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Closing costs for home sellers can be rather expensive. It's not uncommon for a seller's closing costs to approach 10% of the home's selling price, which would translate to a massive $50,000 expense on a $500,000 home sale.
With that in mind, here's what all home sellers should know about the closing costs they might have to pay, why seller closing costs could be even more in some cases, and whether any of the closing costs are negotiable.
What are closing costs?
The term closing costs refers to any expenses that must be paid upon the closing, or finalization, of a real estate transaction. Real estate closing costs can be paid to real estate agents, local governments, lenders, and more. Some closing costs are traditionally the responsibility of the seller, while others are typically paid by the buyer, although there are several examples of closing costs that could end up being paid by either party to the transaction.
Real estate commissions are the seller's responsibility
In most real estate sales, the bulk of the seller's closing costs come in the form of commissions paid to real estate agents. This is because the seller typically pays the commissions to both their listing agent and the buyer's real estate agent.
The industry standard for real estate commissions is 3% of the sale price each to the buyer's agent and the seller's agent, so 6% altogether. This isn't set in stone, and we'll discuss some of the ways you could potentially reduce this expense when selling your home, but it's the most common form of commission structure in the U.S. real estate market.
Just to give you an idea of how big of an expense this is, my wife and I sold a home several years ago with a sale price of $390,000 and ended up paying $23,400 to cover commissions alone.
List of closing costs a seller can expect to pay
In addition to real estate commissions, there are several other closing costs that home sellers might have to pay. Just to name some of the most common (but this is not an exhaustive list of possible costs), seller closing costs may include:
- Title insurance: This is a form of insurance that will protect the buyer in the event that someone else claims ownership of the property. For example, if it turns out a contractor has a lien on the property that nobody knew about, or unresolved loans come up years down the road, the buyer will be protected. Even though title insurance is clearly for the benefit of the person you're selling the home to, it's typically an expense paid by the seller.
- Transfer taxes: This tax covers the cost of formally passing legal ownership of the property to the new owner. This can vary dramatically by geographic location and sale price, ranging from less than $100 to more than $10,000 in some cases.
- Property taxes: Many first-time home sellers don't realize this, even if they've owned the home for many years, but we generally pay property taxes in arrears. That is, the bill you paid at the end of 2019 or in early 2020 was for your 2019 property taxes. Because of this, sellers are expected to cover the portion of the upcoming property tax bill for the period of time they owned the home.
- HOA dues: If your home is in a neighborhood with a homeowners association (HOA) or condo association, there are likely to be some fees associated with that. For one thing, you'll need to cover the property's HOA dues until closing (but if you've pre-paid any of your dues, you may get some of them back). And many HOAs charge a modest transfer fee when the property changes hands.
- Legal fees and/or escrow expenses: If you've ever been through the homebuying or selling process, your closing probably took place in an attorney's office or with an escrow agent present. To put it mildly, attorneys and escrow companies don't work for free. Expect to see a fee for this service on your closing statement.
Should a seller pay for a buyer's closing costs?
In addition to these expenses, it's not uncommon for a seller to cover some of a buyer's closing costs as well. This can either originate from an offer from a seller in order to attract interest to a home or from a buyer who requests seller-paid closing costs as part of their offer.
Buyer closing costs tend to run anywhere from 2% to 4% of the purchase price, although higher or lower amounts are certainly possible. Just to name a few, buyer closing costs commonly include:
- Appraisal fees.
- Mortgage origination fees or discount points paid to the lender.
- Inspection fees.
- Title insurance for the lender.
- Prepaid property taxes and homeowners insurance (also known as prepaid escrow).
- Credit report fees.
- Application fees.
Seller-paid closing costs are especially common when buyers don't have much cash available for a down payment and want to buy the home with as little out-of-pocket expense as possible. When my wife and I bought our first home, we used an FHA loan with 3.5% down -- a very common method for first-timers. We negotiated a purchase price of $336,000 for the home, but we ended up offering $346,000 with $10,000 in seller-paid closing costs to keep our out-of-pocket requirement as low as possible. In a situation like this, paying a buyer's closing costs makes no net difference to the seller and can greatly expand the pool of potential buyers who are more worried about their down payment than the size of their loan.
Are any of a seller's closing costs negotiable?
A few of these expenses may be flexible -- such as by calling a few title insurance companies to compare prices. However, most seller closing costs aren't. For example, transfer taxes are set by local governments, and your property taxes and HOA dues are outside of your control in most cases.
However, the largest component of seller closing costs -- real estate agent commissions -- is absolutely negotiable. In fact, I'd go so far as to say that no home seller in today's real estate environment should have to pay 6% of the sale price in commissions to sell their house. Just to name a few ways you could reduce -- or even eliminate -- your sales commissions:
- Several so-called iBuyer programs exist that buy homes directly from sellers, such as Zillow (NASDAQ: Z) (NASDAQ: ZG) Offers. These can not only eliminate commissions but can give sellers more control over the timing of the sale.
- Disruptive real estate brokerage companies like Redfin (NASDAQ: RDFN) offer significantly lower selling commissions than most agents charge.
- Because of disruptive forces like these two, many real estate agents are willing to negotiate their commission structure to attract business. This is especially true in cases where your listing agent and the buyer's agent are the same person.
The bottom line is that seller closing costs are part of the home-selling process that you'll have to deal with. However, with some work, you may be able to dramatically reduce the largest part of your closing-cost bill.
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