You are negotiating a real estate transaction and are trying to figure out how much it will cost to do the necessary work to close the transaction. You are trying to figure out who will pay for the necessary services and fees, and when these amounts will need to be paid. Not all costs associated with closing a transaction are always paid at closing. Sometimes service providers like inspectors and surveyors want to be paid upfront for their services. When you are trying to figure out what, who, when, and how much, there is one thing you should remember…It’s all negotiable.
That said, sometimes it makes more sense for one party to pay for a fee or service than it does for the other party. For example, most home inspectors investigate a property from the buyer’s perspective. They look for what is wrong in a property. They look for the hidden surprises that buyers may not have the skill to locate themselves. If the inspector is being paid by the seller, or the seller’s agent he has an incentive to overlook things that he might not otherwise. For this reason, in my opinion it is better for the buyer to pay for property inspections. The buyer is the one benefiting from the information obtained in the inspector’s report. The seller already owns the problems that the inspections may bring to light. Please don’t take this the wrong way, I do not know a reputable home inspector that I believe to be anything less than forthright. I am just stating that the temptation is there if the seller is signing his paycheck. Most of the time they want their fee paid upfront, before the actual closing.
In my time selling real estate, I have seen some very creative negotiations. I have seen sellers pay all conceivable costs and have seen buyers do the same. Most often though, both parties pay some. I have seen some people who could not get past feeling like the other party gained a ten dollar advantage on them somehow. When negotiating, it’s usually better to stand back and look at the big picture…the bottom line. Don’t get so bogged down in who pays what that you loose sight of the ultimate goal.
Below, I am going to detail some of the more common costs associated with a land for sale transaction. Not in terms of dollars and cents, but in terms of category of cost and rationale behind who typically pays what. This list is by no means exhaustive. Talk with your agent or attorney for information on your specific transaction. Again most of these fees can be paid by any party to a transaction…It’s negotiable.
- Attorney’s or Closing Agent’s Fees – This is the fee charged for performing the closing. These fees vary greatly from state to state and area to area. If the closing agent or attorney is representing one party in the transaction, then the represented party should pay the fee. Sometimes both seller and buyer will have representation for the closing process. Again, the represented party should pay. I complete many transactions where neither party is represented and this cost is split evenly between buyer and seller. Usually this fee is paid at the closing.
- Costs associated with financing- There are many fees that are associated with borrowing funds to complete a transaction. Typically these fees are buyer costs. There are some rules and regulations that dictate who can pay some of these costs. Your lender can help you understand these fees and if a certain party must pay the fees in a given transaction. Sometimes sellers help pay these costs to leave more funds available to the buyer for down payment. Usually these fees are paid at the closing.
- Brokerage Commissions – In the typical land transaction, the seller pays this fee. I have been paid by the buyer when working on their behalf dealing with unlisted property. Generally the seller is represented by an agent. Most of the time that agent offers other agents a co-brokerage fee that is a portion of the total fee that the listing agent and seller negotiated for when the property was listed. There is no law that requires this co-brokerage arrangement and sometimes you will find listing agents who are unwilling to share their commission with a selling agent. In this case, unless the buyer expects his agent to work for free, then both seller and buyer may pay a brokerage fee. This fee is almost always paid at closing, except on some owner-financed deals. In instances where the seller was financing a property with a low down-payment, I have agreed to accept my commission at a later date. This would need to be negotiated with your agent.
- Surveys – Sometimes surveys are required and sometimes not. Sometimes a buyer or seller may want one completed when it is not required. It is always my position to recommend having a survey completed, unless there is a very recent survey that corresponds with the physical boundary lines that are evident on the property. Sometimes even then, it’s not a bad idea. However, surveys tend to be expensive and I have a great many elect not to have one done. From personal experience, I have had more buyers pay for surveys than sellers. However, having a current, clear survey is one of the best sales tools a seller can have. This is one that you just work out by negotiation. Care should be taken as to what type of survey you are negotiating. At it’s most basic form, a survey is having the corners marked, and a legal description derived from the information gathered in the field and previous deeds. This is the least expensive and most often used option. At the other end of the spectrum, you have fences, roads, and structures located on the plat of the property, boundary lines blazed and marked, plus those most basic things described above. Some find it necessary to have a topographical survey completed as well. Just be clear in what your expectations of the survey are. Generally, surveyors want to be paid when the work is completed, and may require some upfront deposit. However, when opting for a simple boundary survey where only the corners are marked, you might negotiate with the surveyor to be paid at closing.
- Environmental Audits and Inspections – In my experience, I have only had a few buyer’s request that these be completed. Each time the cost was borne by the buyer. Each time the inspector required his fee up-front. The seller really has no interest in providing this for a buyer, unless there is a known problem that the seller wants to quantify in the sales process. Generally speaking, I would say that the requesting party should pay for this service.
- Home and Structural Inspections – Most of the home inspections I have been involved with are at buyer’s cost. The inspector, as stated above, is generally inspecting on the buyer’s behalf. The seller may elect to have this done prior to marketing a property in order to make it more marketable. Again, home inspectors usually want to be paid up-front.
- Appraisals – Usually appraisals are associated with financing the purchase. This cost is most often borne by the buyer. I have had sellers have an appraisal completed in the listing process for marketing purposes. On a few occasions, I have known of appraisal fees being paid at closing, but for the most part, this is a service that is paid for upfront.
- Title Search/Abstracts – If you are not sure what this is, read my article on the topic, Title Searches, Abstracts and Insurance. These are generally performed by the closing agent or attorney, or someone that they contract with for the service. It is usually paid for at closing, and most often, by the buyer. This is something that is negotiable and can usually be paid by either party.
- Title Insurance – Again, read this article to learn more about title insurance: Title Searches, Abstracts and Insurance. Title insurance is for the benefit of the buyer or the buyer’s lender. Mortgage title insurance is a cost associated with financing. Owner’s Title Insurance is for the sole benefit of the buyer. Mortgage title insurance is always paid for at the time of closing. Owner’s title insurance can sometimes be purchased after closing, but is usually taken care of then.
- Taxes and Property Insurance – These are generally prorated at closing, meaning that the seller pays for these for the amount of time that they own the property in the tax or insurance period and the buyer pays for the amount of time they will own the property in the period. These fees are funded by debits or credits to the buyer or seller. Custom on how these are handled will vary a great deal. Each county has it’s own way of dealing with property taxes. It will even vary from attorney to attorney in a given area. Generally speaking, if the seller has already paid for an insurance policy that will cover a property during a time when the buyer will own the property, then the seller will get a credit at closing. If there are taxes due from the seller, then generally the buyer will get a credit at closing and the seller will be debited. All of this too, is negotiable. However, you will find that the standard language in most contracts will be for these items to be prorated as of the date of closing.
- Deed Preparation – This fee is for drafting the document that conveys the property from the seller to the buyer and states the warranties and rights that the seller is granting the buyer. In most closings, I find that the seller pays this fee, at closing. It is not entirely uncommon to have a situation where the buyer pays all the fees originated by the closing agent or attorney.
- Mortgage Preparation – This fee is for drafting a mortgage and is most common to sales of owner-financed property. Usually on lender-financed sales, the lender supplies a mortgage with the language that they want in the document. This fee is usually paid by the buyer at closing.
- Recording Fees – These are the fees that the county charges for recording your documents into the public record. These fees are based on the sales price of the property, the number of pages, number of documents, and when recording mortgages, the value of the mortgage. These are sometimes referred to as Deed or Mortgage taxes. In financed transactions these fees are usually collected at closing. Sometimes in cash transactions, it is left up to the buyer to physically carry the deed to the recording authority after the closing. This is a negotiable cost, but realize the seller has no interest in whether or not a buyer’s documents get recorded.
- Courier Fees – At times, documents will need to be shipped to other places. This can be for the benefit of the buyer or the seller and is paid for by the benefiting party. Your closing agent or attorney will collect these at closing. Not commonly negotiated in the formal contract for sale.
- Funds Transfer Fees – In some transactions, a buyer may not bring funds to closing but may elect to have them transferred electronically to the closing agent’s account. Sometimes a seller would rather have his funds transferred to him electronically. There are fees associated with these transfers at the bank level for the closing agent. Usually they pass this fee on to the party benefited, with a little padding, at closing. Not commonly negotiated in the formal contract for sale.
- Affidavits, Power of Attorney,and Other Documents – From time to time in transactions the need arises for the closing agent to draft and have executed other documents. This usually arises from the need to clear up defects in the chain of title or when some party to the transaction cannot attend the closing and wants someone to sign in their stead. If there are issues in the chain of title that need to be cleared, the fees associated with that are most commonly paid by seller. Otherwise these fees will be collected from the benefiting party at closing. Not commonly negotiated in the formal contract for sale.
Again, this list is certainly not all the possible closing costs. However, I have attempted to cover the ones that I see as most common in transactions that I deal with in land sales. There are no absolutes in who pays what. Not all of these costs listed above apply to every transaction. However, with a little investigation into the purpose served by whatever generates the fee, there is usually a logical choice…It’s negotiable.
This content may not be used or reproduced in any manner whatsoever, in part or in whole, without written permission of LANDTHINK. Use of this content without permission is a violation of federal copyright law. The articles, posts, comments, opinions and information provided by LANDTHINK are for informational and research purposes only and DOES NOT substitute or coincide with the advice of an attorney, accountant, real estate broker or any other licensed real estate professional. LANDTHINK strongly advises visitors and readers to seek their own professional guidance and advice related to buying, investing in or selling real estate.