Selling your house can be costly. When the time comes to downsize or sell your home, there are a few financial aspects to consider, especially in the area of closing costs. If you’re hoping to pay off your existing mortgage in full, or maximize your profit to fund retirement, make sure you understand all of the fees associates with the sale of your home.
Real estate transaction fees are typically equal to a percentage of the sale. The closing costs, realtor, escrow, and attorney fees, and potential for repairs, can get expensive. Knowing all of your options up front will help you make the best financial decision for your future.
Building equity in your home is one of the perks of home buying. Don’t lose your nest egg to high fees and sale costs. If now is the time to sell your home, make sure you know exactly what to expect when it comes to closing costs and other financial obligations. A private sale may cost you more than it’s worth. Find out in our guide.
What happens to the equity in your home after selling?
When you sell your home, the equity is your profit. For example, when you buy a home for $300,000 and pay off $200,000 prior to selling, you could net $200,000 in profits after paying off the remaining $100,000 balance of your mortgage.
The funds will essentially be deducted from your profits.
Oftentimes, a buyer will submit an offer with a request for the seller to absorb some of the closing costs so the buyer doesn’t have to pay out of pocket or roll it into their mortgage payment. When the seller concedes to some of the closing costs, it’s reduced from the overall profit, or net equity on the home.
7 Things every seller should know about closing costs
Whether you’re selling a home or purchasing, closing costs are one of the most pressing matters to address. When a seller is hoping to reduce their upfront costs or avoid rolling any additional payments into their monthly mortgage payment, they might request concessions from the seller.
Absorbing closing costs is a common tactic used to motivate buyers and sell your house quickly. The longer a house stays on the market, the harder it is to sell. Most sellers end up having to reduce their initial selling price if it stays on the market too long, which cuts into profits even further.
Make the best decision for your financial future by educating yourself on all of the potential fees that could be incurred from the sale of your home.
1. What are closing costs?
Closing costs include all fees associated with the sale or purchase of a home.
All closing costs must be paid in advance of the transfer of property from one owner to the next. If the sellers are responsible for payment of the closing costs, they will either present a check at the closing or they will roll the costs into their monthly mortgage payments, in which case they will not be required to make an additional payment at the closing.
A down payment is made once an offer is accepted, at the beginning of the buying process. Typically it’s put into escrow during the buying process while inspections and other housekeeping matters take place.
Closing costs will be the final payment a buyer pays prior to signing the paperwork. This payment is made at the very end of the buying process.
2. What’s included in closing costs?
Closing costs are meant to cover a wide variety of fees associated with the purchase of a home. Once the home buying process is initiated, fees will begin to incur. From the realtor commissions to obtaining the buyer’s credit report and checking the title on a house, fees are constantly stacking up.
Typical closing costs consist of:
- Realtor fees
- Credit reports
- Title fees
- Origination fees
- Appraisal fees
There are other expenses included depending on the details of the transaction. Before the real estate transaction can close and the property can transfer ownership, the closing costs must be paid.
If the seller is paying the closing costs, or partial costs, those fees will be deducted from the sale of the home. If the buyer is paying closing costs, a check is required to be presented at the closing.
3. Who pays for closing costs?
There is no obligation on either side to pay closing costs. Many buyers use closing cost concessions as a negotiation tool in order to get a better deal on a new home purchase.
For example, a couple looking to purchase a $150,000 home with a total savings of $30,000, could request the seller pay the closing costs of approximately $4,500, so they can use their full savings for the down payment.
The down payment needs to be at least twenty percent for the buyer to avoid paying private mortgage insurance. If the buyers don’t have enough in their savings to cover all of the closing costs plus the down payment, a seller can absorb the burden and still move forward with the sale of the home.
Using incentives like paying closing costs keeps a buyer interested. If you need to sell your home quickly, or you’re concerned about the amount of time that it’s been on the market, offering to pay closing costs is a great way to help attract motivated buyers.
4. Average closing costs for a seller in california
Most people can expect to pay between two and five percent of the total cost of the home for closing costs.
The average cost of a home in California was $440,000 in 2015. If a buyer requested closing costs to be paid as a part of a sale, the seller could be responsible for up to $22,000.
If you’re anticipating a $100,000 profit from the sale of your home and end up paying $22,000 in closing costs, you’ll net less than 80% of your anticipated profit.
Preparing in advance for the cost of closing helps a seller either price their home differently, or look for alternative ways to sell their home that doesn’t include closing costs.
Considering the high price of homes in California, closing costs are significantly higher than in the rest of the country.
A seller could end up with a significant reduction in profit if they absorb the closing costs for the sale of their home. A buyer may be required to put down a large amount of money in addition to their down payment if a seller is unwilling or unable to make closing cost concessions.
The cost of fees involved could impact how quickly a house is sold. If the closing costs and down payment are high and the seller doesn’t offer concessions, a buyer may not be motivated to move forward with a purchase.
5. How to calculate your closing costs
It’s difficult to know the exact costs that will be paid over the purchasing period, estimate between two and five percent to be safe. For example, if you’re looking to purchase a $350,000 home, you can anticipate closing costs between $7,000 and $17,500.
If you’re a seller looking to motivate a buyer by offering to pay closing costs, you could potentially be responsible for over $17,000.
Oftentimes, a buyer and seller will negotiate a compromise where one party agrees to pay a certain amount of closing costs and the other party is responsible for the remainder.
Since the sale of a home depends greatly on the current market, location, condition of the home, and other variable factors, sellers may need to offer incentives and take on more of the financial burden of the associated fees.
6. Is it worth it to pay a buyer’s closing costs?
Since the sale of a house depends on many different key factors, sellers should be prepared to offer motivation.
During a buyer’s market, there are a lot of different options for buyers. They don’t feel a sense of urgency or motivation to make a purchase that isn’t attractive.
In order to sell your home in a buyer’s market, you have to make the purchase appealing, usually by offering financial incentive like the payment of closing costs.
Another reason sellers may need to incentivize buyers is the condition of the home. If your home is outdated in areas like the kitchen or bathroom and requires any major repairs, or may require major repairs in the next five years, offering to cover closing costs may help offset these renovation costs.
7. How to avoid paying closing costs
There are a few ways to avoid paying closing costs.
Your first option is to not offer to pay closing costs for a potential buyer. The pro of this option is that you will be able to net all of your equity. The cons are, you may not sell your house quickly and the longer it’s on the market, the longer it may stay on the market or you may end up having to reduce the sale price.
When reducing a sale price, you could end up losing as much as the closing costs anyway.
Your second option is to sell your home to SoCal Home Buyers. We make the selling process fast, easy, and simple.
Buyers are able to bypass the stress, hassle, and unpredictable costs of the selling process when they work with SoCal Home Buyers.
A Simpler Way to Sell Your Home
SoCal Home Buyers has been helping sellers for over twelve years and can guarantee a fast, smooth and painless transaction.
Specializing in helping buyers with a seamless selling process, you can avoid the unexpected closing costs, stress and hassle associated with selling a home on the real estate market.
You earned the equity in your home and deserve to access every cent. Working with SoCal Home Buyers to avoid paying closing costs helps you get the most for your home with the least amount of hassle – guaranteed!