Selling Your Home

 

Closing and Closing Costs


The Final Step

Sold sign
Almost Done!

Closing is the final official step in the transaction process. It consists of a meeting – often at a lawyer’s office – with you - the seller, the buyer(s) or a buyer’s representative, and usually a real estate attorney or other closing agent. The mortgage lender may also be present, along with others.

Real estate companies often facilitate filing the appropriate paperwork to the various agencies – all part of the fees you pay at closing.

For many sellers, understanding the closing is the most confusing piece of the process. It involves:

  • Structuring and paying a variety of costs, called “closing costs”
  • Paperwork to comply with federal, state, and local laws, including disclosures, tax reporting, and other filings.

A qualified real estate attorney can explain or facilitate the paperwork, and before the actual “closing,” your agent should help you with an estimate of your closing costs. These are specified on what’s called a Settlement Statement, or HUD-1, at the actual closing meeting.

What are the Closing Costs?

Transfer Taxes

Be sure to find out about transfer taxes in your state and locality before settlement/closing. Certain localities have surprisingly high tax rates that can run into thousands of dollars, making a significant difference in your net proceeds at closing.

If you use a real estate attorney at closing, expect the following types of fees:

Broker or agent’s commission: the 5 or 6% commission you agreed to pay upon sale of your home. This amount is typically split between the seller’s agent and the buyer’s agent. If you have not used an agent, the buyer’s agent will get his or her (most likely) 2.5 or 3% (purchaser's agreement)

Attorney fee: typically a flat fee which may range from $300 to $600, depending upon the attorney, your location, the market you are in, and so on. Some attorneys will charge a higher flat fee to a seller who is without a broker.

State transfer taxes: Depending upon where you live, there may be taxes imposed at a state and local level, based upon sales price. These are called "transfer taxes", and they are assessed on real property when ownership is exchanged. For example, Kentucky assesses 50 cents per $500 of sale price at the state level and nothing at the local level. Other states have more complex schemes for transfer tax, at state, county, and city levels. Some states have no transfer tax. Some cities require the buyer to pay the transfer tax. 

Title Insurance: Sellers are often required by contract to pay for title insurance. This insurance is usually based upon the value of the sale. Title insurance guarantees the buyer that the property is owned, free and clear, by the seller, and protects the buyer in the case of any liens or other problems with clear title to the property. The few hundred dollars for title insurance is something that is typically recommended.

Survey: A seller is usually required to provide a property survey to the buyer. The survey shows the exact boundaries of the property.

Real estate taxes, and other tax credits: Since property taxes are paid in arrears, the new buyer of your home will receive the property tax bill for a period of time when they were not in possession of the property. As a result, sellers typically give a credit which is prorated towards the amount of real estate tax owed. Calculation of these credits is an estimate, and may also include other related municipal taxes that are typically held in escrow by the mortgage company – for sewage or other services.

Payoff of Loan: As the seller, you will need a payoff letter with the exact amount of the outstanding balance on your (mortgage) loan. This payoff amount will include principal plus interest that is outstanding as of the date of sale. Proceeds from sale of the house will be used to pay off the outstanding loan.

Other fees: Other amounts you may have agreed to pay at closing will also be included. These may include amounts for filing paperwork, messenger services, and so on.

Tax deductibility: Talk to your realtor and your financial advisors about how you structure closing costs versus sale price, cost of repairs, and so on. Certain closing costs are tax deductible. Take advantage of the opportunity to deduct what you can.

Net proceeds from the sale: Here’s what’s left – these are the monies that remain for you to invest, to purchase your next home, or for some other purpose.

 

Potential complications to a successful “Close”

The period of time between the contract and the actual closing can be an anxious one. You know you have a mountain of paperwork ahead, and Murphy’s Law can always kick in.

What kinds of things can go wrong? And how can you prevent them?

What Can Happen? How to Handle it?
Buyer’s financing falls through   Working with qualified buyer’s  agents means they’re more likely to pre-qualify their clients financially, reducing the likelihood of this happening
Buyer’s financing is insufficient due to appraisal coming in too low – for example, the buyer offered $200,000, but the appraiser said the house is worth $185,000. If your home appraises too low, double check the appraisal – there could be a mistake (e.g. appraiser pulls comparables from wrong neighborhood). If not a mistake, ask for a larger down payment, or ask your realtor about creative financing options to make up for the amount the lender will not cover
Coordinating two closings at once (selling your home and buying another) Properly written contingencies in both contracts help protect you, should anything go wrong with one or the other. Get cooperation of all agents; discuss scheduling both closings to take place using the same location and service providers, one meeting following the other. If that isn’t possible, schedule closings as close together as possible. Allow sufficient time for moving out and moving in of all parties.

 

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