Praemonitus, praemunitus. (Forewarned, Forearmed.) Nothing like the Latin to succinctly capture an ageless truism! And while the Latin use of the phrase was focused on military prowess, we in the twenty-first century apply it to all aspects of life. This article focuses on how to be forewarned about the true cost of your home purchase/sale, so as to be forearmed against a traumatizing eleventh-hour surprise phone call about unexpected and bank-breaking “extra” costs.
When looking for a home to buy, or when looking to sell your home, remember to factor in the closing costs. These costs are inescapable and may as well be dealt with up-front rather than cause strife at the end of the process. At the time of closing, there are more important issues to focus on, and more stress than at the onset of the journey. So it is best to handle the issue of these “extra” costs when logic and reason prevail and before the pressure of the closing is looming.
The buyer’s offered purchase price, or the seller’s accepted offer, is the largest part of the money involved in the transaction, but not the only part. If the additional costs are properly factored into a proposal or an acceptance, the buyer and seller are free to focus on the transition of ownership instead of “unanticipated” but completely standard fees that seem to cripple the buyer when it is time to close the deal.
For the buyer, it is best to anticipate extra fees of approximately five percent (5%) of the agreed upon purchase price. For instance, if a buyer pays $2 million for the house, with seventy percent (70%) financing, it is best to assume that the total cost, with fees, will be $2.1 million. The fees will be something around $100,000.
In our assumed purchase of a $2 million home, the buyer’s costs include state and local transfer taxes of approximately $66,000, insurances of approximately $16,000 (title insurance and homeowner insurance), inspection and surveyor costs of approximately $5,000, miscellaneous governmental recording charges, and title search charges of $2,000. In addition to those charges, there are less “standardized” costs of the lender—the buyer’s attorney charges, lender counsel fees, adjustments due to seller for real estate taxes and fuel, etc.
These buyer fees can be separated into categories as follows:
- The home.
- “Adjustments” due the seller for taxes, gas, and oil prepaid by the seller.
- Governmental taxes and recording fees.
- Other professional costs, which consist of surveyor costs, insurance (title, home, and flood, if applicable), attorney fees (for both buyer and lender), inspection fees (house, pest, water, fuel storage tank, mold, searches, for example), and the closer fee.
- Lender costs, including escrows, if applicable.
The seller’s costs are less easy to quantify because payoffs vary, each owner’s basis in the home varies, and whether the Investment Income Tax applies is a question for the accountant to answer. But the seller should discuss these issues with her accountant before deciding how to invest the “net” proceeds.
The seller fees can be separated into categories as follows:
- The payoff of any mortgages.
- Recording fees if there is a mortgage to be paid off.
- Transfer Tax.
- Capital Gains Tax (only due at closing if the seller is not a New York resident).
- Real estate agent fee.
- Investment Income Tax.
So, sharpen those pencils and go find a new home, knowing that the true cost is not a headache that pops-up in the final hour – destroying the joy of the closing – but something, rather, to plan and factor into your new acquisition.
Theresa K. Quigley, Esq. serves as General Counsel and Executive Managing Director, Saunders & Associates