Closing costs are a combination of all the fees associated with buying or selling a home. Many sellers erroneously think that most of the costs will fall on the buyer and can be a bit shocked when looking through their closing statements. The term “closing costs” itself is a bit nebulous and depending on who you’re talking to (your lender or the title company for instance) and which side of the transaction you’re on (buyer or seller) at any given moment, the phrase can mean a few different things. Closing costs for sellers can add up and eat away at the net amount received by the seller at closing, but with a little forethought and some calculations, your agent should be able to provide you with a seller’s net sheet that explains what those costs are and estimate about how much they’ll be. These net sheets are not exact and there are several factors that can affect the final numbers, but they do serve to assist you with seeing the bottom line on the day of closing. Here are some of the costs you may be paying (remember, most items in a contract are negotiable, so you may pay all or some of these and there may be other costs – talk with your agent to get a more accurate picture of what your transaction will look like).
Seller Closing Costs
Home loan payoff – If you took out a loan to purchase the home, chances are you still owe some money to the lender (if your loan is paid off in full – congratulations, this cost won’t apply to you!). If there is still a balance due on your mortgage, the title company will request payoff information from the lender and this money will be subtracted from the proceeds of the sale of your home. Home loans can be structured in a lot of different ways, so you’ll want to be sure that you get your payoff information from the bank – multiplying your monthly mortgage payment by the number of months you have left on your loan isn’t always going to be accurate (but will give you an estimate until the bank gives you the final number). Most mortgage statements have a phone number on them that you can call to request payoff information. Payoff numbers usually have a time limit on them though, so be sure you make note of that as well. Anything beyond that date may change your numbers. If you have home equity loans or lines of credit from Prosper or any other financial company, these will also need to be factored into your payoff amount.
Prorated property taxes – Depending on when you close on your home, how this is calculated can vary, but the basics remain the same – you pay taxes for the days you owned the home. This calculation gets a bit more complicated if you close on your home after the tax bill has been paid, because the bill is usually paid prior to a full year’s cycle coming to a close. In this case, you may be due a prorated amount from the buyer to cover those days you’ve already paid for that you will not be the homeowner anymore.
Escrow fee – Simply put, this is the cost of using the title company. This fee is typically split between the buyer and the seller.
Title insurance – As a seller you will typically pay for the owner’s title policy. There is also a lender’s title policy and this amount will typically be charged to the buyer.
Miscellaneous fees – There are quite a few other fees that go by different names – recording fees, courier fees, tax certificates, attorney’s fees, etc. Some of these fees are required by local and state governments while others are the costs associated with the actual work of the title company. If you have questions about these fees, talk to your agent and closer at the title company and they can show you what each one is for and how much it is (they are all broken down line by line on your closing statement).
Commissions – Based on your listing agreement you will pay the commissions for the agents. Typically, the seller pays both their agent and the buyer’s agent.
Liens, judgments, and back taxes – If you owe money and someone has placed a lien against you, a judgment against you was put in place, or you owe back taxes (these can include property, local, state, and federal taxes), these will be collected out of your proceeds. One of the things a title company does in their title search is discover these particular items, so you should know about them in advance of your closing date.
HOA related fees – If you owe any homeowner’s association dues, those will be collected at closing. You may also have to pay for any unpaid violations of HOA rules (some HOAs will fine you for not following their rules). There may be HOA transfer fees associated with the sale and costs to obtain the HOA documents required.
Contractual obligations – As there are many negotiable items in the contract, you may also pay for home warranties, surveys, some of the buyer’s closing costs, etc. If there were repairs required by the contract, those bills may be settled at closing as well (some may have been paid up front).
These costs will be deducted from your balance at closing, unless of course they exceed the equity in your home. In that case, you would be required to bring money to the closing table to pay that balance. The goal of any sale is to walk away with a positive balance so you can use that money for other items – a new home, a vacation, your retirement, college funds, etc. Don’t forget as well, there may be tax implications with the money you earn from the sale of your home, so it is always a good idea to speak to your CPA to discuss those so that you’re prepared if there is money owed.
image courtesy of Lachlan Hardy