Understanding Closing Costs

Whether you are an agent representing a client, a house hacker buying and selling every few years, or a flip hacker flipping houses regularly, closing costs are important to understand.

And the problem is most people don’t understand them very well or know how to minimize them.

These “closing costs” can take a huge chunk out of your profits when you sell a home or cost you extra up front money when you buy a home.

I want to give you a “layman’s guide” to the various closing costs & how you should think about them. *Note: These costs vary between transactions but there are certain costs that you can count on each time.

Also, these costs can be negotiated between buyers & sellers. Even if a seller typically pays a certain closing cost, they could negotiate the transaction where the buyer pays that cost. But for ease of explanation, I’m going to share who typically pays certain costs.

Common closing costs for sellers:

1. Real Estate Commissions

   This is usually a seller’s largest closing cost. It is typically 6% of the sales price in Texas, unless negotiated otherwise. So, if you sell your home for $300,000 using an agent, you’re going to see $18,000 come out of your profits at closing. That’s a lot of money! Which is why I recommend selling your house or your flip property without using Realtors if at all possible or using a discount real estate brokerage where you pay a flat fee to have your house listed. I’ve written extensively about this in other posts, so I will link those here and here. If you’re a seller, you want to try to minimize this cost as much as possible.

2. Title Insurance Premium

   The seller typically pays for the title insurance policy since they want to insure to the buyer that the title is clean. This premium is often regulated by the state (it is in Texas) & it can be hard to save money here. You may check your state specifically to see if it’s regulated, and if not, ask around to see what various Title Companies charge for this premium. This premium goes up & down with the sales price of the homes.

3. Attorney’s Fee

   The Title Company where you’re closing will often have an in-house attorney that will be paid to draft the deed. This deed is the instrument used to transfer ownership of the property from yourself to the person you’re selling it to. It will be recorded with the county once it is drafted & signed. *Note: In some states, attorneys perform the closings (rather than Title Companies) & those attorneys will handle this part as well. It’s hard to save much money here, but as you’re shopping Title Companies or Closing Attorneys, you can ask what the Attorney’s Fee is to determine if you can find some savings.

4. Escrow Fee (or Title Company Fee)

   This can be a sizable fee paid to the Title Company (or attorney) to close your transaction. This fee will vary between different Title Companies (attorneys). I would definitely call around & ask multiple companies what their escrow fee is. You may find that you can save hundreds of dollars (or thousands over multiple transactions) by selecting a Title Company (or attorney) that has a lower fee. Both the seller & buyer typically pay an escrow fee.

5. Residential Warranty Fee

   Buyers will often ask the sellers to pay $500-600 (this can vary) for them to purchase a residential warranty to cover the first year or two they live in the property. This is absolutely negotiable & you can save money by negotiating with the buyer to cover this.

6. Miscellaneous Doc Fees

   The seller will pay for a few back-end document/preparation/courier fees. These can vary between closing companies but are usually negligible amounts.

Common closing costs for buyers:

1. Down Payment (if getting a loan)

   This is usually the largest closing cost that the buyer has to pay. The bank will tell you how much down payment will be required for you to purchase the house. You can affect the amount of this payment by the loan product you choose. You already know I’m a “no debt” guy, so I’d encourage you to put as much down as possible, ideally 100%. ;)

2. Lender Fees (if getting a loan)

   As a buyer, if you’re getting a loan, your lender is going to charge you a variety of fees at closing. Examples include: loan origination fees, application fees, underwriting fees, lender title insurance, appraisal fees, etc. There can be quite a few of these. They may ask you to pre-pay certain items as well. The good news is that you can eliminate all of these by paying cash for a house! ;) Otherwise, the way to reduce these is to get quotes from multiple banks and compare the fees, terms, conditions, etc.

3. Survey Fee

   This can be negotiated so that either the seller or buyer pays for this, but often a buyer will offer to pay for a survey if the seller doesn’t have one. These can range from $400-600 in our area & may be less/more in your area. One way to save this money is to encourage the seller to take the time needed to try to find their survey from when they bought the house. If they can find their survey, often the lender will not require another one if theirs is still acceptable.

4. Escrow Fee

   Like the seller, the buyer also pays an escrow fee. Usually the buyer and seller pay the same amount unless negotiated otherwise. This can be reduced by shopping Title Companies (attorneys) and seeing who has the best rate.

5. Inspection Fees

   Unless you pay your inspector directly, these fees will also show up on your closing statement. Typically during an option period, you perform a variety of inspections. Most people will have a general inspection done by a licensed inspector, possibly a pest inspection, and there may be others depending on the condition of the home. These will be closing costs paid by the buyer unless paid directly to the inspectors. When you’re buying a home, I highly recommend you pay whatever fees you need to pay in order to make sure you know what you’re getting into. If you start flipping homes as a business, you may find that you gain enough experience to eventually eliminate this cost.

6. Miscellaneous Doc Fees

   The buyer may also have some miscellaneous document, recording & courier fees. Typically the buyer will pay for the deed to be recorded in the county records. These are small fees that won’t move the needle much.

One other cost that the Title Company calculates in each transaction is property tax prorations. As an example, if you buy a house on March 1st, you will get a credit from the seller for the property taxes from January 1st to the end of February because you’ll have to pay the entire bill at the end of the year. The good news if you’re the seller is that you’ve likely already been escrowing the taxes, so it’s not a “new” cost to you. And if you’re the buyer, you’ll need to keep that money saved so it’s ready to be paid at the end of the year.

I hope this introductory guide to closing costs helps you save a lot of money on your next real estate transaction!