Avoiding Surprises At Your Real Estate Settlement When You're The Seller
Many would be FSBO (For Sale By Owner) real estate sellers are intimidated by the thought of settlement costs, who pays what, and who does what when they and their buyer go to settlement. How can you find out what to expect?
Customs and laws vary from one geographic area to another, so you'll have to do some homework. However, one thing is uniform at all settlements. All elements of the financial transaction among the buyer, seller, lender(s), settlement officer, taxing entities, surveyor, appraiser, termite / flood determination / home inspection and any other reports or service providers paid out of the proceeds of the settlement show up on a form that is universally used.
This form is usually referred to as a "HUD-1." It's a two page document which is a SETTLEMENT STATEMENT approved by the U.S. Department of Housing and Urban Development. It is used in all states.
The buyer, seller, lender (if there is one, and most buyers need one), loan type, mortgage insurance case number, information as to the identity and location of the property being sold, the settlement agent (lawyer, settlement company, title company, etc.), and place and date of settlement are shown at the top of the first page.
The rest of the form is divided in half vertically with financial information about the buyer's transaction shown on the left and financial information about the transaction as it affects the seller shown on the right.
Since this article is from the seller's prospective, we're going to focus on the seller's part of the form. The line numbered 502 shows "Settlement charges to seller (line 1400). This line shows the total of all the settlement charges that come from the seller's funds and is the total shown at the bottom of page 2 of the form, so it makes sense to start on the second page of the form. (Isn't that just like the government?)
So flipping to the back (the second page is on the back), the first few items concern the real estate commission. If one is due, the total amount of the commission is shown, as is the percentage of the sales price it's based on. Also, the real estate brokerage firm, or firms, to whom it's paid, and the amounts paid each are shown. If either firm charges an administrative, or transaction fee, that is shown also.
You will not be charged a real estate commission or fee unless you agree to pay one in advance. FSBO sellers often agree to pay a partial commission (usually about half the typical commission) if a real estate firm brings them a buyer. In the part of Virginia (greater Fredericksburg area) in which I worked as an agent, then broker, for more than 20 years, the typical residential real estate commission is 6% of the sales price. Typically, this amount is divided equally between the listing and selling firms, so the firm bringing the buyer to the transaction would be paid 3%.
If the seller agrees to pay any of the items normally paid by the buyer in connection with getting a loan, this is shown next. In "hot" markets, there are not usually charges of this sort. In very slow markets, there often are. You should not be charged anything here unless you have agreed in advance to pay something.
The next section that will affect you comes under the broad category of "TITLE CHARGES." These are items typically charged by the settlement agent (and a lawyer if the settlement agent is not a lawyer). They include things like the settlement or closing fee, title search, title examination, document preparation, title insurance, a payoff process fee (for handling the payoff of your mortgage if there is one), FedEx fees (to get any payoff to your lender quickly), and recording and release fees (to record the new title at the courthouse and get a release of the old lien from your mortgage holder).
As an example, I'm looking at a HUD-1 from the sale of a house for $700,000 in Virginia in 2008. Under TITLE CHARGES, the seller paid the attorney who handled the settlement $150 for handling the closing, $95 for document preparation, $170 to handle the mortgage payoff and cover FedEx fees, and $62 to handle recording the new ownership and get a release of lien from the mortgage holder. This was fairly typical for the time and place. To get a feel for what you can expect, ask several settlement agents in your area what they would charge.
As an aside, title insurance mentioned above is a one time charge to insure the value of the title. The buyer's lender usually requires it to insure the full amount of the mortgage with the lender named as the beneficiary. The buyer can also insure the value of the home in full so that he/she/they are paid for any value above the mortgage amount if anyone should ever be able to prove that they are the rightful owners of the house instead of the buyer. This insurance premium is usually paid by the buyer. In the example I'm looking at, the one-time premium was $3,254.
The next category is "GOVERNMENT RECORDING AND TRANSFER CHARGES." The amounts charged vary by jurisdiction, so you need to find out what things are charged where your property is located. In our example, there were recording fees and city taxes charged to the buyer, and a Grantor's Tax of $771.50 charged to the seller.
Finally, there is the "catch-all" category of "ADDITIONAL SETTLEMENT CHARGES." The cost of a survey (usually required by the new lender) is included here, but is usually paid for by the buyer. What affects the seller and appears here is things that he agreed to in the sales contract that haven't shown up in the other categories. If agreed to, things like the premium for a homebuyers' warranty policy ($55 on the example), a pest inspection (termites and other wood destroying insects) report charge ($345 on the example), and anything else the seller agreed to pay that is an optional negotiated item.
Now, it's time to flip back to the front of the form and look at the column marked, "SUMMARY OF SELLER'S TRANSACTION."
The first section is the "Gross Amount Due To Seller." It includes the sales price of the house and the sales price of any personal property that is being conveyed at the same time but isn't covered by the sales price.
The next section is "Adjustments for items paid by seller in advance." Since taxes and assessments are typically prorated, with the seller paying for the part of the year he owned the property, and the buyer paying for the part of the year after the settlement takes place, anything the buyer has already paid for beyond the settlement date is credited back to him here. (In our example, city real estate taxes had been paid for a period of time that went beyond the settlement date, so $707.52 was credited back to the seller here.)
The numbers in the first two sections are added together to get the "GROSS AMOUNT DUE TO SELLER," and it's shown next.
The next section is "Reductions In Amount Due To Seller." The total of the settlement charges from page two goes here. Also, any mortgage loan payoffs (the unpaid balance owed on your mortgage or mortgages) go here.
The next section is "Adjustments for items unpaid by seller." This section includes any taxes or assessments that have accrued through the day of settlement, but haven't been paid yet. The amounts for the part of the year the seller owned the property will be subtracted from the "gross amount due to seller" here.
Next, the amounts in the "Reductions In Amount Due To Seller" and the amounts in the "Adjustments for items unpaid by seller" sections are totaled.
Then, that amount is subtracted from the "Gross amount due to seller," and the result is "CASH TO SELLER," or what you've been looking for all along, "the bottom line" which tells you how much cash you'll get out of your sale.
By checking out these things in advance, you can minimize surprises at settlement.