Closing Costs: Adding Up the Details
Buying a home? Here's how to know what you—and your wallet—can expect from your final statement.When you think about the cost of buying a home, you probably think mostly of the down payment. As a seller, you probably think of your costs in terms of the agent fees, since the real estate commission typically rears its unattractive head on the seller’s side of the balance sheet.
There is a laundry list of other costs to both the buyer and seller, however, which are not inconsequential. We call these the “closing costs.”
In my southern California market, it is generally accepted that, for both the buyer and the seller in the transaction, these closing costs will ring up at about 1 percent of the sale price. This “1 percent rule” excludes any lender fees charged to the buyer, which can add up to another 1 percent or more of the sale price. Depending on the customs of your market, your mileage may vary, but you do need to be aware of these fees and what havoc they might wreak with your bottom line, whether your concern is cash in or cash out.
Usually, we tend to think of closing costs as the fees charged for title insurance and for escrow (or, if you are not in an escrow state, attorneys). These are typically the bigger fees, but you will undoubtedly see a bunch of other little charges on your final settlement statement that quickly and collectively start to equal a big, four-digit number.
Consider a recent estimated settlement statement I received on behalf of one of my buying clients. Following are just some of the curious fees which showed up as charges to the buyer. (The amounts are the amounts our client was charged by this particular escrow company. Again, these charges are not fixed; they will in fact vary, often dramatically, depending on your region and your service provider.)
- Loan Tie-In Fee ($275) - The loan-tie in fee reimburses reflects escrow’s time and resources to coordinate the lender requirements and print out lender documentation.
- E-mail Document Fee ($50) - Honestly, I’m not sure what this one is all about. Last time I checked, my e-mail is free.
- HOA Processing Fee ($50) - This property was governed by a Homeowners Association, so someone had to order the rules, regulations and financial statements for the buyer.
- Notary Fee ($200) - In the old days, loan documents were signed in the escrow office. Today, this function is most often out-sourced to a “mobile notary” who takes the documents to the buyer for signing.
- Messenger/Wire Fee ($100) - While my client never received a wire or had anything delivered to him by messenger, someone must have on his behalf, and thus the charge.
- Imaging/Technology Fee ($65) - Think of this as a trip to the office supply store for printer cartridges. While most documents are emailed to escrow (see E-mail Document Fee above), escrows and attorneys still like paper. The imaging fee reflects their need to print and archive these documents.
- Sub Escrow Fee ($125) - This is a fee charged by the title company to handle the buyer’s loan funds and to pay off the seller’s existing loan.
In our case, we also had bonus messenger and wire fees from the title company, and several other surprise charges with mysterious names. But, here is what you should be aware of. Unlike lenders, who are legally required to present the buyer with a “Truth in Lending” disclosure statement in advance which memorializes all costs to be incurred for their services, escrow and title companies are not required to itemize their own incidental closing costs up front. You have to ask.
Like so much in life, the devil is in the details when it comes to the costs of the real estate transaction. Your agent can and should provide you with an estimate of closing costs early in the process, but it is only an estimate. The savvy home buyer and seller would be well advised to speak to the companies who might be managing the transaction and to get these costs in writing before committing to use their services. When you are sitting down to sign loan documents and a couple of days away from exchanging keys, it will be too late to negotiate.