Closing Costs Explained
Have you ever tried to understand closing costs? In theory, it should simple, but in reality, calculating your exact closing costs can be extremely complicated.
According to Realtor.com, “closing costs for sellers vary according to where you live, but as the seller you can expect to pay anywhere from 6 percent to 10 percent of the home's sales price at settlement.” That amount of inconsistency is insane, and difficult to budget for. Therefore, I highly recommend calculating your exact closing costs using a seller net sheet, like this one!
With that said, closing costs can still be difficult to understand even after reviewing your net sheet. I created this guide to help you understand each and every closing fee to help you save as much money as possible.
Real Estate Commissions
Real Estate commissions are generally the largest closing cost associated with selling a home. In Ohio, the seller pays the commission for both their own agent and the buyer's agent.
In a "typical" sale, this will run you 6% of the sale price with 3% going to each of the two agents. But in a CommonCents sale, it's much less! The buyer agent commission still applies, but the listing agent commission is just $2,500.
Some brokerages also charge what's known as additional commissions, sometimes referred to as a document storage fee. This extra fee, ranging from $100-300, is one of the most blatantly unethical closing costs out there today. Often weaseled into listing and buyer agreements, additional commissions are just another way for brokerages to make more money. After all, what's an extra $200 on a $200,000 purchase?CommonCents has not, does not, and will not ever collect additional commissions.
Prorations technically aren't closing costs, but they can be expensive. They're also very confusing, which is why I'm including them in this guide.
So what exactly are prorations? Simply put, they are property taxes, HOA dues, or any other recurring fees associated with the property that are paid in arrears (AKA paid after the fact).
For example, most property taxes are paid in arrears, so your 2020 tax bill actually isn't due until 2021. Therefore, if you sell your home on February 1, you'll have to pay the buyers the pro-rated taxes for January 1-31 since they're the ones who will have to pay the actual tax bill.
This can get even more complicated if you escrow your taxes. Be sure to check with your lender to see how much is held in your escrow account. Hopefully, those funds can offset much of the tax burden.
Regardless of where this stands, just remember you have to pay all property taxes for the time period you own the home. There's no real way around this, but it can significantly impact the amount of money you owe/receive at closing.
Title, Escrow & Settlement Charges
In the state of Ohio, title and escrow are generally done by the same company. That is, the people handling the transfer of the deed from the seller to the buyer also act as the third party liaison in the transfer of funds from the buyer to seller, often involving a third party lender.
The actual fees involved in the transfer are relatively low, ranging from $400 to $800 depending on what title company you use. These transfer fees are generally listed as a myriad of small line items on your settlement statement and may include items such as ALTA endorsement, closing fee, closing protection coverage, post-closing services, deed preparation, title search fee, survey coverage, and binder fees.
The largest of the title fees, however, is title insurance. There are two types of title insurance, owner's and lender's. Depending on where you live, how this is paid for will, but in Central Ohio, the generally-accepted practice is for sellers to pay for owner's title insurance and buyers to pay for lender's title insurance. This is baked into the standard purchase contract used by the Columbus Board of Realtors.
Owner's title insurance protects the buyer in the event of a title dispute or lawsuit. Such incidents a rare, but there have been cases of long-lost relatives coming out of the woodwork to stake a claim on a home that was sold from the family decades earlier. More common disputes involve a neighbor's fence or patio infringing on your property line.
Lender's title insurance is just like owner's title insurance, except it protects the lender rather than the homeowner. This policy does not apply if there isn't a mortgage involved or if the lender doesn't require it (though most do).
As a regulated market, title insurance rates are set by the state of Ohio. They generally range from 0.5 to 1% of the sale price. Click here to calculate your rate.
Government Recording & Transfer Charges
"Nothing in life is certain except for death and taxes".
Benjamin Franklin, or perhaps Mark Twain (no one really knows for certain), once remarked these famous words and real estate is no exception to the rule.
Government recording and transfer charges include the fees associated with recording your deed and mortgage with the county. In effect, it's a tax. While the exact amount will vary by location, you can generally expect to spend approximately 0.3% of the sale price here.
Last, but not least, is the loan payoff. The total amount you owe on your home (including any second, third, or fourth mortgages) will be deducted from your proceeds.