Who Pays Whose Closing Costs?

"No buyer in their right mind pays their own closing costs. The seller will do that."

That's what one of my buyers was recently told at a "first time homebuyers seminar." It didn't strike me as particularly useful information. But it did make me realize that a lot of buyers don't fully understand the concept of "closing costs", whose costs are whose, what those costs go toward, and who's responsible for paying them.

I think a lot of buyers lump all "closing costs" into the category of "what it costs to close the deal", figure those costs are all mutually incurred, and thus each party equally benefitting. Under that scenario, one party is as responsible as the other, and who pays what is strictly a matter of negotiation.

But that's not the case. In Colorado, the only real expense that truly benefits both parties equally is the 200 bucks or so that the title company is paid to close the transaction. That fee is usually split between the buyer and seller. In addition there are some nominal recording and transaction fees required by the various municipalities for the privilege of recording the transaction. These fees are very, very small as an overall percentage of the total closing costs.

So when a buyer pays thousands of dollars in closing costs, what are they paying for? The vast majority of that money is paid to the buyer's lender for the buyer's loan. Here's a rough overview of how it breaks down:

Origination fee: Most lenders charge an origination fee of 1% of the loan amount. That's a lot of money -- $1000 for every $100,000 borrowed.

Points: Some buyers choose to pay additional "points" (usually 1% of the loan amount for every point) to buy down their interest rate.

Title Insurance: The lender doesn't want to get stuck with a loan on a house that the buyer doesn't rightfully own.

Appraisal: Because the property is the collateral on the loan, the lender will take it back if the buyer fails to make payments on the loan. The lender therefore has a vested interest in making sure that the house is worth what they're paying, and so they require an appraisal of the property to. Does the lender pay for that? Of course not -- the buyer does!!

Days of Interest: Most buyers are delighted to find out that they won't have to make their first house payment until the first day of the second month after closing. In other words, if the purchase closes in June, they won't have to make their first house payment until August 1st. There's a reason for that. Mortgage payments are made "in arrears", which means you're always paying for the previous month. An August 1st payment is paying the July interest expense. But where did June's interest go? It's collected at closing, when the buyer pays the interest on their loan for the rest of the month. If the loan closes early in the month, that can be equal to almost an entire month's loan payment.

Escrow: Most buyers set up their loans to take a certain amount every month for property taxes and insurance. Their lender will then require that the buyer set up a reserve in advance (ie at closing) so that those escrow accounts start out with a positive balance.

Fees, fees, fees: Processing fees and handling fees and overnight shipping fees, blah, blah, blah. If the lender incurs an expense along the way, it's passed on the the buyer.

All of these fees are the buyer's expenses. They benefit the buyer, and paying them is the buyer's responsibility.

Sometimes buyers, especially first-time buyers, don't have the thousands and thousands of dollars on hand that they need to close their loans. So, as a part of their offer, they ask the sellers to pay a certain amount toward their closing costs. Sellers will often agree to this because they realize it's the only way this particular buyer could buy the house. But they mentally subtract that amount from their net proceeds, and negotiate the price accordingly. In other words, if they're agreeing to pay $4000 in closing costs, they're going to ask for $4000 more in the purchase price than they would have if they weren't paying closing costs. Because essentially it's money they're giving to the buyer to pay costs that are the buyer's responsibility and for the buyer's benefit.

Remember, the sellers have their own closing costs, and they're generally much more than the buyer's costs. Seller pays:

Agent commissions: The seller pays both real estate agents. Yes, the seller generally pays anywhere from 5% to 7% of the purchase price of the home for commission, including 2.8% that goes to the buyer's real estate agent. That's a pretty good deal for the buyer!

Title Insurance: This is purchased for the sake of the buyers, to assure them that that they're not ending up paying for a home they don't legally own.

Property Taxes: The seller pays the buyer for whatever property taxes are owed for the days of the year the seller lived in the house. (The buyer will turn around and give that money to the county when the tax bill comes!)

HOA Transfer Fees: Oddly, this can add up to lots of hundreds of dollars. HOA management companies often charge into the three figures just to write a letter.

So will the seller pay the buyer's closing costs? That depends on a lot of factors. How long has the house been on the market? How "motivated" (anxious, desperate) is the seller? Can the seller make up enough in the purchase price to justify the money they're giving back in the form of closing costs?

Sometimes asking the seller to pay for closing costs is the right thing to do. But just know that "it all comes out in the wash." Purchase price or closing costs, sellers are going to be looking at their bottom line, and negotiating accordingly.

Slow Market?

"I'm sorry. That house just went under contract."

"Please submit your offer, but know that we've already received two other offers on that property."

We haven't hear talk like that too often in the past couple of years, but I'm certainly hearing it now. Over the past several weeks, I have faced the following scenarios:

I take buyers to look at a house that's been on the market for three days. While we're there two other potential buyers come through with their agents. My buyers like the house and make an offer that evening. Agent has already received another offer, and he receives a third the next morning. We're in a three-way bid situation. We get the house

I take buyer to look at house that's been on the market for two days. She falls in love with it. Having learned my lesson, we go straight back to write up the contract. I call the listing agent to tell her an offer is coming in. She tells me "Oh, that property just went under contract."

I take a buyer to look at a condo. She likes it a lot, but has a couple of questions. I call the listing agent, who tells me "Oh, that property just went under contract."

I take a buyer to look at houses. She likes two of them, and wants to go back and look again a couple of days later. Both have gone under contract.

If I'm with a buyer and we find the property they want, I am encouraging them to work with me to submit the offer ASAP. I would obviously never pressure anyone to make a decision before they're ready or submit an offer before they're certain. But once they're certain, it's time to act. I'm tired of seeing my buyers disappointed!

So I think the market is picking up! Granted, this is the case for certain well-priced properties in good condition in desirable neighborhoods. There are still plenty of homes languishing on the market for various reasons. Some sellers still think it's 1999 and that their homes have been appreciating at double-digit rates for the past few years. Some homes just aren't desirable. And some perfectly good, well-priced homes just haven't found the right buyer yet.

But, all in all, I'd say the signs are good!

Champagne Tastes on a First-Time Homebuyer's Budget

When I'm wearing my "buyer's agent" hat, I work with a lot of first-time homebuyers. I love my first-time homebuyers. They're open, eager to learn and very excited about the prospect of owning their own home. Every single one of them has been smart, reasonable and a lot of fun to work with.

It's other realtors' first-time homebuyers who are getting on my nerves lately. I'm hearing more and more about a trend among first time homebuyers making offers on listings. They can't afford a new house, or they want to live in a neighborhood where there are no new houses. So they make an offer on an older home, and then they expect the sellers to turn it into a new home.

It doesn't work that way.

Of course, most homebuyers -- unless they're buying a "fixer" house -- want their new home to be relatively free of major defects. That's what an inspection is supposed to reveal, and what the inspection notice is supposed to address. But I'm hearing more and more about buyers -- mostly young buyers -- who are contractually agreeing to purchase homes, and then during the inspection period they are asking for enormous concessions to replace perfectly good fixtures and systems simply because they aren't shiny and new.

Older homes, especially those not located in "hot" neighborhoods, are generally priced lower than newer homes for a reason. They're older. The upside to that is that they often have more "character" than their sometimes bland newer counterparts. But the downside is that the laws of nature dictate that everything disintigrates eventually, and an older home may be a little further down that road than a new home.

I don't know why this is happening. Maybe it's some kind of sociological condition brought about by the expectations of the current generation. If that's the case, it isn't universal, because I already told you that my young clients are all fabulous. Maybe these buyers have just been reading the newspaper for too long. (Or the internet -- twentysomethings don't read the newspaper, do they?) They read about the "buyer's market" and maybe they start to believe that all sellers are desperate.

Generally, they aren't. And exhorbitant, unreasonable inspection demands tend to make them very cranky and more apt to say "so long" than to continue negotiating.

Whatever the reason, it's not a good trend. Sellers lose weeks of exposure to potential buyers while their houses are "under contract," only to be faced with unreasonable and really impossible inspection demands that kill the sale. Buyers, aside from wasting the sellers' time, waste their own time, their realtors' time, the title company's time. I guess it's good for the inspectors, but I really don't see where anybody else benefits.

It's important to be reasonable in the inspection period. Sure you should to ask them to address the sagging roof or the furnace that's about to blow. But don't expect sellers to wave their magic wands and turn old houses into new.

Because what is old is not always new again.

Choose your mortgage broker carefully

As long as the rate is good, it doesn't really matter who does the loan. Right? Wrong. It does matter. It matters when you (or, more likely, I) get the call saying "Umm. We're not going to close on time."

Seriously. I get some variation of this call far too often. Sometimes it leads to a wildly stressful closing day, postponing and rescheduling the close time, wondering if the funds are going to come in. Sometimes it leads to a close "in escrow" before the funds have arrived, which leads to me spending the entire next day on the phone begging the mortgage officer to push the wire through so we can complete the transaction.

Sometimes it leads to weeks and weeks delay. And sometimes, after all of that delay, it leads to no closing at all.

That's why it scares me to death when a buyer tells me "Oh, yeah, my buddy/handyman/manicurist/whomever has started doing mortgages, so that's who I'm using for my loan."

Mortage interest rates don't vary too much from lender to lender. They're set by the market. But in a real estate transaction, a good mortgage broker is worth his or her weight in gold.

In a real estate transaction, mortgage brokers have deadlines they need to meet in order to keep the transaction running smoothly. The two most important are the appraisal deadline and the loan commitment deadline. If those deadlines are missed, it throws the entire transaction into chaos. Often the close is delayed. And the longer a close is delayed, the greater the chances that the transaction won't close at all.

Or sometimes mortage brokers "approve" borrowers they have no business approving, or approve them for loan amounts the borrowers can't qualify to borrow. There's no time like a few days before closing to find out a buyer doesn't really qualify to buy a house he's planning to buy.

If I'm working with a buyer who doesn't have a relationship with a good, reputable lender or mortage broker, I sent them to Deana Hollstein at Colorado Mortgage Alliance. I get nothing for referring clients to Deana. No referral fees, no trips to exotic locales.

What I do get is the knowledge that Deana takes her commitment to her clients as seriously as I do, and she has taken very, very good care of any buyer I have sent her way. Deana shares my business philosophy of "first look out for what is best for the person." She's honest with them about what they qualify for and how the loan programs work. And she seriously cares about making sure they aren't getting in over their heads or borrowing more than they can afford. Deana also takes her deadlines very seriously. She'll move heaven and earth to make sure that everything is done when it is supposed to be done. When Deana's handling my buyer's mortgage, I can breathe a whole lot easier.

Whether it's Deana or someone else, a good mortgage broker can make the difference between a stressful, delayed closing and a stress-free transaction that closes on time.

Trust me, I know.