Who pays for what?
A new buyer client recently asked me “Don’t the sellers pay our closing costs?” and it was a good reminder that there is A LOT of misleading information out there that can confuse both buyers and sellers.
Everything is negotiable. Who pays for the title search, the transfer taxes, the HOA fees, even who pays the Realtors who negotiated the transaction.
The Tennessee Purchase and Sale Agreement used for most residential sales outlines these expenses as the seller’s responsibilities:
Seller shall pay all existing loans and/or liens affecting the Property, including all penalties, release preparation costs, and applicable recording costs; any accrued and/or outstanding association dues or fees; fee (if any) to obtain lien payoff/estoppel letters/statement of accounts from any and all associations, property management companies, mortgage holders or other liens affecting he Property; seller’s closing fee, document preparation fee and/or attorney’s fees; fee for preparation of deed; notary fee on deed; and financial institution (Bank, Credit Union, etc.) wire transfer fee or commercial courier service fee related to the disbursement of any lien payoff(s). Seller additionally agrees to permit any withholdings and/or to pay any additional sum due as is required under the foreign Investment in Real Property Tax Act. Failure to do so shall constitute a default by Seller.
Whew. And the following is outlined as the buyer’s responsibilities:
Buyer shall pay all transfer taxes and recording fees on deed of conveyance and deed of trust; Buyer’s closing fee, document preparation fee and/or attorney’s fees; preparation of note, deed of trust, and other loan documents; mortgage loan inspection or boundary line survey; credit report; required premiums for private mortgage, hazard and flood insurance; required reserved deposits for insurance premiums and taxes, prepaid interest; re-inspection fees pursuant to appraisal, insured Closing Protection letter; association fees (Buyer shall be responsible for all homeowner or condominium association transfer fees, related administration fees, capital expenditures/contributions incurred due to the transfer of Property and/or like expenses which are required by the association, property management company and/or the bylaws, declarations or covenants for the Property); and any costs incident to obtaining and closing a loan, including but not limited to: appraisal, origination, discount points, application, commitment, underwriting, document review, courier, assignment, photo, tax service, notary fees, ad any wire fee or other charge imposed for the disbursement of the Seller’s proceeds according to the terms of this Agreement.
Again, whew. If you are involved in a real estate transaction and don’t understand these terms, ask your agent. Do not agree to anything you don’t understand.
So that’s what the contract says by default, but what is typical in our market?
Speaking only from my experience in the Memphis region, this is what I see most commonly:
The seller pays for the title search, to prove they have marketable title (the right to sell the house). They pay their own closing attorney and any fees for paying off their existing mortgage. They usually pay for any special assessments planned by their condo association.
The seller pay their listing agent for marketing the property and negotiating on their behalf. That listing agent’s brokerage in turn often pays the agent who brought the offer, but not always. That is decided between the sellers and their listing agent when the house is listed. If the sellers or listing brokerage is not paying the buyer’s agent, or not paying as much as the buyers agreed their agent should be paid, the buyers will pay their agent as agreed to in their buyer representation agreement.
The buyer pays for title insurance to protect themselves in the future, all costs associated with their mortgage, their closing attorney’s fees, transfer taxes, and prorated amounts for property taxes and home insurance premiums placed in escrow, and of course, the house! As noted above, they also need to pay their agent or request that the listing brokerage or seller do so.
Other than repairs, the things I see most often negotiated are:
A daily rate for a “rent-back” or the time a seller might be allowed to stay in the house after closing to pack up.
Repair credits for items that everyone agrees need to be fixed but either the buyer wants to have done under their own supervision, or the seller doesn’t have the upfront funds or time to repair.
Seasonal items like having a pool closed before the transaction closes.
Appliances, either to stay or be removed.
Furniture. Don’t want to fix that cracked storm window but happy to leave the pool table? Deal.
Home warranty. No way you’re replacing the working 25-year-old beast of a furnace? Maybe the buyers will accept a home warranty just in case it conks out the day after closing.
I haven’t seen anyone offer to pay for the other party’s attorney or inspections, appraisals, etc.; however, if the seller agrees to a general concession, for example 3% of the purchase price, that can be applied to any of the buyer’s expenses as long as the lender approves. Your Realtor should check with the lender before you agree to any unspecified credit like that. Some loan types cap the amount that a seller can credit to the buyer.
Other things I’ve seen thrown in the mix:
A few month’s yard service
Two large outdoor sculptures valued at $50,000
Smoke remediation
A credit to build a fence for the buyer’s Great Dane
All the potted plants on the patio
All the furniture, dishes, and cleaning supplies
Since buyers are paying higher mortgage rates than they were a few years ago, while prices have not dropped significantly, affordability is a big obstacle in the market. We are seeing more transactions with seller contributions toward buyer’s closing costs to help get homes sold. Hence my client's assumption. But you cannot assume anything. Every transaction is unique, and every seller and buyer has different motivations and needs. A seller may prefer a price reduction over providing a credit at closing toward the buyer’s expenses. A buyer, on the other hand, may even be willing to pay a higher price but get a credit at closing to buy down their interest rate. The important thing to remember is EVERYTHING IS NEGOTIABLE.