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Q & A with America’s Real Estate Professor: Closing costs paid by the buyer

Zillow • Oct 15, 2013 at 4:07 PM

Closing Costs Paid by the Buyer

Q. I’m buying a property and there are thousands of dollars worth of closing costs that I understand I need to pay. Does the seller pay some too? It just seems like a lot of money. Marjorie L. Des Moines, Iowa

A. There are lots of transaction costs on real estate deals, paid to lots of different parties. The seller pays some, you pay some and the cost is shared on others.

Real estate transactions are very complicated, and in order for transactions to go smoothly, there are lots of professionals that need to be involved in the purchase and sale of real estate.

What you pay and what a seller pays is governed by the nature of the cost and sometimes local customary practices and/or whatever is negotiated in your purchase contract.

As a buyer, you should expect to pay all the financing costs – appraisal, loan fees, credit report and title policy for the lender. You would also probably share the escrow costs, plus government recording fees and taxes as well as notary fees. Depending on the price of the property – whether or not you are financing it and if it is near property tax due dates – if you are escrowing taxes and insurance, it will probably end up being a minimum of several thousand dollars and for more expensive properties could easily add up to $10,000 plus.

Make sure to get a Good Faith Estimate from your lender and take the time to review each line item and cost. Then you will know what costs are involved for purchasing a property. Be advised, it will cost more than you think. Thanks!

Building a Home

Q. We are searching for a home in the San Francisco area and cannot find one that suits us. We’re fortunate to both have great jobs, so we can afford to buy a tear down and have a home built that we love. But we’ve been warned by many people to find an already built property and not to get involved in having a custom home built for us. Thoughts? Marti and Tina J., San Francisco area

A. Those warnings are real and you should seriously consider whether you want to have a custom home built. First, try to find someone who was happy with the process and costs. I bet you’ll have a tough time doing that.

Real estate building in general is one of the highest risk projects that one can undertake. Costs and fees – architect fees, impact fees, plan check fees, consulting fees – typically spiral out of control from day one. And that’s before you even put a shovel into the ground!

You’ve also got the new neighbors that come out of the woods to fight you or push for design changes that add to your costs – even if they like the project – that usually delay the project for months at a minimum, while you pay, pay and pay.

Then you’ve got to negotiate with the general contractor, the construction costs, insurance issues and be able to determine at the end if the builder did a good job.

An average person should find a home they like that is already built and maybe modify it somewhat if needed. This will give you the greatest chance of keeping your finances, stress levels and marriage intact. Good luck!

Leonard Baron, MBA, is America’s Real Estate Professor®. His unbiased, neutral and inexpensive “Real Estate Ownership, Investment and Due Diligence 101” textbook teaches real estate owners how to make smart and safe purchase decisions. He is a San Diego State University lecturer, blogs at Zillow, and loves kicking the tires of a good piece of dirt! More at ProfessorBaron.com. Email your questions to: Leonard@ProfessorBaron.com

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