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What's up with those closing costs?

Important notice to readers: This post has been filed under “Boring Stuff About Contracts,” and I wasn’t kidding. Agents armed with feed readers might do well to move along.

Ah, closing costs. They are an expensive annoyance, and they tend to confuse at best. Mostly, they serve as a cold shower dose of home buying or selling reality.

Caveat emptor:  I work in Southern California. What is typical in Southern California may not be the norm in other areas. Like Northern California. Or the Ozarks. Consult your local expert before making my remarks the cornerstone of your retirement planning. Fees cited are estimates only. Your mileage may vary.

The 1% Rule

We, the people of the Agent genus, like to say that whether buying or selling, closing costs will ring up at about one percent of the sale price, and here we are excluding the real estate agent’s fee.  This is mostly true for sellers, but in our new lending world, this is not necessarily true for the buyer.

In Southern California, there is a traditional laundry list of buyer and seller closing costs. The agent’s fee ordinarily rears its ugly head on the seller’s side of the balance sheet. With this exception, both parties are created sort of equal.

Who Pays What?

San Diego Real Estate Closing CostsFree Legal Forms

Whether buying or selling, you will undoubtedly see a bunch of little charges that collectively start to equal a big, three-digit number. These include fees associated with recording and notarizing documents, courier charges, and title “binder” fees to name a few. The big boys for both sides are the title and escrow fees. In our market, escrow fees are traditionally split down the middle, with each paying his own (the exception being in VA loan situations where the lender requires the seller to shoulder the entire escrow fee burden).

Sellers usually pay for the Wood Destroying Pest and Organisms inspection (more affectionately referred to as the Termite Report) and any work required to remediate active infestation, although this is technically a negotiable item. Sellers also pay for the Natural Hazard Disclosure Report (which will tell you if, among other things, the home is located in a protected habitat for the spotted toad, and I am not kidding), for City and County transfer fees (“tax stamps,” currently carrying a price tag of $1.10 per $1,000 dollars of value in San Diego County), for Homeowners Association Transfer Fees (yes, they will charge between $250 and $400 to produce the HOA documents for the buyer’s review and to transfer the billing), and for a buyer Home Warranty policy. Think of the latter as catastrophic illness coverage. If your dishwasher makes funny noises the day after closing, they will give you headphones and charge you the minimum $45 service call, your deductible; if, on the other hand, the dishwasher decides to channel Old Faithful one week after possession, they might replace it (but not your wood floors). In any event, it beats a poke in the eye.

Don’t forget the lender fees

Buyers beware. If you are getting a loan versus paying cash (which means you), there will be loan tie-in fees (to compensate escrow or title for dealing with the lender), sub-escrow fees (to compensate title for dealing with an outside escrow), a tax service fee (beats me, but it is purportedly related to the lender servicing your loan), and other fun charges. There are two categories of closing costs which tend to whop the buyer upside their unassuming head: Loan origination fees and prepayments.

Loan origination fees are lender-dependent.  It can be a small fixed fee or it can range from 0.5% to 2% of the loan amount. Agents in our area typical assume a default 1% loan origination fee in their buyer closing cost estimates.

Prepayments can add up

Prepayments will vary based on the flavor of the loan and the time of month and year you close. These days, the rule of thumb is that with less than 20% down, the lender will require that taxes and insurance be “impounded,” meaning that you pay these items with your mortgage payment in installments, rather than when they are due, and the lender makes the payment for you. With impound accounts, a lender may require four to six month’s worth of “reserves” to be paid up front. This insures them against a late pay or default situation. So goes the homeowner’s insurance. Almost always, it is required that a one-year policy be bound at closing (in our market, $1200 to $1400 is a good rule of thumb for a single-family detached home). With an impound account, the lender may require an additional reserve on this as well.

Even if you are bringing buckets of money into the transaction, you can expect some property tax prepayment depending on the time of year you close. Our San Diego property taxes cover a July 1st to June 31st tax year. The first “bill” is delinquent on December 10th and the second on April 10th, but each covers a period forward and in arrears. So, say you close escrow on October 1st. The seller has presumably not yet made their first installment payment, so they will be charged in escrow for property taxes for the period between July 1st and September 30th. The buyer will be charged in escrow for the period from October 1st and December 31st. It is not a cost of the transaction; it is a cost of homeownership. But, if it cash needed to close, and you should be aware. There will be a test later.

For lower down-payment buyers, there might be a Private Mortgage Insurance (PMI) required by the lender. PMI will vary, but it can add a hundred dollars or two hundred dollars or more to your monthly payment, and the lender may require reserves for this as well.  The “piggy-back loans” of yesterday avoided this, but these are effectively obsolete (for now), so buyers with less skin in the game are back to having to insure that they will perform.

Finally, there is the mortgage prepayment. As a buyer, assume that you will be paying your first month’s mortgage payment at closing. It could be a little more or a little less depending on the lender and the closing date. Again, this is a cost of homeownership, not of the transaction, but cash out is cash out, and you need to plan for it. Mortgage interest is paid in arrears. When my bill is due on the 1st of the month, I am paying for the preceding month of enjoyment. So, when I close escrow on the last day of the month and prepay my first month’s interest through escrow, I will not owe a payment again for 60 days. Get it? I didn’t think so.

There is more, of course. I didn’t even broach the subject of inspections and appraisals. But, the moral to the story is that, whether buying or selling, there are costs involved beyond the agent fees which you should be aware of and prepared for. Your agent and lender can break it down for you and your particular situation, but sooner is always better. Don’t let yourself be blindsided.

You can wake up now. I’m done. You’re welcome.

Kris Berg

Kris Berg is Owner and Designated Broker of San Diego Castles Realty. She has been serving San Diego buyers and sellers since 1997.

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  • Howdy

    … and thank you Kris!! I really enjoy how your writing is both informative and entertaining- you’re kind of an online infotainer.

    I was first reading your piece in Inman today on info overload… which then sucked me right into your site- the wicked web presence you weave is working wonderfully (sorry for the accidental alliteration) 😉 I’m in absolute agreement that an informed consumer is a great thing for the real estate world- but we ‘the consumer’ need to know when to transition our research efforts over to ‘you’, the real estate professional. A huge gap will always exist between information and knowledge/wisdom- and I believe in today’s world, that chasm is ever-widening. Which leads me to my second point and your thoughtful post from Jan19 on closing costs…

    It was truly refreshing to see how you’re enlightening the consumer and unveiling some of the unexpected money involved that could drive up closing costs.

    I’m currently in the investigative stages of an international purchase (if you consider a Cdn buying in the US international). I’ve selected an agent (who also happens to be a wonderful blogger) whom I respect & appreciate- but as a distance buyer, I have ‘geo-challenges’ that typical local clients don’t experience. (I’m not where I’m looking at buying nor have I ever lived there.) For this reason, I need to rely on both his localized expertise and his many insights into the nuances of streets, communities, subdivisions, etc…. not to mention huge influencers such as closing costs and tax implications. When I’ve previously asked to leverage off his knowledge base, he’s responded with that terrible “F” word- FHA (or Fair Housing Act). He mentioned an agent cannot “steer buyers to or away from particular” areas- even though part of his marketing alludes to being an “Area Specialist”. I’ve talked to friends in the area that have forewarned me to stay away from certain places- but the word from my real estate professional is that providing such foundational advice apparently breaks the FHA code. Is it just me or is there some contradictions going on here? I could go on about this- but bottom line is that much of the service true real estate professionals offer (especially those with years of experience in specific markets) goes way beyond technology & paperwork & legalities… if FHA gets in the way of agent performance (stripping my agent away of his ability to inform me), then a whole lotta value has exited the agent equation. My agent can work as my chauffeur when I’m south of the 49th- but he can’t tell me that the investment property I’m interested in is bordered by crack houses and unsavoury characters. Is that your take?

    Your feedback is sincerely appreciated,

    Howdy

  • Howdy, Howdy! (OK – I suspect you find that neither original nor amusing.)

    Don’t you hate it when you type a 1000-word comment, publish it to find that you included bad code and it looks like it was written in German plus everything is one giant hyperlink, then you go to edit the comment to receive an error message because you haven’t updated your WordPress software since the inauguration (Carter’s), and then the whole thing disappears into cyberland? Maybe it’s just me.

    Anyway, I am out of steam, so I will give you the short version. Your agent is absolutely right. Fair housing laws prevent us from saying things which could be construed as steering or blockbusting. This doesn’t mean that we are left as valueless lame-ducks; we can give you factual information all day long, and should. We can tell you where to go to find the crime statistics and demographic data and other information in which you are interested. We just can’t interpret for you. Because we are not you.

    The problem is that all people have biases, and subjectivity is not only dangerous but often downright illegal. I touched on the subject here and here. I touched on it in other posts as well, but those date back to the days when I was sporting some really hideous hair in my thumbnail photo, so you won’t be getting those links. Vanity always prevails. 🙂

    In short, my great neighborhood may be your nightmare, and your “unsavory” character may be the kind of guy I like to hang with on weekends. You may love a street where you can park your car on the front lawn and change your oil in the driveway; others may not find this so charming.

    We often recommend to our clients that, when in doubt, talk to the neighbors. Take a walk through your “short list” neighborhoods in the evening when everyone is coming home from work. Neighbors love to spill, and then you can draw some conclusions for yourself and based on your own concerns, not on what my own likes, dislikes and hot buttons may be.

    All that aside, thank you for accidentally stumbling in and for your kind words. With your permission, I may steal your “infotainer” moniker. Spell check doesn’t like it, but I love it. 🙂

  • “In short, … your “unsavory” character may be the kind of guy I like to hang with on weekends.”

    Would that be Steve?

  • Maybe…

Office Location

  • San Diego Castles Realty
  • 12265 Scripps Poway Parkway, Suite 115
  • Poway, CA 92064
  • P: 858.530.2374
  • F: 858.876.1701
  • E: info (at) sandiegocastles.com
  • CA BRE# 01853496

Broker Information

  • Kris Berg, Broker
  • CA BRE #01241572