Real estate sales are highly regulated activities. From the moment a property is offered for sale, dozens of federal, state and local laws determine how it must be advertised, shown and sold. Additionally, real estate agents who are members of the National Association of REALTORS© are obligated to conduct themselves in accordance with the Association’s REALTOR© Code Of Ethics. There are also a number of standard practices that are not subject to regulation – they are traditions or customs. Some are good, such as listing agents providing shoe covers at the door at an open house when the home has spotless carpets and the seller wants to keep them that way. Others, such as customary allocation of real estate sale closing costs, interfere with aggressive sales strategy and should be ignored. Let’s look at why.
First, what are customary real estate sale closing costs? They are simply fees and expenses paid by the buyer and seller during a real estate sale. Each cost is identified on the buyer’s and seller’s escrow closing statements and typically include:
- Escrow fees
- Title fees
- Notary fees
- Appraisal fees
- Inspection fees (general, electrical, plumbing, roof, pest, pool, well, septic, etc.)
- Home warranty
- County and/or city transfer taxes
- There could be other real estate closing cost items, every transaction is unique
Customs regarding who pays which fees, or how fees are split between buyer and seller, vary from county to county and from one end of a state to another, as is true here in California. Even within the relatively small San Francisco Bay area, customary real estate closing cost allocations vary between counties on either side of the Bay. Are some of these cost allocations required by law? One or two might be, or could be in the future, and buyers and sellers should ask their broker or escrow officer to identify allocations mandated by law. The vast majority of allocations are subject to custom, especially payment of escrow fees, title fees and transfer taxes, so let’s consider how to address them in our buying or selling strategy.
Real estate sales strategy is determined by market conditions and the property in question. Purchase price and length of escrow period are just two of over two dozen contract variables available to buyers and sellers when they negotiate a purchase agreement. Accepting customary real estate closing cost allocations takes a significant negotiating variable off the table for both sides. How much negotiating leverage do closing costs have? Maybe a lot, maybe a little. Closing costs can vary greatly based on the sale price, property type and location (tax jurisdiction).
Sellers want to maintain control over closing cost allocations when market conditions favor them (a seller’s market). If there are many buyers and their property is in great demand, sellers obviously have the opportunity to ask for the best price and terms buyers are willing to pay – including payment of a majority (perhaps even all) of the closing costs.
Buyers want to maintain control over closing cost allocations when market conditions favor their position (a buyer’s market). They want to negotiate a purchase agreement that requires the seller to pay a majority of the closing costs. Even in a seller’s market, buyers want to maintain control over real estate closing cost allocations as an offer strategy. For example, if the seller receives three offers and the purchase price is the same in all of them, but two offers include splitting closing costs as customary in the area and one offer states the buyer will pay all closing costs, which offer is the seller most likely to accept?
In summary, never take any negotiating variable off the table when it is not mandated by law. Whether a buyer or seller, look for every opportunity to use market conditions and available negotiating variables to obtain the best possible price and firms in your transaction.
As always, consult with a tax professional when negotiating tax-related variables in any real estate contract.
Do you have a question regarding real estate sale closing costs, buy/sell strategy or any other real estate matter? Please contact John using Contact Us.