Up Pops the Real Price Tag
At the End, Buying Costs Thousands More Than You Thought

By Dan Rafter
Special to The Washington Post
Saturday, December 8, 2007

Real estate agent Carol Temple vowed not to let her clients lose the sale. But she had to admit that the prospects looked bad: The buyers for her clients' home showed up at the closing table with a certified check that was $2,000 short of the actual amount they needed to close the deal.

And they did not have the extra money in their bank account to make up the difference.

"Me, the seller, the closing attorney, we all had a sour taste in our mouths because of this. The only ones who seemed oblivious to it were the buyers," said Temple, an agent with the Arlington office of Coldwell Banker Residential Brokerage.

This is an extreme example of what can happen when people are surprised by exactly how much money they need to buy a house. Buyers may agree to pay $400,000 for a home, but they will need to shell out more than that when it's time to close on the deal.

How much more? That depends. But a house's purchase price is just the beginning of what buyers must spend to get into a new residence. There are plenty of fees to pay on closing day, and more bills to come.

In Temple's case, the buyers came woefully unprepared for these extra costs and fell short of the closing costs on their loan. Fortunately for Temple and her clients, the buyers' agent agreed to drastically reduce her commission, thus lowering the amount of expenses on the sellers' side and allowing the sale to close.

But if that agent had been doing her job -- or if the lender and the buyers themselves had done theirs -- the situation never would have reached such a dire point, Temple said.

"There should never be any surprises at the closing table," she said. "Buyers should always know exactly how much money they need to close a deal. It should all be cut-and-dried by the time they sit at the closing table."

Mortgage lenders do provide buyers with a copy of what is known as a settlement statement, or HUD-1 statement, an official listing of the exact costs of the real estate transaction for both the buyers and sellers. Buyers, though, are only guaranteed access to this form from their settlement company one day before the transaction settles.

Real estate professionals across the region agree that buyers, especially first-timers, are sometimes unaware of the real cost of buying a home. Fortunately, they say, it's a problem that a little education can solve.

"The first time I meet with clients, they get so much information that their eyes start to glaze over," said Dennis Melby, an agent with the Bethesda office of Long & Foster. "But I do go over all the costs associated with buying. It's a continuous education process. Buying a house is something that most people will do at most three times in their lives. You forget all that goes into it after 10, 20 years."

The extra costs of buying a home aren't minor. On a house that costs $400,000, they can run as high as $8,000 to $16,000. That's why it's so important for buyers to budget carefully before they reach the closing table.

When purchasing a house for the first time, buyers often worry about coming up with that 3 to 5 percent down payment, especially now that no-down-payment loans seem to be a thing of the past.

But what they sometimes don't count on is that the closing costs that go along with a mortgage loan usually add another 2 to 4 percent of a home's purchase price to their out-of-pocket expenses.

That can be a burden for buyers, especially because it comes on top of a down payment for which many people spend a long time saving.

"A lot of first-time buyers mix up the down payment and the closing costs," said Ginger Groene, an agent with Re/Max Allegiance in Alexandria. "They think if they're buying a $300,000 house that they have to put $9,000 down." That would be a 3 percent down payment.

"They don't figure on the 2 to 3 percent that closing costs will add to it. They'll need to have at least 6 percent of the purchase price in the bank to get the process started. When some buyers hear this, it really throws them." These days, sellers increasingly agree to cover some of these costs to close a deal, but any seller help must be negotiated upfront. And lenders put limits on how much the seller can contribute.

Closing costs include a wide variety of fees, such as transfer taxes, title insurance, appraisal fees and document-preparation charges.

The best way for buyers to find out about these charges is to speak with their lender and their real estate agent. Agents often can provide buyers with a list of possible closing costs. A Web site of the Department of Housing and Urban Development, http://www.fha.gov/buyer/closing.cfm, also contains a listing of potential closing costs and settlement fees.

Costs continue beyond the settlement table, too. Groene recalled a couple who worked with her to purchase a home in Haymarket. Unfortunately, they stretched themselves too far financially, taking out an adjustable-rate mortgage to get into a $750,000 house. When the loan adjusted, they faced far higher mortgage payments.

The ending of the story isn't a happy one: "Within a year, they had to get second jobs, get rid of their nanny, move and look for someone to rent their home, the whole nine yards," Groene said. "They should have known better. They bought a 5,000-square-foot home. It was gorgeous, but it was too much for them. They didn't factor in everything they would have to pay to buy and own that large of a house."

A Taxing Situation

After closing costs, local taxes are probably the biggest surprise to inexperienced home buyers.

In the District, for example, home purchases involve two separate levies, a recordation tax and a transfer tax. Buyers usually pay the recordation tax while sellers handle the transfer tax, though this is negotiable. The setup may vary in other regions depending on local customs.

For some buyers, the D.C. recordation tax recently increased. On Oct. 1, 2006, for all home purchases of $400,000 or more, the tax rose from 1.1 percent of the residence's purchase price to 1.45 percent. For homes under the $400,000 limit, the fee remains at 1.1 percent.

In Maryland, there's a state transfer tax of 0.5 percent of a home's purchase price. (It's less if the buyers are first-timers.) On top of that, there's a county transfer tax that varies according to where the residence is. Then, depending on the county in which buyers are purchasing, they pay recordation fees that range from $2.20 for every $500 of a home's purchase price to $6 for every $500.

For a $300,000 home, recordation fees in the costliest county -- Frederick -- add up to $3,600. Again, it's customary for buyers to pay for recordation and sellers to pay for transfer, but that's negotiable.

In Virginia, the state charges a recordation tax of 25 cents for every $100 worth of a home's purchase price. Again, counties and cities may charge their own recordation taxes on top of this. The sellers usually pay what is called a grantor's tax, rather than a transfer tax. Taxes in general can be a mystery to first-time buyers, said Kevin McDuffie, a real estate agent with the Dupont Circle office of Coldwell Banker Residential Brokerage.

"The cost of buying a home here in D.C. can be a real shocker," he said. "The taxes and fees are just one more thing that adds to the costs. I consider it my job to be upfront with my buyers and let them know at the start that they'll be facing these fees."

Holly Worthington, an agent with the Chevy Chase office of Long & Foster, said real estate agents should educate buyers on the tax and closing-cost fees they face. This is especially important when buyers work with lenders that aren't local.

"Too many agents don't do a separate evaluation of the good-faith estimate that lenders give to buyers," Worthington said.

The good-faith estimate is an important tool for buyers. As its name suggests, it lists the estimated closing costs and settlement fees that buyers need to pay to receive their mortgage loan. Mortgage lenders are required to provide their customers with this estimate when the borrowers apply for their loan. If the lender or mortgage broker does not provide the good-faith estimate when borrowers apply, it must be mailed or delivered within the next three business days.

Buyers need to remember, though, that the good-faith estimate is only an estimate. Several of the closing costs listed on the estimate may be higher or lower at the settlement.

An official accounting of closing costs comes with the HUD-1 Settlement Statement. It lists the exact costs of the real estate transaction. Buyers are supposed to be allowed to study this form one day before settlement.

But because the good-faith estimate is not an exact listing of charges, Worthington advises her clients not to rely on it.

"Many times a lender will not be well-versed in how transfer taxes are charged in a particular area, for instance," Worthington said. "A Realtor in that area should know this. But if the agents aren't evaluating the good-faith estimate, they won't be able to find any possible mistakes. That's something that can lead to surprises at the closing table."

Settlement isn't the end for taxes, of course. Buyers also need to be careful when researching the property taxes on residences -- that is, what they will owe the locality each year they own.

In the District and Maryland, property tax increases on many residences are capped by law.

However, when new buyers purchase the home, that limit on property taxes disappears, and buyers may be surprised to see just how high their property taxes can soar. The Montgomery County Council this week approved legislation that will require sellers to disclose likely increases, starting next year.

"You'll often see a tax bill jump in the region after closing," McDuffie said. "A property's tax bill may not have gone up proportionally to the area's normal tax rates. You buy that same property and you'll have your taxes restructured. Suddenly you'll be facing some taxes you didn't expect to pay."

Assessments Add Up

Many other costs of buying a residence, of course, show up long after the real estate transaction is closed. This is especially true when buyers are purchasing residences in condominium buildings or subdivisions that come with association fees.

Buyers are usually prepared to pay monthly fees for lawn-mowing, snow-shoveling and other services. But there are times when people buy into a development only to find that their condo's board of directors is on the verge of levying a special assessment to repair that cracked outdoor swimming pool or to renovate that dreary entrance hall.

This new fee can add a significant amount to monthly payments.

"These fees may be about to be approved and not yet appear in the condominium documentation," Worthington said. "A cursory look at the conditions in the building may give buyers an idea that an assessment may need to be charged to fix something.

But these special assessments can be a surprise to a first-time buyer. They don't happen often, but they do happen."

Buyers most likely won't be able to predict future special assessments. But they can at least ask the association's board members if they are planning any large projects that will call for special fees.

Maintenance Matters

There's another cost that home buyers can never predict with anything near 100 percent accuracy: the bills for maintenance.

Educated guesses are possible. It may be safe to assume that a 100-year-old home will require more dollars for upkeep than will a two-year-old residence. But even then, nothing is certain.

That's why agents say that buyers should always spend the $250 to $450 that a home inspector typically charges. Inspectors are paid to comb through a residence while searching for faulty systems, leaky roofs, patches of mold, potentially leaky basements and other costly problems.

But inspectors are not infallible. They miss things. And some problems can't be spotted. That's why homeowners should set aside a budget for maintenance and repair projects every year.

"The worst is when inspectors don't find a problem that turns out to be an expensive one after the buyers purchase the home," Worthington said.

"It happens occasionally. No one can predict that. But you need to have some money set aside for potential repairs. You don't want to get behind financially if something does go wrong."