers need to know that in most cases, buyers will be requesting repairs and they need to be prepared to address those early on in the transaction.
Paying Off the Mortgage
If the seller has not paid for the home in full, the biggest and most important part of the closing costs are going to be paying off the balance of your loan or Mortgage. Escrow will get the totals for the loan payoff from the seller’s bank including fees to satisfy and payoff the loan before the seller sees any of the money from the sale of their home. If you happen to have any liens on the house including tax liens or otherwise, those obligations will need to be settled as well.
So let’s look at the totals, and at the same time, summarize the costs of selling a home with a sale price of $500,000.
Commissions at 5% = $25,000
Broker Processing Fee = 350
Escrow Fees = 1,600
Title Insurance = 1,420
Transfer Taxes = 550
Retrofit = 100
Termite Inspection = 100
HOA Documents = ?
Home Warranty = 450
NHD Report = 95
Total = $29,665 Representing a cost of 5.921% to the seller
Property Tax Refund
The seller needs to pay their property tax up until the date when they leave the property. If the seller has prepaid their property taxes which often are the case, they will get the prorated money back from the State.
HOA Pro rated dues will be refunded for those of you who pay HOA fees. If you have pre-paid your fees, you will be getting back some of that money.
Escrow will often overestimate the costs of doing business in order to have a pad, enough money where they don’t have to go running to the seller asking for more money. That pad is generally around $500. You may get some of that back.
Additional Costs to the Seller
Not everything can be calculated as far as costs to the seller because there are items like I have already described to you like requests for repairs, unforeseeable termite damage and costs to remediate that damage which can be pretty expensive in some cases. Don’t forget the possible costs of having to do some costly Retrofit work as well.
In some cases, the Real Estate Agent may suggest the seller make some repairs or improvements before the home goes on the market. That will be another expense to the seller as well but that kind of expense will go a long way towards getting a better price on the home. With that said, the seller does not have to make any improvements that will cost them money and create a monetary hardship. Often those repairs can be worked out at the close of escrow in the form of a credit to the buyer. That way the seller can in essence have the buyer do the repair after close of escrow with no out of pocket cost to the seller until after the sale of the home.
So that is about all I have for you in this episode of the Real Estate Answer Man What does it Cost a Homeowner to Sell a Home. I hope that all of you home sellers have a better idea as to what it costs, and why. Thanks for listening all the way through. Please visit my blog at www.Barrykessler.com or www.simivalleyrealestateanswerman.com. Check out my YouTube videos, get links to the things I talk about here on my podcast, the Southern California Real Estate Answer Man Show, and please download my other podcasts and tutorials.
Remember I am a Real Estate Agent for real!
If you are selling or buying a home in Southern California, especially in the San Fernando Valley, Burbank, Glendale, Hollywood, Simi Valley, Moorpark and East Ventura County, the Kessler Team will be able to help you with the latest Real Estate selling and buying tools in the industry. We are not challenged by technology and we also bring along our experience in the Real Estate business, to assist you in buying or selling a home.
Thanks for the listen, and I hope to be helping you sell your home for the best price and in a timely manner in the near future. Give me a call at 818-426-6415. Join me again on another episode of the Southern California Real Estate Answer Man Show.