Some closing costs to sell are not negotiable and are necessary to sell. Some costs are negotiable. The proceeds you will receive after your sale is a combination of the original loan amount that is paid down over the years and the increase in value you have obtained over the years then subtract the expenses to sell. This calculation is called your equity. Equity is basically your net proceeds after expenses. This post will help you understand how to calculate every possible cost to determine what your net proceeds will be after selling your house.
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LOAN AND LIEN PAYOFF
The loan you originally obtained to acquire your home or any refinanced loan balance will need to be paid off. This is required and necessary to sell your home. The payoff is ordered by the title company around 1 week prior to your closing date. It is usually good for 15-30 days. Once you close, the title company pays your loan(s) off. This is usually done electronically and posted within 1-3 days. In some cases a person may have a 2nd lien for a pool or home addition or originally used a 1st and 2nd lien to purchase their home. If this is the case, in order to sell both the 1st mortgage, the 2nd lien and any additional liens will need to be paid off . Other liens could include contractor liens or tax liens, however, these are not common.
TITLE COMPANY/ESCROW FEES
In Texas using a Real Estate Attorney is not required. An attorney can provide an extra layer of protection when selling, but unlike some other states, is not required. Texas is an Escrow State where an escrow or title company directs the closing of a real estate transaction. They act as a neutral third party to coordinate the closing. Their duties include having the buyer and seller sign documents, hold earnest money, release earnest money when a contract is terminated and disburse funds after closing. Each title company employs an attorney to draw the deed for closing and to do an Abstract of Title. They also provide a commitment to issue a title insurance policy to the buyer and actually issues the policy to the buyer after closing. The seller fees are typically around $1,250.
PROPERTY TAXES/ESCROW ACCOUNT
Around 70% of all mortgages have escrow accounts. An escrow account makes it possible to pay your property taxes and insurance as part of your mortgage payment and on a monthly basis. The mortgage company pays the property taxes and the insurance one time each year when due. This spreads out these costs over 12 months instead of the large lump sum being paid out 1 time a year. The other approximately 30% of all sellers either don’t owe anything on their house or opted out of having an escrow account. In this case they pay their property and taxes and insurance one time per year when they are due.
It is important to note that if you have an escrow account with your mortgage company you will pay prorated taxes at the closing table, but your escrow account will then be refunded to you within around 30 days of closing by mail. For those who do not escrow the property taxes and insurance the prorated taxes will come out at closing with no reimbursement other than potential insurance reimbursement depending on the time of year your insurance was renewed.
How to calculate prorated taxes: Total taxes for the year divided by 12 x number of months you have lived in the home for the year = prorated taxes owed by seller. For example let’s say your taxes are $7,500 for 1 year. $7500 divided by 12 = $625 per month. Your sale is taking place on September 15th. That is 8.5 months into the year. $625 x 8.5 = $5312.50. This is the amount that would come out of your proceeds and credited to the buyer. In the meantime you have been paying close to $625 per month into your escrow account as part of your payment, therefore, there should be around $5312 sitting in your escrow account that would be refunded to you within 30 days of closing.
Broker commissions are negotiable in the State of Texas. The going rate is typically 6%. Keep in mind that there is a Listing Broker and a Selling Broker. The listing broker represents the seller and the selling broker represents the buyer. The total commission is typically paid by seller then split in half between the two brokers. After brokers receive commission at closing, each real estate agent is then paid a split out of that commission.
Keep in mind you may have to pay some of the marketing expenses if you negotiate a lower commission. You may be cutting into the marketing budget. This budget is very important to give your listing exposure to the highest number of buyers in the shortest amount of time with deep and narrow marketing plans. The outcome of a good marketing plan is the highest possible sales price in a typical period of time for the market area you are located. If you are negotiating a lower commission the real estate agent will typically cut the marketing budget in order to be paid a commission for doing the listing. You may think you got a good deal, however, it could impact your final sales price.
Intermediary transactions are legal in the State of Texas. This is when the listing broker/agent represents both sides of the transaction and receives all the commission. Be careful with this as the listing broker/agent is required to become a neutral party in this case and can only do paperwork for both sides. They are not able to advise or direct either party once Intermediary notice is signed. You may also get a break on the commission in this case, however, you never hired the listing broker/agent to become neutral. You likely hired them to represent you and your best interest. Their role has changed when acting as an intermediary.
TITLE INSURANCE POLICY
The title insurance policy is an important policy that is purchased for the buyer at closing. It is a policy that protects the buyer, during the time of ownership of the property, from any claims of other past owners or relatives of past owners, past due taxes or construction costs that may come about over the years if something was missed in the title search or abstract.
The title insurance policy is negotiable, however, in the State of Texas, traditionally the seller has paid for the title policy. The title policy rates are regulated in the State of Texas and based on a formula which is calculated from the actual sales price. In heavy seller’s markets it is common for the buyer to opt to pay the fee to be more competitive with their offer. Ultimately, it is always a negotiable expense.
You can obtain title insurance premium by clicking on this chart:
Seller contributions are part of the expenses a buyer would have to pay to obtain a mortgage. They can include origination fees, appraisal fees, underwriting fees, escrow account set up fees and other fees. When the seller agrees to contribute to these fees it is called a seller contribution or seller concession. Basically, the seller gives up the amount they are paying for seller contributions and it helps the buyer bring less money at closing. This is not typical in a seller’s market but very common in a buyer’s market.
Home warranties are typically supplied by the seller for the buyer in lieu of repairs on minor items. They cover such things as HVAC systems, Hot Water Heaters, Appliances, Minor Plumbing issues, Minor Roof Issues and there are additional coverage items such as pools, sprinkler systems, garage doors, etc. The policy is for 1 year and the cost is anywhere from $350 + depending on what is covered. Typical Home Warranty paid by sellers are around $500.
HOA TRANSFER FEES
In communities with Homeowner’s Associations there are two fees to be paid. The first fee is for the resale certificate and is usually anywhere from $250 – $600. This is typically paid directly to the homeowner’s association by the seller about 3 weeks prior to closing. It takes some time to get the certificate, so the sooner the better. The buyer would not ordinarily pay this fee. If they were to back out of the sale early on or even later the resale certificate could be used for a future sale. The second fee is the transfer fee. This fee is a negotiable fee between the buyer and the seller and usually runs anywhere from $250-$450.
HOW TO CALCULATE ESTIMATED NET PROCEEDS
Here’s the formula:
Sales Price – Loan and Lien Payoff – Title/Escrow fees-Broker Fees – Title Insurance Policy –Home Warranty – HOA Transfer fee – Prorated Taxes + Escrow refund = Approximate Net Proceeds