Whether you’re selling or buying, real estate transactions have several supplemental expenses that many may not be aware of. Sellers do not get to simply collect their money and walk away, while buyers should be mindful of multiple costs that exist outside of the obvious down payment and mortgage. Collectively, these charges are referred to as closing costs – expenses that sellers and buyers must incur to complete a real estate transaction. And in California, closing costs are among the highest in the nation, so understanding them is certainly important.
Another major component of real estate expenses is property taxes. Property Taxes are taxes on real estate determined by local governments. Although they are often a component of closing costs, they are also recurring and must be paid twice a year. And like closing costs, property taxes in California are among the highest in the country. Consequently, understanding them will empower you to make informed financial decisions in real estate.
Closing Costs for the Seller in California
While sellers understandably have fewer closing costs than buyers, there are nonetheless a couple to keep note of. Unless you are selling your property completely independently, you will need to pay a broker’s commission, which is a fee paid to the listing broker for marketing the property. Typically, this cost is split between the seller and the seller’s broker.
Another closing cost for sellers is title insurance, which provides assurance to the buyer that the property they are about to take possession of holds a legal and valid title. Under California law, the seller must pay for the buyer’s policy.
Sellers must also pay a documentary transfer tax, which is a tax levied on the transfer of any real property. In other states, this is sometimes referred to as a “real estate transfer tax.”
Other fees for sellers have to do with escrow and accrue while the real estate transaction is pending. This can include several services performed for the purpose of completing the transaction, such as document preparation.
Finally, sellers are often responsible for various seller concessions that are made to the buyer. These expenses are made up of any fees that the seller customarily agrees to pay on behalf of the buyer, such as prorated property taxes, mortgage discount points, and/or a home warranty.
Closing Costs for the Buyer in California
Buyers, on the other hand, have substantially more closing costs to worry about than sellers. These expenses can be categorized as either non-recurring fees (one-time payments), lender fees (involving process of obtaining a mortgage), or recurring fees (paid periodically).
A common example of a non-recurring fee is costs related to escrow. These are standard fees paid for escrow services. Buyers are also responsible for the notary fee, which represents the cost to verify signatures. Finally, buyers must also pay the recording fee, which must be made in order to record the change of ownership with the county government.
As mentioned, buyers must also pay several lender fees in the process of securing a mortgage. The mortgage origination fee is charged for creating the loan, while the underwriting fee is paid for the various paperwork and deal management. There is also a flood certification fee, which represents a risk assessment that the lender conducts for the property. One optional lender closing cost involves discount points, which is a fee that can be paid to reduce the current market interest rate on your mortgage. Finally, lenders typically require buyers to purchase mortgage insurance when the down payment is less than 20% of the purchase price of the home. This protects the lender in the event you are unable to make your mortgage payments.
Lastly, buyers are also responsible for several recurring fees of which the first installment must be made at closing. One of these is prepaid mortgage interest, where the interest portion of your first mortgage payment must be paid upfront. Another recurring fee is property taxes, and typically six months of taxes has to be held in an account. Finally, buyers are required to pay Homeowners Association (HOA) dues. The amount paid at closing must cover the first two months.
When looking into purchasing a home, prospective buyers may come across something known as a “no-closing cost mortgage.” This type of mortgage offers the promise of eliminating all upfront fees for the buyer upon closing. Sounds great, right? In reality, these types of mortgages can be highly deceptive. While you will certainly pay less in the short-term, this special type of mortgage is often packaged with an exceedingly high interest rate. Moreover, the actual closing costs may be buried in the total of the mortgage, meaning that the buyer will then have to pay interest on the closing costs over time. Consequently, no-closing-cost mortgages are generally not as ideal as they seem.
As discussed, property taxes are a type of recurring fee that must be paid by the property owner twice a year. In California, the first installment is due on November 1st and considered delinquent after December 10th, while the second installment is due on February 1st and considered delinquent after April 10th.
Property tax rates are determined by your local county, and the total amount due is calculated based on the value of the home. Naturally, the more valuable your home is, the more you will have to pay in property tax. For many California homeowners, the property tax bill is one of the largest tax payments that must be made all year. As a result, prospective homebuyers would be wise to consider the county property tax rate as well as have an awareness for how their potential home value will relate to their property taxes in order to have a more complete understanding of their recurring real estate expenses.
As you can see, there are many supplemental costs involved with selling and especially with buying a home. I hope that this guide will prove useful for you in whatever real estate transaction you are seeking. If you have any further questions, please don’t hesitate to reach out to me. I would be happy to answer them as well as assist you with selling or buying a home!