“Closing” occurs when the title of a property is transferred from the seller to the buyer. There are costs associated with that transfer for both the seller and the buyer.
Starting with the seller the types of closing costs that could be involved include:
- Mortgage payoff
- Title Fees
- Filing/recording fees
- Association fees
- Miscellaneous negotiated items
The Mortgage payoff is just as it sounds. The closing agent contacts the lender to get the exact details of pay off so that the amount due can be calculated for the date of closing. If there is a Home Equity, or second mortgage, that information is gathered as well. At closing, the amount owed is deducted from the proceeds that the seller has due to them and those funds are paid directly to the lender or lenders to pay off that loan.
The second item are the taxes that will be due. In FL there is no income tax so when real property is sold the a Documentary Stamp Tax is assessed on documents that transfer the interest, or deed, of a property. The Doc Stamp is levied at a rate of 70 cents per $100 of the purchase price. The Florida Department of Revenue has a great page that gives various examples of how the taxes would be calculated if the transfer of the deed is anything except a regular sale. A $300,000 sale could expect a documentary stamp tax of $2100.
Property taxes in FL have an ad valorem and non-ad-valorem, assessments. Ad Valorem are based on the calendar year from Jan 1- Dec 31, and are paid in arrears. In other words, you pay for 2020 at the end of 2020, not upfront or as you go. The tax is based on the assessed value of the property. NON ad valorem taxes are not based on value, but a unit of measure determined by the levying authority. For example, the county may have an assessment for fire and rescue, storm water utility, and solid waste collections. These are paid at the beginning of the year. As part of the closing the party handling the closing will determine who owes what based on the closing day. Let’s say you are closing on the purchase of the property on May 15th. The seller would owe taxes from Jan 1- May 14th. The buyer “owns” the closing date, so they would owe from May 15th to Dec 31st. The closing agent will calculate and prorate so that each party only pays what they owe. Since Ad s are due at the end of the year they will owe their portion as a credit to the buyer. However, the since the seller has already paid the non-ad velorm taxes, the buyer will owe a credit back. This is all calculated and will be reflected on the settlement statements.
Commissions are the next item that would be on the seller’s closing costs. Typically, the seller pays one Brokerage a fee to list, advertise, sell, manage the transaction, and pay a buyer’s agent’s fee. Commissions are set by the broker of each firm. There is no “standard” fee to be set for an area as that would breach the Sherman Anti Trust act by having brokers conspire together to set prices. Can their be a “typical” fee? Yes. When I meet with a potential seller to give a listing presentation part of my market analysis is to include what their competitors are offering as a commission to the buyer’s agent so that they can make an informed decision as to what they want to offer the buyer’s agent.
For the example of this discussion only, let’s say that all the competitors are offering 3% commission. It wouldn’t be in the seller’s best interest to offer 1% as agents may not rush to show their home. By the same token, if a seller really wants to get attention to their home and hope for a quick sale, they may offer 4%, or a bonus to the buyer’s agent if the home is under contract in the first 30 or 45 days so that their offering is more appealing. These are all strategies that I go over with seller’s because ever sale is different. Every seller has a different motivation and time frame and one cookie cutter solution won’t work.
Next, are title fees. In order to clear a title for sale a closing agent must do a title search a municipal lien search, and so on. These fees are typically itemized on the ALTA, which used to be the HUD, and are a fancy way of saying your settlement statement.
After that are the filing and recording fees. These are usually small. Less than $100. It is paid to record the deed in the name of the buyer and release it from the seller. The county charges a fee to title company so this is passed on to the appropriate party.
Next are Association fees. If the property being sold is in a community with a Home Owner’s Association or is a condominium there are fees that are associated with these associations. The closing agent needs to determine exactly which party in the transaction owes what. In order to do that they get what is known as an estoppel letter from the HOA and, or the condo association.
This letter will come from the company that manages the appropriate association. The details of the letter explain what the exact fees are, when they are due, and what has been paid. These details are necessary to keep one party from claiming something as a fact that isn’t true. In other words, the seller could claim they have paid the HOA dues for the entire year and the buyer owes them a credit back for the overage paid. Or, they could claim they are current with their dues when in fact, they are three months over due. This official letter, that is signed and dated by the association manager provides legal details to certify that a certain chain of events is due and that each party will only pay what they owe and not more.
Finally, there are the miscellaneous negotiated items. Since this list could go on Indefinitely with “what ifs” this list will only cover the most common.
- Title Insurance – First, what is title insurance. A title is insurance that protects the buyer of a property in case issues arise with the property not covered by a title search. If an issue arises, you could lose the rights to your property even after closing on it. Title insurance protects you in these circumstances. If the buyer gets mortgage, title insurance is required by the lender to cover their portion. Title insurance covering the buyer is optional. Who pays for this insurance is part of the contract negotiations. Although it can always be either the buyer or the seller, it is common for the buyer to pay the title insurance in Sarasota County and for the Seller to pay it in Manatee County. Even though the rates are set so that no matter where you get the title insurance the price is the same, who ever is paying for it gets to be the one to pick who the closing agent is as well.
- Home warranty- there are several home warranties available that have varying costs and coverage. While a buyer can opt to purchase their own, they can also request that the seller cover the warranty. Costs vary from a few hundred to close to a thousand dollars depending on what all is added, like coverage of a pool and the equipment, adding ceiling fans, sink faucets and so on.
- Buyer’s closing costs could be included. Many people are in the position that they have good credit and enough money to put down their deposit but not enough to cover closing costs. Rather than negotiating a discount on the price they pay a little more, but then ask for a seller’s concession toward closing costs. Maximum contributions have been set depending on the type of loan a buyer is getting.
- For example, Conventional loans the most a seller can contribute is 3% of the sale price. For an FHA loan, it is up to 6%, and for a VA loan it is usually 4%. These can change so it is always best to discuss it with your lender if you have any questions.
- Special Assessments. If the HOA or condo association has a special assessment in place to resurface the parking lot, or fix the pool, or whatever they may be working on, that fee is usually divided between the buyer and seller. The seller pays what is due while they own it and the buyer covers what is due during their ownership. However, during negotiations the seller may agree to pay a larger sum than is “their share” or even pay off the assessment.
- Repair allowances. If the home needs a new roof, flooring, appliances, or any other upgrade or repair, rather than doing the repair before closing an amount is negotiated. Let’s say there is older carpet that is stained and needing to be replaced. The buyer doesn’t want to pay for it because it isn’t in usable condition. However, the buyer does want to pick their own flooring. Maybe they want tile or hardwood instead. Rather than having the seller replace the flooring, an amount of money is agreed on by both parties. That amount of money is subtracted from the seller’s proceeds and credited to the buyer reducing their amount due at closing.
Those are the most common fees for the seller to expect at closing. The good news is, if the seller has equity in the home, they don’t have to bring cash to the closing table. All the fees above are calculated based on the date of closing and subtracted from the proceeds. Everything that is owed, taxes, commissions, association dues, are all paid directly by the closing agent to the company to which it is due. The seller can get their portion as a check—which may have a week to ten day holding period before they can use the funds which is set by their bank. Ask them if you aren’t’ sure. The seller can also get their funds by wire transfer. Typically, this happens quickly and there is no hold on the funds. The closing company wires the funds to the seller, and once their bank releases it the funds are available almost immediately.
From my podcast “Selling Sarasota”: