Whether you’re buying or selling your own home or an investment property, real estate closing costs are an often misunderstood expense that can heavily impact your budget.
This article is about taking the mystery out of closing costs. We’ll explain:
- What closing costs are,
- How closing costs are calculated,
- Who pays closing costs, and
- How to reduce closing costs.
What Are Closing Costs?
Real estate closing costs are the expenses incurred to transfer a property from the seller to the buyer.
It takes a team of professionals to successfully close a real estate transaction. You have real estate agents, escrow officers, title insurance representatives, appraisers, and lenders who all require payment for their services. You also have ownership expenses (such as property taxes, insurance premiums, and HOA dues) to prorate between the buyer and seller, so that each party is paying their fair share, based on their period of ownership.
Closing costs encompass all of these transfer expenses and ownership prorations.
How Are Closing Costs Calculated?
Calculating the total closing cost due is difficult because each cost is calculated separately, often in different ways. Some fees, such as real estate agent fees, are typically set at a percentage of the property’s sales price. Others, like mortgage loan origination fees, are based on the loan amount. There might also be hourly fees (perhaps for the title research to confirm that the seller has the legal right to sell) and flat fees (perhaps for the inspector who assesses the physical condition of the property).
Each cost is calculated individually, then totaled to show the final amount due.
In an effort to prepare you for the final amount due at closing, you’ll typically get a Closing Statement draft well before the closing date (perhaps a few weeks before, depending on how long your contract period is). However, this draft is subject to change as new information is uncovered. Projections may change if the sales price is renegotiated after the inspection or appraisal, for example. Or the tax assessor may provide new information that changes the property tax calculations.
So the Closing Statement drafts can help you prepare for the final closing costs, but are not set in stone until the Final Closing Statement is issued a few days before closing.
How Much Are Closing Costs?
Because so many different factors go into closing costs, they can vary widely from one deal to the next. They also vary widely between buyer and seller, as each party is responsible for different charges. Let’s start with an overview of how much buyers and sellers typically pay in closing costs, then we’ll dive deeper into the expenses covered in those totals.
How Much Do Buyers Pay in Real Estate Closing Costs?
On average, buyers typically pay 2-5% of the property’s purchase price in closing costs.
It is important to note that buyers are now responsible for their real estate agent’s compensation (which was traditionally paid by the seller until 2024). This fee is entirely negotiable, but may add another 2-3% of the purchase price if the seller is unwilling to help cover this expense.
These closing costs are in addition to your down payment amount.
How Much Do Sellers Pay in Real Estate Closing Costs?
On average, sellers typically pay 6-10% of the sales price in closing costs when covering all real estate agent fees (their agent and the buyer’s agent). If the buyer does not need help covering the cost of their agent, this amount could decrease by 2-3%, leaving the seller to pay somewhere in the 3-8% range.
Detailed Breakdown of Closing Costs by Buyer and Seller
Here is a more detailed look at the expenses that make up closing costs
Closing Costs Typically Paid by the Buyer
Specific closing costs paid by the buyer will vary, but common expenses include:
- Loan origination fees: Administrative charges from the lender to process and set up your new mortgage.
- Appraisal fees: Payment to a certified appraiser who determines the property's fair market value.
- Survey fees: Covers the cost of confirming property boundaries and land features.
- Title search fees: Paid to title professionals who review records to confirm that the property has a clean ownership history and no known legal issues like liens or ownership disputes.
- Homeowners insurance: The upfront premium for the mandatory insurance policy that protects the property against fire, storm damage, and theft.
- HOA fees: The portion of the homeowner association’s dues that need to be paid upfront at closing when you purchase a residential property in a community with shared amenities (like private streets, pools, or parks).
- Escrow reserves. Funds the lender sets aside in a dedicated account to make sure property taxes and insurance get paid on time (even if you miss a mortgage payment).
- Miscellaneous fees. A catchall for smaller charges, such as credit checks, notarizing paperwork, or overnighting important documents.
Closing Costs Typically Paid by the Seller
Sellers usually face fewer closing costs than buyers. Common seller-paid closing costs include:
- Title insurance. This one-time cost provides the buyer with protection against unexpected title issues (like an old lien or a surprise ownership claim) that weren’t caught during the title search.
- Transfer fees. These are administrative charges tied to changing ownership of the property. They might come from the title company, escrow provider, developer, or homeowners’ association, depending on the property and location.
- Home warranty (if offered). Some sellers choose to include a home warranty as a peace-of-mind perk for buyers. It typically covers repairs or replacements for key systems and appliances if they break down within the first year after the sale.
Closing Costs that May Be Paid by Either Party or Both Parties
Some closing costs are shared between the buyer and seller, while others can be paid by either party, depending on the state or the details of the transaction.
Here are a few common costs that may be split or assigned to either the buyer or the seller:
- Real estate agent fees. Before August 2024, it was standard practice for the seller to cover the entire commission (negotiable, but usually 5% to 6% of the sale price), which was divided between the listing agent and the buyer’s agent. Today, as the result of a legal settlement, buyers are expected to pay their own agent’s fee. However, sellers may be willing to offer a concession to help buyers cover this fee in an attempt to make their listing more accessible and appealing to a wider range of buyers.
- Attorney fees. In certain states, hiring a real estate attorney is mandatory to finalize the sale. Even where it’s optional, some buyers and sellers choose to bring in an attorney to review contracts, provide legal guidance, or ensure a smooth transfer of ownership.
- Prorated property taxes. These are adjusted based on the time each party owns the property during the tax year. If taxes are paid in arrears, the seller gives the buyer a credit at closing for their share. If taxes are paid in advance, the buyer reimburses the seller for the portion that applies after the closing date.
- Transfer taxes. Responsibility for this tax depends on state laws. In places like California and New York, sellers usually foot the bill. In states such as Delaware or Nebraska, the buyer pays. Others, like Pennsylvania, often split the tax down the middle.
How to Reduce Closing Costs
Closing costs can often be negotiated between the buyer and seller.
Ways to Reduce Closing Costs as a Buyer
Here are a few proven ways to lower your closing costs when buying a property:
- Consider a less expensive property. Lower purchase prices come with lower closing costs.
- Shop around for services. You don’t have to use the title companies, appraisers, or other vendors your lender recommends. Comparing rates from other providers could potentially save you hundreds of dollars.
- Negotiate lender fees. Some fees, like application or origination charges, are set by the lender and may be reduced or even waived if you ask. This is especially true for buyers with strong credit profiles or investors who use financial services often.
- Negotiate real estate agent compensation. Real estate agent fees are negotiable, so you may be able to talk your agent down. However, you often get what you pay for. The best agents may not be willing to come down much on price.
- Ask the seller for concessions. You might negotiate for the seller to cover some or all of your closing costs as part of the deal, particularly if you’re in a slow market or the property has been sitting on the market without much buyer interest.
- Close at the end of the month. When you close later in the month, you reduce the number of prepaid daily interest charges you owe at closing, which can slightly lower your upfront costs.
- Consider a no-closing-cost mortgage. Some lenders offer loans where they cover your closing costs in exchange for a higher interest rate. This can reduce your upfront expenses, but may cost more over time, so weigh the long-term impact.
- Take advantage of assistance programs. First-time buyer programs and state or local housing agencies often offer grants or low-interest loans to help cover closing costs.
Ways to Reduce Closing Costs as a Seller
As a seller, you may be able to limit your closing costs by:
- Negotiating real estate commission. The largest seller expense is often the agent’s commission. While traditionally 5%-6%, this amount is, and always has been, negotiable. Just make sure you understand how much is going to your agent and how much (if any) is going to the buyer’s agent/ And make sure you’re paying your agent enough that they can afford to properly market your listing.
- Skipping the home warranty. Offering a home warranty can attract buyers, but it’s optional. If your market is competitive or the home is in good condition, you may not need to include one. Foregoing the home warranty could save you a few hundred dollars.
- Reviewing your title company and escrow fees. If you’re choosing the title or escrow company, compare quotes. Some companies charge more than others for similar services. Ask for a breakdown of costs up front.
- Making repairs early to avoid concessions. Buyers often ask sellers for additional concessions to repair any defects found in the inspection. Addressing any obvious issues in advance can prevent last-minute negotiations that cut into your sale proceeds.
- Understanding transfer tax rules. Some states or counties allow negotiation over who pays the transfer taxes. Don’t assume it’s automatically your responsibility. Check your local laws and talk to your agent or attorney.
Mitigate Investment Property Closing Costs with Gatsby Investment
Closing costs are one of the biggest hurdles to buying a property. This is especially true for real estate investors, who often have to make higher down payments than buyers purchasing their primary residence. If you’re looking to invest in real estate without the high upfront expense of the down payment and closing costs, consider alternative real estate investments that allow you to invest in real estate without buying property.
Real estate syndication, for example, allows you to buy into a professionally managed real estate deal and share in the profits. This strategy is more passive than direct ownership, reducing the upfront capital, ongoing maintenance, and property management required of traditional rental properties.
Specializing in high-return-potential syndication deals in Los Angeles, Gatsby Investment has a sterling track record. From 2017-2024, we’ve provided average annualized returns of 22.3% to our investors! Our efficient systems and long-standing relationships with local lenders, builders, and designers allow us to minimize costs and maximize yield potential.
With less than $25K, you could invest in a multi-million-dollar real estate development.
So if you want more of your real estate investment to go toward building equity rather than paying closing costs, explore Gatsby’s unique real estate investment opportunities and choose your project today!