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:
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 their property. The seller's lender will be able to assist you in obtaining an approximate payoff figure if you can indicate a tentative settlement date. Don't forget to add a daily interest charge until the lender receives the full mortgage payout.
You should find out if there will be a prepayment 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 in full 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 ask about the policy of the lending institution.
Points. This is one of the least-understood areas of real estate financing. Sellers often question why they have to pay points to help the buyer get a loan.
On VA or FHA financing, the buyer can only pay one point, which is equal to one percent of the loan amount. Market conditions being what they are, sellers may find themselves having to pay as many as three to five points. a
As an agent, you must alert the seller of the obligation to pay these points: There will be a problem if he or she learns about them for the first time 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, as the representative of the seller, to ascertain exactly how much the seller is willing to pay, and to spell these 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 ranges from $20 to $35. But I have seen too many instances where the seller is hit with a sizeable repair bill after termite damage is discovered during this presettlement inspection.
Ask the sellers if they have a current guarantee from a termite company. If so, that company should be willing to send the letter, for free or for a nominal charge.
Water escrow. In Maryland and in the District, water is the only utility that crates a lien on the property. For the title attorney to give free and clear title to the buyer, all liens must be paid and satisfied.
It is standard practice for the settlement attorney 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, however, one must have faith and much patience. It often takes as long as six months to get a final reading from the District government.
Release charges. When the seller obtains mortgage financing, it is usually 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 governmental 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.
Settlement charge. Some settlement offices will impose a nominal charge on the seller its services.