Selling a house can be complex, especially if you are new to the process. For one, there are considerable costs involved. Currently, you can expect to spend between 6% and 10% of your home’s sale price in closing costs when you sell a house.
Additionally, some buyers will ask you to chip in for their closing costs. If you accept this request, you will spend an extra 2% to 3% of the sale price. This article examines the disadvantages of paying the extra closing costs when you decide to sell a home in San Diego, including the effect this may have on the price of the home as well as appraisal implications.
Who Pays Closing Costs?
In addition to learning how to sell a home by owner, you need to know which costs you are likely to incur. As outlined below, both the buyer and seller must pay for certain closing costs in a real estate transaction.
Closing Costs For Buyers
- Loan fees, including the origination fee and discount points
- Title insurance
- Appraisal fee
- Property inspections
- Homeowner association (HOA) transfer fee, if applicable
- Real estate taxes, prorated to the settlement date
Closing Costs For Sellers
- Agent commissions
- Loan balance payoff amount
- Transfer taxes and recording fees
- Copies of HOA governing documents, including Declaration of Covenants, Conditions, and Restriction (CC&Rs) and bylaws
- HOA dues, prorated to the settlement date
- Real estate taxes, prorated to the settlement date
Some closing costs, such as the settlement fee (also known as the closing fee), vary by location. It’s your state and local real estate customs that determine who absorbs these expenses.
In some California counties, the buyer pays the escrow fee and owner’s title insurance policy. If you aren’t sure which closing costs you–the seller–should pay, ask your local real estate agent or settlement agent.
Disadvantages Of Seller Paying Closing Costs
As a seller, you aren’t paying closing costs out of the goodness of your heart.
Higher Sale Price
In most cases, paying a buyer’s closing costs results in a higher sales price. If you agree to cover some of the buyer’s closing costs when they ask, your agent adjusts the sales agreement by whatever amount you want covered.
For instance, if the buyer asks you for $5,000 in closing costs on a $200,000 home, the sales contract will increase to $205,000. The buyer applies for a mortgage in the higher amount, including interest, so they can finance their closing costs over time.
A seller rarely covers the closing costs out-of-pocket. That’s why the sales price tends to increase.
Your Home Might Not Appraise Well
If a seller covering the closing costs causes a higher sales price, the buyer may find themselves facing appraisal problems and financing difficulties. For instance, if they need a mortgage to buy the home, the lender will order an appraisal to assess its value. The lender will only approve the loan if your home appraises at or above the new sales price.
If the home fails to appraise for the higher sales price, the buyer will have a serious financial issue. Their mortgage lender will only give them a percentage of the appraised amount, and they’ll have to pay the remaining amount out-of-pocket. If they can’t cover the balance, they won’t be able to buy your home.
More Interest Over Time
If closing costs and appraisals result in a higher mortgage loan amount, the interest costs can go up too. For example, if your buyer takes out a 30-year loan for $300,000 with a 3.5% interest rate, they’ll end up paying $184,968 in interest over a 30-year term.
If they ask you to pay $5,000 in closing costs, resulting in a $305,000 loan, they’ll pay $188,051 in interest over the term of the loan. The difference in interest paid is about $3,000, meaning a higher monthly mortgage payment of about an extra $25 per month. The buyer may have to make a more significant down payment, too.
More Costs For You
Although paying for closing costs results in a higher sales price, there’s still an added cost to you as the seller, especially if you use a real estate agent. Agents earn commissions based on the sales price. So, if the price goes up by $5,000, it means that you have to pay a few extra hundred dollars in commissions–which come straight from your pocket.
But, you can avoid these commissions and the long and tedious closing process by selling your house to a cash buyer. If you want to sell your home in San Diego, you should consider selling it to Trusted House Buyers, who specialize in buying distressed houses from homeowners who need quick cash.
Final Thoughts
All in all, you have to familiarize yourself with all of the costs of a real estate transaction to avoid disappointments and unpleasant surprises. And if you’re feeling overwhelmed, click here for tips for moving out of state for the first time.