Q: As a recently licensed real estate agent, I am often confronted by sellers wanting to know what they will be charged for closing and settlement costs. Can you summarize these various costs?
A: That's a very good question. All too often we have concentrated on the buyer's charges and ignored or forgotten the seller.
I have analyzed a number of real estate transactions, and the following charges are generally made to the seller:
Real estate commission: The seller should be informed of the dollar amount that will be paid out of settlement for the commission.
Mortgage payoff: Most sellers have at least one mortgage outstanding on the property.The seller's lender will be able to assist you in obtaining an approximate payoff figure, if you give them a tentative settlement date. Don't forget to add a daily interest charge until the lender receives the full mortgage payout. You should also inquire whether there will be any pre-payment penalty. Many of the older loans still require the borrower (in this case the seller) to pay a percentage of the loan if it is paid off infull prior to the full expiration of the mortgage term. In some instances, the prepayment penalty can be avoided, or waived by the lender, and you should inquire as to the policy of the particular lending institution.
Points: This is perhaps one of the least understood areas of real estate financing. Sellers often question why they have to pay points to enable the buyer to get their loan. On VA or FHA financing, the buyer can only pay one point. Market conditions being what they are, sellers may find themselves having to pay as much as three to five points to enable the buyer to obtain the loan. A point is 1 per cent of the loan.
You must alert the seller of their obligation to pay their points, or there will be considerable headaches when the seller first learns of these points at settlement. And don't forget that even under some conventional loans, the seller may be obligated to pay a point. It is incumbent on you the agent, representing the seller, to ascertain exactly how much the seller is willing to pay, and specifically spell those points out in the basic contract.
Termite inspection: Most buyers require that a termite inspection be performed at the seller's expense. Normally, the fee for this service runs between $20 to $35. But I have seen too many instances where the seller is "hit" with a sizeable repair bill, due to termites and damage being discovered by the termite company.
Ask the seller if they have a current guarantee from a termite company. If so, that company should be willing to give the required letter for no cost or at most a nominal charge.Finally, when you make arrangements with the termite company to do their inspection, make sure that they will not do any major repair work without informing you in advance. Since the seller is paying for these charges, the seller should have the option to shop around for another company.
Water escrow: In Maryland and the District of Columbia, water is the only utility that creates a lien on the property. In order for the title attorney to give free and clear title to the buyer, all liens must be paid and satisfied. Thus, it is standard practice for the settlement attorney or company to escrow some money to cover the final water bill. Usually, the office conducting settlement will make arrangements to obtain a final water reading, pay the bill, and refund the balance of the escrowed funds to the seller.
In Maryland, it usually takes about two or three weeks to resolve the water bill. In the District of Columbia, however, one must have faith and much patience. It often takes as long as one year to get a final reading from the District government.
Release charges: When the seller obtained mortgage financing, it usually was in the form of a deed of trust. This is similar to a mortgage, but the property is deeded "in trust" to independent trustees who are authorized to sell the property if a default occurs. When the mortgage is paid in full, the trustees are entitled to a nominal "trustee's fee" and there is a small govermental charge to record the trustee's release. These items are always withheld at settlement and deducted from the seller's funds.
Other government charges: In Virginia, the seller usually pays a grantor's tax. You should ascertain the exact amount of this tax in advance of your client signing the contract. In Montgomery County the seller will now be required to pay a "recapture tax," which is so new - and the formula so confusing - that you are well advised to contact the finance office of the county for further information. Bear in mind however, that the seller will have to pay this tax.
Settlement charge: Some settlement offices will impose a nominal charge on the sellerfor "settlement." In Virginia, this can be quite high - and you should include a ceiling on these closing costs in the contract for sale.