Closing Costs for California Real Estate
Remember rule one in real estate:
Everything is Negotiable
Closing costs refer to the expenses paid by the buyer and the seller as negotiated at the close of the sale of property. The payment of the closing costs is a negotiable subject between the buyer and seller. No law requires that certain closing costs are the responsibility of the buyer or the seller. (The only exception can happen with some government backed loans where regulations prohibit the buyer from paying certain closing costs.)
Local customs can create the standard that certain closing costs are typically paid by the buyer, and other costs are usually paid by the seller.
The home buyer’s and possibly a mortgage borrower’s closing costs can be divided into two categories. First, the nonrecurring closing costs and second, the recurring closing costs are a way to classify payments. The nonrecurring closing costs are one-time charges paid upon the close of escrow. The recurring closing costs are prepaid items that the buyer pays in advance that will continue as long as the buyer owns the property.
Examples of nonrecurring closing costs for the buyer are Loan origination fees. A fee charged by a lender to cover the expenses of processing a loan. Another one is an appraisal fee. An appraiser charges to give an estimate of property value which can be charged to the buyer. Note that some appraisal costs are paid by the buyer even if the transaction does not make it to closing. Understand if this is the case when you are buying a home. There are more nonrecurring closing fees and costs.
Examples of recurring closing costs for the buyer are hazard or fire insurance. A one-year premium for insurance against fire, storm, and other risks is charged at close of escrow but every year the new home owner will continue to pay for this type of insurance. Another ongoing expense is property tax proration. In California, the property tax year runs from July 1 through June 30 of the following year. If the seller has prepaid the taxes, the buyer reimburses the seller for the prepaid portion. Interest due before the first loan payment is another cost. Interest on real estate loans is typically paid in arrears.
The closing costs paid by a seller are nonrecurring expenses. After the close of escrow, the seller is divested of ownership and has no recurring expenses. Examples of closing costs typically paid by the seller are the transfer tax. The transfer tax is charged when title is transferred. The county has a documentary transfer tax that is computed at $1.10 per $1,000 of the sales price. The pest report and possibly the corrective work are customarily paid by the seller. These can change based in some areas convention.
Real estate brokerage commission is almost always paid by the seller. The commission is normally quoted as a percentage of the sales price. The natural hazard disclosure fee is also generally paid by the seller. The natural hazard disclosure provides seller required disclosures for earthquake, flood, fire, and other hazards.
Some closing costs are split between buyer and seller. The one cost which is generally a 50/50 split is the escrow fees. Knowing that the closing costs are negotiated, the escrow fees are a good way to show good will or demonstrate who is in the power position. Title insurance is another area of negotiations that helps with buyer funds needed at closing.
Some closing costs are prorated between the buyer and seller. Examples of this type of cost are property taxes, interest if loan is assumed by buyer and rents if the property is a tenant-occupied income property.
One of the key values of closing costs is to know the real numbers of your particular escrowed transaction. Ask for a net sheet or closing cost document sometimes called a HUD-1 Settlement Statement. A net sheet is a simple tool that shows the costs required to sell the property and shows approximately what the amount of the proceeds will be after all costs have been considered. The HUD-1 Settlement Statement is a standard form used to itemize services and fees charged to the borrower or buyer by the lender. If there is no loan, then ask for a net sheet for the buyer side of the transaction.
Here is a quick Summary of Closing Costs
Buyer Usually Pays
1. Loan origination fee
2. Appraisal fee
3. Credit report
4. Property inspection fee
5. Tax service fee
6. Recording fees
7. Notary fees
8. Assumption fee, if any
9. Title and escrow fees in buyer-pays areas
10. Title insurance
11. Hazard insurance
12. Interest on loan before first payment
Seller Usually Pays
1. Transfer tax
2. Structural pest control work and report fee
3. Real estate brokerage commission
4. Discount points on government-backed loans
5. Recording and notary fees
6. Title and escrow fees in seller-pays areas
7. Natural hazard disclosure fees
Understanding closing costs can help with the real estate transaction negotiation. Knowing what fees are significant amounts and which is minor amounts can help set the tone of the transaction. Knowing what closing cost will add more money the buyer will have to add to closing can help in finalizing the sale price.
If the local real estate market is in a seller’s market or buyer’s market will help in the negotiations of the closing cost. Whether you believe in a win-win deal or win-lose deal the appearance of fairness will help the transaction to close. Using closing costs to create the atmosphere of a fair deal is generally a good practice.
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