How much are closing costs?
Perhaps the most common and most easily avoided frustration related to closing is simply the shock of the cost. Sellers and buyers are aware that they are paying for an application fee, various inspections, property taxes, transaction fees, commissions, etc., but don’t necessarily stop to add it all up. When they finally see their estimated closing statement, they are unpleasantly surprised.
How do you avoid closing cost surprises and save? While many of these charges are unavoidable, some can be negotiated. In any case, by being aware of them and keeping track of them, buyers and sellers can at least eliminate that sinking feeling when they’re staring at the numbers on their closing statement and realizing that their payment isn’t going to be what they thought it was.
How much should I budget for closing costs?
Unavoidable closing costs or not, having an idea of what your closing costs will be can help you budget carefully and prevent getting yourself into a helpless situation. Did you know the average home seller can spend almost $5000 just trying to prep to sell your home? Though it’s virtually impossible to know the exact amount you’ll need to spend, you can get a decent understanding of what it will look like. Do your best to keep track of the updates and changes you need to make so you can get an approximate calculation on what you might need for mortgage closing costs.
For a ballpark reference, closing costs average out to between six and 10 percent of the total sale price. Make sure you read your seller’s contract so you know exactly what is expected on your end as the seller.
Common closing cost
roadblocks to avoid
some closing cost frustrations happen during the final walk-through. Just before the deal closes, buyers can (and should) do a final walk-through, to ensure the property is in the same condition as when they agreed to purchase it (and when they had it inspected), and also to verify that the home is now empty. Sometimes it isn’t! Most commonly, a few unwanted items – or trash – has been left behind. While this is unlikely to be a deal-breaker, even something as minor as the seller leaving behind a dirty house can delay closing if the buyer insists it be cleaned up. Sellers want to be exact and thorough when both cleaning their house and doing a final walk-through.
Sometimes, though, there are more serious issues that you’ll want to carefully avoid to get the cheapest closing cost. Knowing these scenarios will help you avoid unnecessary headache and cost.
– Agreed-upon repairs have not been done. While a buyer might agree to close escrow if the issue is an unswept floor, they probably won’t want to close if agreed-upon repairs have not been completed!
How to avoid this: a good buyer’s agent will make sure that repairs were completed before the final walk-through. Proactively looking out for the buyer’s interests is one of the main reasons people hire buyer’s agents in the first place. If that didn’t happen for whatever reason, and everyone wants to avoid delaying closing, there are several options:
a). The seller can agree to credit the buyer for a certain amount.
b). A certain amount can be retained in escrow to cover the needed repairs.
c). All of the seller’s funds can be held in escrow and not released until the repairs have been made.
Obviously, these options only work if the buyer and seller can agree on a course of action. That might be another incentive to be sure all repairs are taken care of to avoid this conflict to begin with. Other property and house related malfunctions can cause the same problems during your closing process.
– Promised fixtures or personal property are missing or broken. Maybe the buyer specifically negotiated for the crystal chandelier in the dining room – and now it’s gone. Or more commonly, the stove or washing machine that was included in the purchase is no longer working.
– Walls or floors are damaged. When sellers remove televisions and other wall-mounted devices, the walls left behind can look pretty bad – which isn’t the way they looked during the home tour or the home inspection. Walls and floors can also be damaged during the process of the sellers moving out.
How to avoid this: It may be impossible to avoid some damage. But sellers, don’t just hope that the buyers won’t notice the big dent in the floor or the gaping hole in the wall! If you noticed it, chances are they will, too. Go ahead and fix these things before the walk-through and avoid delaying closing.
– Landscaping maintenance has been neglected. Sometimes when sellers are busy getting ready to move, they neglect the yard. Maybe they even canceled the gardener, wanting to save money in advance of their move. But as a buyer, being confronted by grass two feet high in the front yard can be a nasty shock.
How to avoid this: Buyers can have a clause in their purchase offer stipulating that the sellers must continue to maintain the yard up until close of escrow. Short of that, a credit (perhaps $100) towards a good yard clean-up may be all that is necessary.
– Utilities have been turned off. Sellers, in their eagerness to move on to their new home, may prematurely turn off the utilities. But, it’s not possible to test appliances or the HVAC system without electricity. Buyers have the right to have the utilities on during the final walk-through so they can verify that all the systems are working. It can sometimes take days to get the water, gas, and power turned back on – and that means a delay of several days in closing.
How to avoid this: Sellers, remember your final walk-through! This is part of the deal and can’t properly happen without the utilities.
Then there are the problems not relating to the walk-through. Some of these are even more serious.
– The buyer’s financial situation changes. Some buyers don’t realize that if their debt-to-income ratio changes suddenly, so might the bank’s willingness to loan them money! If buyers take on new debt before closing, this will almost certainly have an impact and may cause the lender to back out entirely. Similarly, if a buyer’s job situation suddenly changes, the lender may no longer wish to fund the loan.
How to avoid this: Buyers may not have much control over whether or not they lose their job, but they certainly can control taking on new debt. Don’t do it! Wait until after the home has closed.
– The buyer’s homeowners insurance has been denied. Maybe the buyers thought this was not an issue, and now, at zero hours, it turns out to be. While the buyers can almost certainly get insurance somewhere else, this won’t happen instantaneously.
How to avoid this: Buyers should apply for insurance with more than one insurance company – and then pick the policy that best suits their needs.
– The house does not have clear title. You may wonder what “clear to close” means in real estate. It means that the owner is actually the one fully authorized to transfer ownership — and that all outstanding debts secured by the property (such as mechanics liens or tax liens) will be paid off. If the seller is willing (and able) to do this, then escrow may close on time or with only a slight delay. If the lien has already been paid, the issue can usually be cleared up with a release-of-lien – but again, getting this paperwork in place may cause a delay. However, if the seller truly does not have clear title to the property (maybe there is a co-owner they didn’t disclose), then the whole deal is likely off.
How to avoid this: Do a title search at the beginning of escrow! Try to uncover problems before getting too far into the process. You may also want to read How To Prevent A Lien From Ruining Your Home Sale.
Of course, there are an almost unlimited number of things that can go wrong in escrow, from death and catastrophe to divorce and changes-of-mind. You can’t prepare for them all, but this list covers many of the most common pitfalls. Moreover, if you have good people on your side (an agent, attorney, and/or title officer), chances are you can work out the problems that arise even if you weren’t prepared for them. While escrow and closing can seem like a mysterious process, there is actually a well-defined roadmap in place to protect both buyers and sellers during the transfer of property. Sure, delays can be frustrating, but it’s better to get it right than to rush things and pay the price down the road. It’s easy for closing costs to rack up when you don’t know common hidden costs. Don’t let them sneak up on you!