Closing Costs

What is it?

Closing costs are the amounts of money a buyer or seller must pay in addition to any sales price. These costs vary by state, and sometimes even by county or city. There are also several closing costs that are charged to the buyer by the lender, which also vary by bank.

How Much Are They?

Closing costs have a lot of variables, but are usually estimated in a range of 2-5% of the purchase price. Below is a list of common costs, and who pays them.

Cost

Escrow Fees

Title Insurance Policy

County Recording Fee

Mortgage Origination Fee

Flood Certification

Appraisal

Inspection

Credit Report

Prepaids (insurance, HOA, etc)

Agent Commissions

Excise Tax

Liens

Who Pays

Split 50/50

Both

Both

Buyer

Buyer

Buyer

Buyer

Buyer

Buyer

Seller

Seller

Seller

Appraisal

What is it?

Any time a buyer is using a loan from a bank to purchase a home, the bank will require an appraisal. The appraisal is not related to the inspection. The purpose of the appraisal is for the bank to ensure that the home has enough value to secure the mortgage in case the buyer defaults on the loan. The appraiser is assigned by an Appraisal Management Company (or AMC), which is contracted by the bank. The AMC has a pool of appraisers, and the appraiser chosen for a given transaction is random and cannot be influenced by any parties in the transaction. In fact, your loan officer is actually forbidden from contacting the appraiser. The appraisal fee is set by the bank, and can range any where from $400-$1000+. Often, if time is tight, a buyer can pay a higher fee for a quicker turnaround on the appraisal report.

What About Low Appraisals?

Many buyers who have talked to friends or family have heard of nightmares of low appraisals. The truth is that low appraisals are actually quite rare (occurring in about 3% of transactions). The appraisal could also come in high - who doesn’t like instant equity!?

When an appraisal does come in low, there are many options for buyers, sellers, the lender, and the Realtors in the transaction to explore. There are many ways to counter a low appraisal, though oftentimes they are not successful. In most situations, the buyer and seller agree to a middle ground price change where the purchase price is lowered a little, and the buyer comes up with a little extra cash.

Commissions

What is it?

In most real estate transactions, the commission is a percentage of the purchase price paid to the agents involved. Contrary to popular belief, there is no set or standard commission, and every agent has the right to set their own on an individual or transaction-level basis. Even publicly discussing or mentioning a standard commission rate violates the law, as it could be considered price fixing.

Who Pays It?

In a typical transaction, a seller pays their agent’s commission, and sets aside a negotiated percentage for the buyer’s agent. This split is disbursed at the end of the transaction based on cooperative agreements between the brokerages and the MLS, as well as the agent’s agreement with their brokerage.

Comparative Market Analysis (CMA)

What is it?

When evaluating the price of a home or property, most real estate agents will use what’s commonly called a CMA. The CMA is a list of similar homes, in a similar area, and with similar features, as the home being evaluated. After determining the list of comparable homes (called “Comps”), adjustments can be made for differences between the homes.

How Accurate are CMAs?

This is a complicated question. The CMA’s accuracy is dependent on a lot of factors, any number of which can reduce the accuracy. One of the biggest challenges is that CMAs look at sales in the past, while trying to evaluate an offer or list price in the present or future. And time changes markets and values.

Another factor that goes into most agents’ pricing suggestions is the agent’s experience. An agent with more current experience will typically have a better idea of nuances in the market that other agents wouldn’t be aware of. Pricing is one of the top reasons to always hire an experienced REALTOR®

Contingencies

What is it?

Contingencies are the part of the offer that sets what must be satisfied for the transaction to continue. If a contingency is not satisfied, this can result in a buyer being able to back out and have earnest money returned; or a seller being able to back out and keep the buyer’s earnest money. A contingency typically specifies the following: Who is responsible; when it is due; and what happens if it is not met.

What Are Common Contingencies?

There are several contingencies in nearly every offer. The most common in our market include:

1. Financing/Appraisal

2. Lead Based Paint

3. Inspection

4. Title

5. HOA/Resale Certificate Review

6. Well Testing

7. Septic Inspection

Inspection

What is it?

The home inspection is typically performed by the buyer, who hires a licensed inspector to ensure the home is in acceptable condition. Because a buyer and their inspector are responsible for any damage done to a home during an inspection, the inspection is considered a “Visual Inspection.” This doesn’t mean the inspector doesn’t due a lot of investigating and testing, but it does limit their ability in some situations.

A buyer should always hire an inspector who is trained and licensed in home inspections. Despite being legally capable of doing a home inspection, construction contractors are not recommended, as this is outside of their typical course of work and can cause conflicts.

The inspector will evaluate all systems of the home, and then generate a report for the client. Nearly all inspection reports are 30-50 pages long (even brand new construction), as it is a report rather than just a list of problems. The report typically includes several photos and pieces of information.

How Much Are They?

The cost of an inspection can vary, and the prices are set by the inspector. The typical cost ranges from $250-$600, depending on the complexity of the home and it’s systems.

Pre-approval

What is it?

Most buyers use a mortgage loan from a lender to purchase their home. Prior to placing an offer on a home, buyers need to obtain some type of letter from the lender indicating that they are qualified for the loan. This is typically called a pre-approval, though there are multiple levels and names. A pre-approval letter is essential to accompany a buyers offer.

What are the Different Types?

As mentioned above, there are three different levels:

PRE-QUALIFICATION: Pre-qualifications were once the norm for buyers making offers. The problem with these, is that anyone with a calculator could create one. These don’t include a review a buyers assets or credit, nor verification of income. For this reason, they are now considered outdated and hold essentially no value in our market.

Typical closing time frame: N/A

PRE-APPROVAL: A pre-approval is the mid-level letter. When a buyer obtains a pre-approval letter, the buyers’ credit is pulled, and assets and income are verified by documents the buyer has (though not yet independently verified with the buyers’ bank and employer). This information is entered into a computer system called Automated Desktop Underwriter (or ADU for short), and it returns a pre-approval amount. This is the standard for most offers.

Typical closing time frame: 30-45 days (some lenders may need up to 60 days)

PRE-UNDERWRITING: For buyers who want an edge in their offer, they can request that their lender put their file through pre-underwriting. When a file is pre-underwritten, the assets and income are fully verified and vetted, and a near full approval is issued. At this point, the only true variables remaining are the subject home and the continuation of the buyer’s employment. This is about as close to secure as a cash buyer, though the closing time frame can be longer than a cash purchase due to needing an appraisal. This is the gold standard, and we generally recommend all buyers attempt to attain this from their lender. Some lenders don’t like to put files through this because it is expensive due to the labor of the underwriting team.

Typical closing time frame: 10-21 days

FSBO (For Sale By Owner)

What is it?

FSBO, or For Sale by Owner, is exactly what it sounds like. In these situations, sellers choose to not use an agent at all when selling their home. In today’s market with numerous options it rarely makes sense for a homeowner to sell themselves. The lure of not paying any commissions may be strong, but very few FSBOs actually end up selling.

For buyers looking at homes, we usually advise against considering purchasing a FSBO. Because the seller is not wanting to work with an agent, the transaction (even with a buyer’s agent) is usually hectic and stressful for the buyer.

Multiple Listing Service (MLS)

What is it?

Agents and brokerages typically belong to a local MLS board. In Western Washington, the local board is the Northwest MLS, or NWMLS. The MLS serves as a facilitation and rule-making body, where all contract templates are provided, and all listings are entered into a database. MLS boards usually serve a particular geographic region, and some agents may belong to multiple MLS boards if they commonly work in different areas.

Escrow

What is it?

As if the terminology in real estate wasn’t confusing enough already, escrow can actually have multiple meanings. Many people are familiar with an escrow impound account, where reserves are held in order to pay certain costs of owning a home (or as otherwise required by a bank), such as property taxes or HOA dues.

During the transaction, however, escrow is generally referred to as the company handling the fiscal duties of the transaction. The escrow company holds deposits (such as earnest money), pays off seller liens, and disburses the money according to the contract agreed to between the parties.

Watch Out for Wire Fraud!

Wire fraud is rampant in real estate transactions, and often occurs when bad actors present themselves as the escrow company to trick buyers or sellers into sending them money. If you are using a wire transfer, always get the instructions from your escrow officer by calling them directly on the phone. DO NOT EVER USE WIRE INSTRUCTIONS RECEIVED VIA EMAIL!

Title Report

What is it?

During the transaction, the title company will run a title report. This report searches all public records for any issues, sometimes called “Clouds,” on the record. There are some very common records, such as CC&Rs, utility easements, or mineral rights. Buyers and sellers have the opportunity to review these reports, and be able to request changes (depending on the contingencies included in the offer). It’s important to note that items on a title report can almost never be removed, so if there is something objectionable the resolution typically involves not moving forward with the purchase.

What About Liens?

It is normal to have liens on a title report, as most owners have a mortgage at a minimum. By Washington law, all liens must be removed from title prior to selling a home, so these will be arranged to be paid and removed by escrow at closing. If a lien can’t be removed for any reason, the sale cannot be completed.

iBuyer

What is it?

iBuyer services are a new concept in the real estate industry. In the iBuyer scenario, a seller sells their home directly to the iBuyer company. The iBuyer is usually a brokerage or large clearinghouse. Sellers usually give up a significant amount of value in exchange for convenience and quick turnaround. Most iBuyer programs buy homes as-is, and can close as a cash purchase in 1-2 weeks. For sellers who are willing to give up 5-10% of their home’s value, this can be an attractive option.

What Are My Options?

At the moment, there actually aren’t any iBuyer options in the Seattle area from any of the major players. Our team is continually monitoring this segment, and will work to partner with them as they become available in the future in order to provide this as an option to our clients.

Closing

What is it?

Closing is when final settlement of all finances, and transfer of a home’s deed, happens. Different areas of the United States handle closing differently, so it’s important to know the process where you live. In Washington, we are considered an escrow state. This means that buyer and seller document signings almost always occur prior to the closing day, an the title company finalizes all of the paperwork with the respective county on closing, as well as receives and disburses all funds as agreed upon on that day.

Aren’t There Attorneys Involved?

In some states, attorneys handle much of the paperwork once terms are negotiated with agents. In Washington, it’s very rare to have an attorney involved in a transaction. Agents (or Brokers) are given a set of template documents and terms that are able to be used without the assistance of an attorney, and escrow officers are Limited Practice Officers who are provided with the legal scope to complete their job. If a transaction, or any terms of a transaction, fall outside of the broker’s education or provided guidelines, they are not allowed to provide guidance for that portion and should recommend the hiring of an outside attorney. Our MLS and state have most situations covered with the template forms, therefore it is uncommon to find yourself in this situation.

Earnest Money

What is it?

The Earnest Money is a good faith deposit that is made when an offer is accepted, and held by the escrow company until closing. It shows the buyer’s seriousness in the offer, as it is the amount the buyer is willing to to give up should they choose not to close for any reason other than those provided for in the offer contingencies. Earnest money is not additional to the purchase price, but part of it. The earnest money will go towards the purchase price, closing costs, or other fees at closing; any balance will be returned to the buyer.

What is standard?

There is no set standard earnest money amount, but we typically see 1-5% of the purchase price (in Washington State, a seller can’t keep more than 5%, even if a buyer offers more). The higher the amount, the more seriousness the buyer shows. We typically recommend no less than 2%, and usually suggest 3-4%.

Keep in mind that this must be deposited within two days of an offer being accepted, so this needs to be in a very liquid account that can be accessed easily. We recommend buyers searching for a home have this available in a savings or checking account.

Buyer's and Seller's Agent (Broker)

What is it?

The buyer’s agent in the transaction represents the buyer, and the listing agent represents the seller. In Washington, agents’ legally licensed title is Broker, while their managers are title Managing Broker or Designated Broker (depending on the brokerage’s structure). The agent has strict fiduciary responsibilities to their client as outlined by Washington State Law, including the Law of Agency and real estate laws. Most agents are also Realtors and must abide by the National Association of Realtors’ Code of Ethics, and attend 30 hours ethics training every other year.

Who is the Selling Agent?

If the terminology of agents wasn’t already confusing enough, you may hear the terms “Selling Agent” or “Selling Office". They are both actually the buyer’s agent, despite sounding like they would be the sellers agent. This is because the listing agent is considered to have listed the home, and the selling agent is considered to be selling the home to their buyer.

Mortgage Terms

What is it?

There are many terms that your lender may use, those they vary by lender. Rather than define each one (we’re not loan officers), we would prefer to leave it to the experts. Here is a list of common terms to be aware of:

• Private Mortgage Insurance (PMI)

• Interest Rate Types: Adjustable or Fixed

• Annual Percentage Rate (APR)

• Loan Program Types: Conventional, FHA, VA, USDA

• Washington State Housing and Finance Committee (WSHFC)

• Equity

• Amortization

• Cash Reserves

• Debt to Income Ratio (DTI)

Settlement Statement

What is it?

The final accounting of all monies handled during the transaction is printed on a Settlement Statement. This is prepared by the escrow company, and an estimated statement is typically available 2-3 days prior to closing. Your agent should review the estimate, and notify the escrow company of any concerns. However, the agent is not apprised of what fees or credits are related to the lender, so the buyer or seller should always review the statement carefully.

What if Something Doesn’t Look Right?

Should any discrepancy be found, the buyer or seller should notify escrow, their agent, and their loan officer right away. Corrections can be made after signing, so this should not hold up signing, but every party should be made aware that closing cannot continue until any errors are corrected. Your agent should be able to handle this for you.

Discount Brokerage

What is it?

Discount brokerages come in a few different forms, but the premise is largely the same: Discounters aim to save people money. They count on consumers either not needing full service, or not understanding the risk of buying or selling a home without full service representation.

What Do I Need to Know?

Our team has extensive experience working for discount brokerages (which is why we choose to be full service). Some discounters lure consumers with low fees or commissions. Some are up front about their limited services, while others claim to provide the same service as a full service agent. The discount option may work for some, but be aware that no discounter provides the same service as a full service agent. Many consumers express frustration with their discounter, especially when it comes to having someone available to take the time to go over every step and explain all of the options for their situation. Often times, discounters force their customers to work with several different agents throughout the process, many with no knowledge of the client or their home prior to meeting.

The truth is that there is no magic way to cut costs without cutting services. But for those who don’t want full service, the discounter may be a viable option.