How are closing costs split between buyer and seller

Closing costs are the moneys necessary to pay off all expenses incurred by buyer and seller on a property.  This will include an accounting of all funds spent and received in the transaction for both the buyer and seller.  Following is a partial list for items generally paid for by either buyer or seller in San Francisco.

Buyers:

  • Escrow fees
  • Title insurance
  • Loan fees, including points
  • Appraisal fee
  • One year’s hazard insurance premium (if not a condominium)
  • Deed recording fees
  • Notary fees
  • Prorated property taxes split between buyer and seller
  • Pre-paid interest to your lender
  • Prorated homeowners dues is you are purchasing a condominium.

Sellers:

  • Transfer tax
  • Real Estate agent commissions
  • Loans and loan fees (to close out existing loans)
  • Prorated property taxes split between buyer and seller
  • A portion of the taxable gain if above allowed limits
  • Prorated rents and security deposits if an income property
  • Deed and recording fees

The estimate of closing costs is generated when both the agents in the transaction, provided to the escrow officer that reflect the terms and conditions of the purchase contract.  The escrow officer will then compare the two sets of instructions and, if they match, the escrow holder will execute these instructions, disbursing funds and recording the deed which marks your ownership of the property.

What do you mean when you hold title to a property?

The way you own a property is called vesting, or holding title

 

The form of ownership chosen in your purchase, known as the vesting (holding title), will determine who may sign various documents and future rights of the individuals in the transaction; it can have an effect on one person buying as well as multiple people. You may have already heard some of the terms, joint tenancy, community property, tenants in common, sole ownership, or held in trust.

These rights associated with each type of vesting involve such matters as: real property taxes, income taxes, inheritance and gift taxes, transferability of title, exposure to creditor’s claims and significant probate implications in the event of death.

Before you can close escrow (or get loan documents), you must have selected a method of ownership.  Please get started on that process as soon as you begin the search for property.  Living trusts for instance, can take months to set up, so your preparation is important.

I urge you to speak with your attorney and/or tax advisor as soon as possible for vesting questions.  Your advisor may make recommendations which require partnership agreements, trust documents, wills, or other such documents.  Since these decisions and the accompanying documents may take time to be generated, I urge you to start this process immediately so that they may be accomplished prior to close of escrow.

What to expect at the title company

Prior to meeting your escrow officer at the title company, both you and your real estate professional should have received a copy of the estimated closing costs for your transaction.  This will be an accounting of all fees and what you have left to pay (if you are buying, receiving if you are selling) prior to closing your transaction.  You will be bringing a cashiers check or arranging for a wire transfer to deliver the balance of funds to escrow.  If you are selling, you can have remaining funds wired to you, or a check cut and delivered to you.

You should also have worked out:

  • all the conditions of your loan with the mortgage broker or lender.
  • obtained hazard insurance on the property
  • bring a valid driver’s license or passport so that the notary can verify your identity
  • decide how you would like to hold title-this may require conversations with estate attorneys or accountants far in advance of closing escrow, as estate and tax planning require time to implement.

After the signing you will be waiting for the lenders final review of your loan documents, funding the loan and the title company recording your deed, making you the owner (or not if you are selling) of your new property.  Once all these things have occurred, usually within a few  business days, you will be notified of closing and get (or give) your keys
Expect to receive your policy of title insurance and the deed to your new property sometime within the next month after closing.  They should be put into a safe deposit or other firesafe box.

Selecting how to hold title to your new property

The form of ownership chosen in your purchase, known as the vesting (holding title), will determine who may sign various documents and future rights of the individuals in the transaction; it can have an effect on one person buying as well as multiple people. You may have already heard some of the terms, joint tenancy, community property, tenants in common, sole ownership, or held in trust.

These rights associated with each type of vesting involve such matters as: real property taxes, income taxes, inheritance and gift taxes, transferability of title, exposure to creditor’s claims and significant probate implications in the event of death.

Before you can close escrow (or get loan documents), you must have selected a method of ownership.  Please get started on that process as soon as you begin the search for property.  Living trusts for instance, can take months to set up, so your preparation is important.

I urge you to speak with your attorney and/or tax advisor as soon as possible for vesting questions.  Your advisor may make recommendations which require partnership agreements, trust documents, wills, or other such documents.  Since these decisions and the accompanying documents may take time to be generated, I urge you to start this process immediately so that they may be accomplished prior to close of escrow.

Who pays closing costs?

Closing costs are the moneys necessary to pay off all expenses incurred by buyer and seller on a property.  This will include an accounting of all funds spent and received in the transaction for both the buyer and seller.  Following is a partial list for items generally paid for by either buyer or seller in San Francisco.

Buyers:

  • Escrow fees
  • Title insurance
  • Loan fees, including points
  • Appraisal fee
  • One year’s hazard insurance premium (if not a condominium)
  • Deed recording fees
  • Notary fees
  • Prorated property taxes split between buyer and seller
  • Pre-paid interest to your lender
  • Prorated homeowners dues is you are purchasing a condominium.

Sellers:

  • Transfer tax
  • Real Estate agent commissions
  • Loans and loan fees (to close out existing loans)
  • Prorated property taxes split between buyer and seller
  • A portion of the taxable gain if above allowed limits
  • Prorated rents and security deposits if an income property
  • Deed and recording fees

The estimate of closing costs is generated when both the agents in the transaction, provided to the escrow officer that reflect the terms and conditions of the purchase contract.  The escrow officer will then compare the two sets of instructions and, if they match, the escrow holder will execute these instructions, disbursing funds and recording the deed which marks your ownership of the property.

What is escrow?

Once you have successfully ratified (get into contract), escrow begins, which comprises of two things:

the length of time necessary to complete the purchase or sale of your property and,

the inclusion of a neutral third party in the transaction (an escrow officer at a title company) who acts as an intermediary to create a secure environment in which to collect and disburse all the funds and documents related to the purchase of your property, including recordation and delivery of the deed to the buyer and any proceeds to the seller at closing.

During the escrow period, there are many activities going on simultaneously of which you will be a part. You will be very busy during this time. You should plan to ease your normal routine to make time for meeting your contractual responsibilities.

A few of the buyers’ activities will comprise of:

  • Schedule and attend physical inspections.
  • Work through the financing specifics with your mortgage broker or direct lender to secure financing
  • Review all disclosure materials
  • remove contingencies.
  • Increase your deposits for down payment and closing costs
  • Choose how you want to hold title if more than one person is buying the property
  • Sign loan documents
  • Review the accounting of moneys owed (or received from) escrow
  • Arrange for hazard insurance
  • Give 30-day notice to your landlord if you are renting.  I recommend waiting until your loan has been approved or giving a provisional notice.
  • Select a moving company and begin packing.
  • Arrange for all utilities to start when you close escrow.
  • Notify the post office, doctors, banks, and others of your new address.

A few of the seller’s activities will comprise of:

  • Making the property available for inspections
  • Answering questions
  • Making negotiated repairs
  • Preparing to move
  • Compiling information requested from the buyer

What are the elements of a purchase offer?

The real estate purchase contract, also known as a purchase offer, or offer, is meant to be binding and spells out in detail your obligations and responsibilities. Some key points are:

Purchase Price

  • The purchase price should be looked at as part of the strategy for negotiation.
  • Are there multiple offers?
  • Is it priced low?
  • Is it priced high?
  • How long has it been on the market?
  • What have other similar homes sold for?
  • What is the condition of the property?
  • Is it unusual in the marketplace (i.e. is this a one-of-a-kind property)?

Ratification / in contract / in escrow
These are the terms used to convey that you are in the process of purchasing a property.  It means that buyer and seller have agreed to price and terms and are moving toward transferring ownership of the property.

Deposit / Good faith deposit / Earnest Money Deposit
A good faith deposit is most often a personal check made payable to a title/escrow company, which accompanies your offer; an offer must have ‘consideration’ to be valid.  The check is deposited after you get into contract and is applied toward your down payment and closing costs.  You will generally make three deposits to escrow prior to closing.

Inspections
Your offer should be made contingent upon your obtaining, reviewing and approving thorough and professional inspection reports so as to be satisfied with the properties condition.  These may include reports by inspectors such as licensed pest control and general contractors, underground storage tank specialists, and additional reports by structural engineers, roofers, sewer inspectors, and chimney sweeps if applicable.

Disclosures
Most sellers of residential properties and involved agents are required by law to disclose any information, which may materially affect the value of your property.  A few exceptions to this requirement are probates and foreclosures.

Loan Contingency
If you are obtaining a loan to finance the purchase of your property, you will most likely need time to obtain a loan from a lender at terms acceptable to you.

Close of Escrow and Physical Possession
Close of Escrow (COE) and physical possession of the property are negotiable and may not occur on the same day.  A typical COE is scheduled for 30 to 60 days after the contract is accepted.  If the property is tenant occupied, or if the sellers request to rent back the property after the COE, your possession of the property would occur after your ownership begins.

Liquidated Damages, Mediation, and Arbitration of Disputes
These three sections of the purchase contract address what happens if the buyer and seller get into a dispute and have difficulty coming to agreement.  You should review these paragraphs prior to writing a purchase offer.  If you are unclear as to what they mean, or how they may impact you, please consult with a real estate attorney to better understand these clauses.