Closing and acquisition costs: who pays what? | Opinion
Real estate sales transactions are quite a complicated production. Unless you buy and sell real estate with some frequency, you will be blown away by all the associated expenses.
For starters, there is no specific list of closing costs. The main ones will be discussed here. Second, and with few exceptions, there is no law that dictates who pays the closing costs of a real estate transaction. It comes down to what the buyer and seller agree to.
When it comes to certain closing costs, there are traditions and customs that prevail in a transaction in Texas and in these cases there are certain expenses that the buyer almost always pays and certain expenses that the seller almost always pays. . Even the contract forms that the State of Texas provides to real estate licensees have closing cost responsibilities assigned to buyers and sellers by tradition. A seller usually pays a real estate commission if the property is listed with a broker. He will pay for the title insurance for the new owner. In the rare event that a buyer pays for their title insurance, they have the legal right under federal law to choose the title insurance company. The cost of title insurance is based on the price of the property sold.
The seller provides a deed of guarantee. The seller provides tax certificates indicating that the taxes on the property are in force or if there are tax arrears due. If the seller has to repay a mortgage, he bears the costs of preparing the lien releases. Sellers pay taxes due on the property from the first of the year through the closing date, plus any overdue taxes. If a seller and buyer agree to non-customary terms, they can change the standard contract language as long as there is no agreement that contradicts the law. For example, under a VA (Veterans Administration) loan, the seller must pay for an inspection for wood-destroying insects (termites, carpenter ants, etc.). There is, however, no law that states that the seller cannot increase the purchase price to cover expenses, as long as the buyer and seller still agree on all terms.
A cash-paying buyer typically has low closing costs. He pays to register the deed in public records and will pay half the cost to complete the sale. The seller will also remit to the buyer the taxes he owes until the closing date because the buyer will receive the invoice for the whole year in October. If a buyer gets a loan, they can expect to pay for an appraisal, credit reports, loan origination fees, usually an investigation if not going through a local lender, preparation and registration of all documents relating to the loan. It must also provide title insurance to the lender, although lender title insurance is very inexpensive.
With respect to surveys and the purchase of undeveloped land, there is no clear custom as to who pays for a survey. Whatever the buyer and seller agree will be the deciding factor. If a buyer is considering using a non-local lender, such as an out-of-town mortgage broker or an internet lender, closing costs can be significantly higher. Don’t be fooled by ads that say “No closing costs”. It is simply not true. These costs will somehow be buried in the loan, resulting in a higher effective interest rate.
If an FHA or VA (Government Type Loans) is involved, there are certain expenses associated with the purchase that federal law will not allow the buyer to pay and the seller will have to pay. What usually happens with this type of loan is that the price will be pushed back to cover these expenses and the buyer will ultimately pay for them through their mortgage payments. Sometimes a buyer will not have the money to cover closing costs and the costs will be added to the purchase price of the property. This mechanism can significantly increase the amount of interest a buyer pays over the term of the loan.
The reality is that a buyer with good credit will almost always be better off looking for financing in their hometown. Local lenders will often have higher interest rates than non-local lenders, so you need to weigh what you’ll save in closing costs against what your higher interest payments will be. How long the buyer plans to own the home can affect whether a local or out-of-town lender is chosen. A competent real estate permit holder can help you with this type of calculation. By law, a lender must provide a buyer with a GFE: Good Faith Estimate of Closing Costs and Monthly Payments. It’s always a good idea to visit more than one lender so GFEs can be compared. Some GFEs have misleading numbers and this is where an agent can help the buyer interpret the data. The federal government has also tightened GFE requirements to more accurately reflect closing costs.
Whenever a buyer and seller transact between them, they must have a contract drawn up by a lawyer so that whoever pays for what does not become a point of contention at the closing table. Banks and title companies will often require the parties to obtain a contract so that disputes do not arise at the closing table. Some real estate dealers, for a small fee, can draft a contract using Texas forms. No buyer or seller should ever have an agreement in which one party forces the other to agree to pay “all” closing costs without specifically stating what those costs are and what the maximum dollar amount for each of those costs should be. .
Many other costs can be associated with the acquisition or disposal of a property. Today, most buyers have the homes they buy inspected. This is a cost that may be incurred even if the sale does not close. In most cases, inspections are a good idea, since most sellers aren’t aware of every little flaw. Once an agent had to hit me three times on the head before I agreed to have the furnace inspected on a house we were buying. It was mid-February and the oven had a cracked heat exchanger and was emitting carbon monoxide. Regardless of the time of year, vendors had to turn off the furnace. The sellers also gave us a credit for a replacement oven. The $60.00 spent on the inspection was a drop in the bucket and a potential lifesaver.
A typical whole-home inspection by a licensed Texas inspector (don’t use any other!) can cost anywhere from $300.00 to much more depending on the size and construction type of the home. Wood-destroying insect inspections can cost around $125.00 and are money well spent for many types of residences. A few years ago, we were involved in a commercial transaction where the buyer had already spent $500.00 for a building inspection and an additional $2,400.00 for an environmental inspection. Inspection revealed that there had been a “promiscuous” spill on the property. The lender, in order to protect themselves, then demanded an additional inspection which probably would have cost as little as $10,000.00. The case died because the buyer did not want to spend $10,000.00 without knowing if the seller would be willing to remedy any contamination found; and, if contamination had been discovered, the Texas Commission on Environmental Quality would have required remedial action that could cost tens of thousands of dollars. The consequences of buying the building without further inspection could be devastating for both seller and buyer.
Incidentally, when Southern Multifoods purchased the southeast corner of South Jackson and East Rusk Streets in 1998, the vendor had to spend over $25,000.00 to remove the contaminated soil. There was a gas station on this corner decades ago.
Sellers often end up incurring expenses they never imagined. In the example above, the seller had to take a few thousand dollars out of their net proceeds because of the furnace. There are occasions when a seller’s title is defective because the seller may have a judgment against him that must be satisfied in order to convey clear title; or additional owners (such as heirs) come out of the woodwork and the seller has to incur legal costs to get all rightful owners on board. Again, another reason why lawyers – like it or not – and title reviews should be part of any real estate transaction.
Mike McEwen is a real estate broker with 33 years of experience in the field.