Closing Costs: The Great Unknown of Real Estate Transactions
By Zachary Mathie, Attorney
When I receive a call from a client and am asked to draft a real estate purchase agreement for a piece of property they are buying or selling, I am inevitably greeted with a moment of silence when I ask them how the closing costs are to be split for the transaction. The moment of silence is typically followed by these three questions:
What are Closing Costs?
In short, closing costs are essentially all fees associated with a real estate transaction aside from any agent commissions that are paid at the closing, which is the point in time when the title to the property being purchased and sold will change hands. For instance, closing costs can include: attorneys’ fees, conveyance fees, survey fees, document preparation fees, owner’s policy of title insurance premium, lenders policy of title insurance premium, inspection costs, title search fee, recording fees, bank fees, and any other costs of the transaction that are to be paid at the closing.
How Expensive are Closing Costs?
The expense involved with closing costs varies from transaction to transaction based primarily on the purchase price and the county where the property being sold is located. The exact amount of many of the fees outlined above are derived as a percentage of the overall purchase price involved in the transaction, and can vary from county to county. For instance, the conveyance fee is a transfer tax assessed by the county auditor on real estate sales. Each county in Ohio varies in how the conveyance fee is calculated. In Holmes County, the conveyance fee is calculated by dividing the overall purchase price by 1,000 and multiplying that number by 4. For a $100,000 real estate transaction, the conveyance fee in Holmes County would be $400 ($100,000/1,000 = 100 X $4). In contrast, Wayne County uses the same formula for calculating the conveyance fee however a multiple of two is used rather than four. The conveyance fee on a $100,000 real estate transaction in Wayne County would be $200. This is just one example of how the calculation for closing fees can alter from one transaction to another.
How are the Closing Costs Typically Split?
I see closing costs split in various ways. In some transactions, the seller and buyer decide to split the closing costs 50/50. In other transactions, the seller or buyer may agree to pay all of the closing costs. There is no right or wrong way to split the closing costs. The ‘typical’ (typical meaning the most often used method in my experience) split is that seller pays: 1) preparation of the deed, 2) state and local transfer taxes, and 3) any survey required to transfer the property (not including a mortgage location survey required by the buyer’s lender). Buyer typically pays: 1) lender’s policy premium, location survey and endorsements and all other costs associated with buyer obtaining financing, and 2) recording of deed, mortgage, and any other documents. Buyer and seller then split: 1) the closing fee charged by the title company handling the transaction, 2) title examination fee, 3) title insurance commitment, and 4) owner’s policy of title insurance premium. Nothing is set in stone when it comes to closing costs. How they are divided differs from one transaction to another.
I realize that the explanations given above were nothing close to exact. But that’s why I refer to it as the great unknown. Due to the varying factors in calculating closing costs, from the location of the property to the purchase price, it is nearly impossible at the outset of a real estate transaction to know the exact amount of closing costs in any given real estate transaction. However, there are various helpful fee calculator tools out there that allow you to plug in specific information regarding your transaction to give you a ball park figure for closing costs. First American Title Insurance Company has a helpful fee calculator at the following link: https://facc.firstam.com/Calculator. If you are thinking about buying or selling some real estate, use the above link to get an estimate of the closing costs involved in your transaction so that you are in a better position to negotiate the terms of the real estate purchase agreement with the opposing party. If you have any questions, the experienced real estate attorneys at Critchfield, Critchfield, & Johnston, Ltd. would be more than happy to take your call and answer any questions you may have.