A real estate transaction comes with various costs that can be sizable. While most people are familiar with the expenses of investing in real estate, few are aware of the costs of selling a house. In fact, it is fairly common for a home seller to be completely surprised by these closing costs at the end of the home selling process. So what are the closing costs for the seller? And what does the seller have to pay when selling a house? This article will focus on closing costs for a seller and go over the expenses you will incur when you sell your house.
Related: 20 Tips for Selling Your Home in 2020
What Are Closing Costs for Sellers?
Before explaining what closing costs for a seller are, we must first define the concept of closing in real estate. House closing refers to the final phase of contract fulfillment. In other words, this is when the agreement between buyer and seller is finalized and all the relevant documents are transferred. This process goes through a third party that ensures compliance with all contract conditions.
Closing costs in real estate involve several expenses for both the buyer and the seller. Figuring out who pays which closing cost can be quite confusing at times. To make everything clearer, let’s take a deeper look at the closing costs for a seller and a buyer upon the conclusion of a real estate deal.
Buyer’s Closing Costs
Buyer’s closing costs tend to be higher than closing costs for sellers. Here is a list of some of the real estate closing costs that a buyer can expect to pay:
1- Application fee
The first cost for buyers is the application fee. This is an amount of money that the lender charges in order to process the loan application.
2- Title search fee
Carrying out a title search is essential if the lender wants to ensure that there are no issues with the investment property’s ownership. Generally speaking, a title search company handles this process for the buyer.
3- Lender’s title insurance
Besides the search fee, buyers also incur the cost of insurance for the property title. This is often requested by the lender for the purpose of protecting against any liens that the title search failed to identify.
4- Inspection fees
These fees cover a wide range of home inspections. The most common costs are pest inspection and lead-based paint inspection. The fees are typically paid to a certified home inspector.
5- Appraisal fee
This is another fee that lenders require from buyers. In fact, a professional appraisal is extremely important for lenders since it allows them to determine the fair market value of the income property as well as the borrower’s loan-to-value ratio.
Seller’s Closing Costs
Here are some of the main costs that you should expect when selling your house:
1- Buyer’s title insurance
Much like the lender’s title insurance fee that the buyer incurs, the fee for the buyer’s title insurance falls on the seller. The cost for buyer’s title insurance varies depending on several factors, but the average fee tends to be around $800 to $1000.
2- Attorney fee
Attorney fees are not always applicable. However, some sellers prefer to hire an attorney to handle the closing process. Attorney fees can be anything from $150 to $500.
3- Transfer tax
This is a tax that the seller pays when the title transfers over to the buyer. Transfer taxes vary depending on which jurisdiction the transaction is taking place. For example, the city of New York imposes a tax of $2 for every $500 of the sale price whereas states such as Idaho and Louisiana don’t impose one at all.
Related: Investment Property Tax Deductions When Buying or Selling Real Estate as an Investor
4- Mortgage payoff
This is one of the typical closing costs for a seller who still owes debt on an investment property. In some cases, the lender might even levy a prepayment penalty. Naturally, the mortgage payoff is a variable cost that differs from seller to seller.
How to Calculate Closing Costs for a Seller
Figuring out how to estimate closing costs for sellers can be a tricky proposition. While the fees that a lender or an insurance company set are straightforward, some of the costs that come with selling your home require a good understanding of state and local laws. Make sure to check real estate laws in your jurisdiction and consult with a real estate agent who can provide you with professional guidance throughout the closing process.
Reducing Seller’s Expenses
Excessive costs can severely affect a real estate investor‘s return on investment. In an increasingly competitive housing market with tight margins, the only way to ensure a good return is by reducing the average closing costs for a seller. Here are some of the ways that will enable you to reduce closing costs for sellers.
Related: How Much Does It Cost to Sell a House?
1- Avoid high real estate commissions
Commissions can amount to a substantial percentage of the sale price if you don’t manage them carefully. While an experienced real estate seller might be able to negotiate lower fees when flipping investment properties, a regular seller will often end up paying as high as 6% of the sale price in commission fees.
One step you can take to minimize these fees is listing your property for sale yourself. Consider listing your home or rental property for free on the Mashvisor Property Marketplace! This platform allows you to reach thousands of potential buyers while saving you a significant sum of money.
2- Factor in closing costs for sellers when setting the sale price
The reason why some sellers are blindsided by closing costs is due to the simple fact that many of them fail to consider these expenses when setting their sale price. Before listing the property, the seller needs to accurately estimate the closing costs and set a price that can cover them without affecting the desired profit margin.
3- Don’t overpay for buyer’s title insurance
Buyer’s title insurance is one of the few negotiable closing costs for sellers. Consequently, you should shop around before picking a company to work with. Small companies with little overhead often offer highly competitive rates for sellers.
The Bottom Line
Understanding closing costs for a seller is extremely important when putting up a property for sale. Applying some of the best practices outlined in this article will enable you to negotiate lower fees and avoid any unnecessary costs that might lower the profitability of the sale.