Buying and selling a house can be a complicated process, and we all know that closing a transaction costs money. There are two or more parties in the transaction–the buyer and the seller, and sometimes a lender and realtors- and each of them can and do pay certain costs depending on the circumstances. The question is, then: who pays what?
First, the What
One person’s understanding of what constitutes closing costs is often different than another’s. There are even title companies that differ on this matter. We’ve called nearly every title company in town for quotes (to check out our competition, of course!) and some of them will only tell you that “our closing fee is $500.” This is fundamentally misleading, because the closing or settlement fee that the title company charges isn’t the only fee! At Fairmount, we do our best to give you a full picture of all the costs you may have to pay at the beginning of the transaction so you won’t be shocked when it’s time to close.
A basic cash transaction usually involves the following fees:
- Closing or settlement fee: charged by the title company for generating documents, handling the money, recording the deed, chasing down unresponsive parties, herding cats, and whatever random tasks that need to be done to satisfy all the parties. This is usually a flat rate.
- Title insurance premium: charged by the title insurance underwriter for issuing title insurance. This fee is set by statute in most states and is based on the purchase price. (in Ohio, it is $5.25 per thousand).
- Title insurance commitment/binder: charged by the title company for preparing to issue title insurance. This fee is meant to be charged by the title company even if the transaction cancels. It is usually set by statute and the title company must charge it (in Ohio, it is between $50-100).
- Title exam fee: charged by the title company for searching the state of the title. This usually involves searching public property and court records for the current owner and all previous owners back at least 42 years.
- Deed preparation fee: charged by an attorney or law firm for prepping the deed, since drafting deeds is the practice of law and title companies cannot perform this service by themselves.
- Recording charge: charged by the county recorder’s office for accepting the deed for record. It is usually a per-page charge ($34 for the first two pages and $8 per page above two in Ohio).
- Transfer tax: charged by the county auditor and based on the purchase price of the house (up to $4 per thousand in Ohio).
Here are some other items that the seller or buyer may be charged for that are not strictly “closing costs.”
- Tax proration: since taxes are billed and paid 6-12 months behind in most states, the seller must give a credit to the buyer to compensate them for the time the seller owned the house but the buyer will get the bill. Usually it is calculated by taking the previous year’s bill, dividing it by 365 and multiplying that number by the number of days between the last day of the period the taxes were paid and the closing date.
- Rent proration: similar to the tax proration, but applied to rents actually collected by the seller.
- Mortgage/lien payoffs: the seller must pay their mortgage or other liens as part of the closing, and the title company usually handles that.
- Realtor’s commissions: usually are a part of the closing costs but aren’t necessarily closing costs since the realtor gets paid pursuant to a separate agreement with the seller.
- Closing Protection Coverage: this fee is optional and is charged to the party who wants it.
How to allocate costs
There is no wrong way to allocate closing costs between the parties, although some allocations are fairer than others. Each region has its own traditional allocations of costs, which are usually determined by the standard realtor’s purchase contract in that area. In the Cleveland area, closing costs are usually allocated as follows:
- Buyer and seller split the settlement fee and owner’s title insurance premium
- Seller pays the transfer tax
- Seller pays the title exam fee
- Buyer pays the deed prep and recording fee
- Buyer pays the commitment fee
- Buyer pays any costs associated with the loan
Should the seller pay all the costs?
This is possible to encourage a sale, but it is not recommended if the buyer is planning to borrow money to buy the property. Loan costs can be expensive beyond your expectations, so it is better to make the buyer shop for the cheapest deal and have them take care of it themselves.
Should the buyer pay all the costs?
This is typically how distressed properties in foreclosure are sold. Usually the seller wants a flat amount of money for the property and doesn’t care how they get it. When the buyer pays all the costs, however, sticker shock can ensue because like mentioned above, many title companies mislead their prospects as to the true cost of closing a transaction and often omit the fact that a buyer and seller each usually pay their own set of costs.
There’s no real wrong answer. Determine who pays the closing costs by the circumstances of the deal, how distressed the property is, and who can afford them. When in doubt, choose the traditional method in the region. The title company can help you figure that out.