Most buyers and sellers put a lot of thought and discussion into price during the offer stage. However, when it comes to closing, the parties typically rely on their Realtor to fill in the blanks of who pays what costs. We have all heard the "devil's in the details," so if you want to understand how closing costs are split between the parties, continue reading; you might even want to save this for future reference.
There are two categories and three aspects to closing costs.
The two categories are nonrecurring and recurring. Think of nonrecurring as fees paid only once to purchase a house. These fees are usually charged by the lender and title company. Typical nonrecurring closing costs include attorney and document preparation fees, loan origination and discount points, fees to provide clear title, etc.
Recurring fees -- also called pre-paids -- are those that continue over the life of the loan. These include property insurance, property taxes, prepaid interest and private mortgage insurance.
Closing costs are further divided into three aspects:
What is required? Required closing costs are driven by the loan program a buyer uses, such as FHA or VA. Examples include document preparation, tax registration or escrow closing fees -- which must be paid by the seller.
What is customary? Customary closing costs vary regionally in regard to what the buyer or seller pays, or what is split between parties. Anchorage is unique in that the appraisal customarily has been the seller's cost, while nationally it is a buyer's cost.
A problem occurs if the transaction doesn't go through. The seller might be stuck paying for another appraisal for the next buyer if the first appraisal can't be used. Perhaps a solution is to change the custom of who pays for the appraisal; this change could create a better balance between the parties.
What is negotiable? Negotiable closing costs often depend on how much help buyers need with their closing costs or if they are just trying to get a good deal. While having the seller pay some of the buyer's closing costs might be good for the buyer, it can create a problem for the seller.
Depending on the lender and the loan program, appraisers must adjust comparable sales values to compensate for these types of concessions. This can create a downward spiral as concessions deflate values, forcing sellers to reduce the sales price while still paying buyer's closing costs.
Here is an example of the downward spiral. If your neighbors sell their house for $300,000 but pay $8,000 in the buyer's closing costs, the adjusted value is $292,000. A month after your neighbor moves, you sell your home for $300,000 and pay the same $8,000 in buyer closing costs. After all, isn't that what your neighbor did? Unfortunately, if the appraiser uses your former neighbor's house as a comparable sale your appraisal will likely come in less than what you agreed to in the offer. By this time, you've packed up, scheduled the movers and feel forced to decrease your price to the appraised value ... and so the downward spiral begins.
How do you protect yourself? Perhaps a solution that balances the benefit between seller and buyer is to decrease the amount of closing costs the seller will pay by the same amount of decrease in the appraised value. In the example above, if the appraised value comes in $5,000 less than what the buyer offered, you decrease the closing costs paid for the buyer to $3,000.
Whether buying or selling, your Realtor can explain how closing costs affect your particular situation. Once you understand, you are in a better position to make choices that maximize your bottom line.
Clair and Barbara Ramsey are local associate brokers specializing in residential real estate. Their column appears every month. Their e-mail address is email@example.com.
BARBARA AND CLAIR RAMSEY