A Complete Guide on Closing Costs

Closing costs may range from 6 to 10% for the home seller. Selling a home is already stressful. Why should you have to deal with mysterious fees you know next to nothing about on top of marketing and home maintenance? 

That’s what these percentages are for many home sellers – mysterious payments without reason. Unfortunately, these expenditures are a massive part of property sales. But what are closing costs, and are they avoidable?

Below are seller closing costs explained. Keep reading to learn more about these extra fees and how to avoid them. 

What Are Closing Costs? 

Closing costs are an integral part of the property sales process. Whether you’re buying a new property or selling it doesn’t matter. You will have closing costs covering various services related to home real estate. 

As we have said, sellers can expect to pay up to 6 to 10% in closing costs. These costs can fluctuate according to factors that vary from person to person. 

You may already know the percentage you pay in closing costs. But what are the exact fees? Here is a quick list of closing costs sellers can pay:

• Agent commission
• Transfer tax (depends on the state)
• Prorated property taxes
• Pre-listing inspection (optional)
• HOA transfer fee (depends on the circumstances)
• Capital gains tax (circumstantial) 
• Home warranty (if the seller chooses to do so)
• Seller contribution (if the seller decides to aid the buyer)
• Attorney fees (depending on the state) 
• Escrowed money promised to the buyer

Calculating Closing Costs

Calculating closing costs can get tricky because no two situations are the same. Let’s say your selling price is $400,000, and you received $373,000 for the house. 

We’ll keep our example formula simple for easy math. We will focus on the transfer tax ($1,900), attorneys’ fees ($800), and the realtor commission percentage (8% or $32,000).

The math looks like this: $400,000 x 0.08 = $23,000. This is how we get the relator’s 8% commission. After that, you add the transfer tax and attorney’s fees for more streamlined math.

So the final formula will look like this: $23,000 + $1,900 + $800 = $25,700. Your closing costs are $25,700. 

Our example is an ideal situation where all you’d pay is the transfer tax and attorney’s fees. The closing costs calculation formula is “Sales price x realtor’s commission + other costs = closing fees.” 

Can You Avoid Closing Costs? 

If someone asks you, “What are closing costs?” You might understandably answer, “pointless.” This is not true. Closing costs are a required part of the process. 

You may have guessed from the earlier sections that some closing costs are avoidable. You can’t get out of paying closing fees, but there are methods to allow you to reduce these fees. 

Request an All Cash Offer

Property investors and house-buying companies are willing to pay off closing costs on houses needing repairs and for sellers that need quick cash. Cash offers also eliminate realtors’ commission fees. 

We Buy Houses Memphis won’t ask sellers to make repairs, nor do we charge you inspection or relators’ fees. You can offload your home with little to no closing costs or stress. 

Choose “For Sale By Owner”

Realtors’ commissions are your most significant fee during property sales. You’re paying about 50% to your and the buyer’s agent. But it is possible to escape a listing agent’s commission.

Many buyers looking to reduce costs go “for sale by owner” or FSBO. FSBO means you’ve sold your house without an agent’s help. 

FSBO sales can be beneficial for some sellers. However, these sales come with various challenges. You’re responsible for every aspect of sales proceedings, including: 

• Marketing
• Speaking with potential customers
• Working with the buyers’ agent
• Negotiating offers

The problem with going the FSBO route is you need an understanding of how real estate works. You’ll need the know-how to market your property and speak with your buyer’s agent.

You can even still end up paying the agent. You can still be responsible for this fee if the buyer has an agent. 

Negotiate Lower Agent Commission

Your agent wants to make you happy because that’s their job. This gives you an opening to negotiate a lower agent commission rate. 

Remember that your agent’s time is valuable, so they may not reduce their rates too much. You can try finding a “low-commission agent” or someone who accepts a lower fee. 

We should warn you that using low-commission agents comes with disadvantages. They may not do much marketing work because they don’t get much money. Research these agents before choosing one. 

Prioritize Recommended Repairs

Agents may recommend repairs and updates to refresh your home for would-be buyers. Sellers willing to put in work can recoup enough money to cover closing costs from the property sale. 

Increasing the value of your home can backfire. Some fees are part of your property value percentage. The more you improve your house, the more you may pay in closing costs. 

Hire a Good Agent

Hiring a good agent nets you vast amounts of money. An excellent agent can sell your home for the highest price, offsetting closing costs. Avoid agents that work for buyers and sellers. 

“Dual agents” are hard to negotiate with. Compare agents online and read client reviews and testimonials. Find the agent’s listings in your area and check for recent property sales. 

Set Competitive Prices

Competitive pricing in a seller’s market is a good strategy. Check what other homes in the area sell for. Consider selling yours for a little lower than the average price. Buyers may not ask you to help with their closing costs. 

Fees Associated With Closing Costs

Sellers have fewer closing costs to pay. Despite the lesser numbers, they can add up to more than the buyer’s fees at the end of the sale. We listed the closing costs earlier, so now we’ll explain each fee’s purpose. 

Agent Commission

The agent commission is how much you pay your agent to help you sell your property. Agents subtract their commission from your original asking price, not the net fee you receive from the sale. 

Transfer Taxes

Transfer taxes (or transfer duties) is the taxation of real estate documents given by the seller to the buyer.

Who pays the tax and the cost depends on the jurisdiction. Some states demand the seller pay, while others say the buyer pays.

Prorated Property Taxes

Property taxes from the closing date are due at the end of the year. How much you pay depends on the amount prorated from the expected closing date. Pushing back the date will change how much property tax you pay.

Pre-listing Inspection

Pre-listing inspections help sellers understand the condition of their homes. These inspections survey the major functions of the residence, like electrical, plumbing, and HVAC. 

Pre-listing inspections are optional, so this is one closing cost you can skip. 

HOA Transfer Tee 

Some homeowners associations charge transfer fees when people move out of the neighborhood. Whether you pay for this depends on your HOA.

Capital Gains Tax

The government imposes capital gains taxes on profits from assets sold. These assets can include stocks, bonds, and real estate. The capital gains tax, in this instance, applies to money from your home sale. 

You qualify for an exemption from this tax if you’re selling your primary house. Your sales funds wouldn’t be taxable if you owned and lived in the house for at least two years. 

Home Warranty 

You don’t have to pay for the home warranty, but it helps cover costs for unforeseen issues. Imagine if the refrigerator broke down before closing. The warranty will cover the replacement fridge. 

Seller Contribution Fees

The seller contribution is the percentage you put toward the buyer’s closing costs. You may wonder why you’d offer to cover someone else’s closing fees. There are situations where a contribution is worth the investment. 

You can agree to pay the buyers’ closing costs in exchange for an increased sales price. The result is more money from the property sale. Offering to pay closing costs can help move a struggling home off the market. 

Attorney fees

Certain states mandate that you have an attorney to negotiate property sales. You can search for an attorney with low rates so you don’t overspend on this fee.

Escrow Fees

Escrow functions like a holding account to keep the money until all parties meet the requirements of the real estate deal. Buyers and sellers often split escrow fees. 

Both parties can come to whatever agreement suits them financially. Buyers and sellers can ask each other to pay their share of the fee. 

Frustrated by Real Estate? 

Real estate is a maze of strange terms and mysterious fees. Hopefully, our “closing costs explained” guide clarifies some things for you. You can’t avoid closing costs, but you can reduce the amount of money you pay. 

Are you sick of the rigors of real estate? We know how challenging selling your home can be, and we’re here to offer a better alternative. 

Contact us at We Buy Houses Memphis to skip all the stressful parts of property sales. You can trust us to give you an honest and fair home estimate.