No one likes to pay real estate closing costs. Buyers ask me: Isn’t the seller supposed to pay those? Sellers say: What are all these crazy costs – isn’t the buyer supposed to pay?
As a land broker, what fascinates me is that buyers ARE sellers. Sellers ARE buyers. Or they will be, in a few years, or on a different property. They’re the same people! Of course, when they switch sides, they will forget that they thought the other guy should pay.
So, who should pay for closing costs? My answer is: It’s negotiable. But it is generally unwise to negotiate! Regardless of the side you’re on, agreeing to split costs is in your enlightened best interest.
But first, what are “closing costs”? Let’s concentrate on the big ones and set aside the miscellaneous costs. The important closing costs in California are title insurance, escrow, and natural hazard reports. Three other cost items are also significant but not considered “closing costs:” back taxes, other liens, and the real estate commission. So, to discuss all the big numbers, I will touch on those too.
The negotiation on “who pays what” starts when the buyer submits an offer. The buyer proposes “who pays” in paragraph 3 of the standard California Vacant Land Purchase Agreement. The buyer makes their proposal by checking boxes.
There are two customary patterns for sharing closing costs:
First Common Pattern for Sharing Closing Costs
Split all closing costs 50-50 between buyer and seller like this:
The 50-50 split is the pattern I prefer. I’ll explain why below.
Second Common Pattern for Sharing Closing Costs
Another standard pattern is where the seller alone pays for title insurance, the natural hazard report, and miscellaneous costs. The buyer and seller divide the escrow fee 50-50.
The seller is responsible for delivering a clear title. Therefore, the logic of this pattern is that the seller pays for title insurance to show the buyer that the title is clear. Further, California law requires the seller to disclose any natural hazards. Hence, the seller pays for a natural hazard report to comply with the law.
This second pattern is typical for houses and condos in California, so it is also often used for vacant land.
Who Pays Back Taxes, Liens, and the Commission?
Now consider other big-ticket items: back taxes, liens, and the real estate commission. These are not considered “closing costs.”
The boilerplate language says the seller will pay for those items:
Paragraph 16B says, “Title is taken in its present condition … except for…monetary liens of record …. Seller will take any necessary action to deliver title free and clear of such lien….”
Paragraph 20 says, “The following items shall be PAID CURRENT … real property taxes and assessments….”
Further, the seller likely signed a separate listing agreement with his agent, agreeing to pay the entire commission, including the buyer’s broker commission. This will change with the recent National Association of Realtors legal settlement, but at this writing, the seller generally pays all. Ask your Realtor what the current customs are in your market.
So, the escrow officer will deduct liens and back taxes from the seller’s proceeds. Escrow will also likely deduct the commission from the seller’s side.
Because these items are not considered “closing costs,” there are no checkboxes for them in paragraph 3 of the agreement.
Let’s summarize. Unless there is some agreement to the contrary, the seller will pay back taxes, liens, and (probably) commissions. The buyer will not pay for these.
Asking Sellers to Pay for Everything and the Kitchen Sink (and There is No Kitchen)
Buyer’s agents occasionally check every box in paragraph 3 and ask the seller to pay for all!
They write that they want the seller to pay for a well test, and sometimes they ask for that when there is no well! They also want a perc test, the corners marked by a surveyor, and this and that. Offers where they throw it all in and see what sticks are usually prepared by an agent accustomed to selling houses, not land.
When receiving an offer like this, it’s best to take a deep breath and pull out the counteroffer form.
While all items are negotiable, it is not customary for sellers to arrange or pay for “extras.” I generally advise my sellers to decline to pay for these items.
When sellers decline to pay, it is still customary to allow buyers to perform any surveys or inspections they care to do. So sellers, if you receive an offer asking you to pay for everything and the kitchen sink, prepare a polite counteroffer. State what you will and won’t do and what you will and won’t pay for. Invite the buyer to arrange and pay for any due diligence they care to do.
Buyers and Sellers View Not Sharing the Cost Burden as Unfair
Buyers dislike it when sellers ask them to pay what they perceive to be the “seller’s” costs, and sellers hate it when asked to pay what they think are the “buyer’s” costs. If asked to carry the other person’s load, each party will think the other is an unfair meanie or a trickster. They will think you’re trying to slip costs into the fine print, which will affect the success of the negotiation.
The parties are likely to be far more accepting of negotiation on price. Buyers understand and accept that sellers want the highest price possible. Buyers may even be a little sheepish. They may be worried about submitting a low-price offer and nervously awaiting the seller’s counteroffer on price. Further, sellers understand the reality that buyers want the lowest price possible. The other party is unlikely to be perceived as “unfair” or “mean” simply by counteroffering on price.
Thus, it is in the best interest of both parties to accept the costs of transferring real estate. Negotiate only on the price.
Advice to Buyers
You should propose to split all closing costs with the seller 50-50, consistent with pattern 1.
Why?
Keep your end goal in mind. As a buyer, you want the seller to accept your offer as written without a counteroffer, right? You also want the seller to accept it before another buyer submits a higher offer, yes?
If you ask the seller to pay for all costs on some items, consistent with pattern 2, the seller may wonder if this is customary. He may phone Aunt Bessie, who was a real estate agent in South Dakota back in 1940. He will ask her whether she thinks this is fair. He may email Cousin Bernie in Long Island, who recently sold his house, to see what closing costs he paid. He may communicate back and forth with his agent on how to respond to your offer. He may request an estimate from escrow to see how significant of a hit all these costs will be.
All this flagellation takes time. The risk of time passing is that another buyer may appear on the scene in the interim.
The annoyed seller may give you a counteroffer on who pays what closing costs. The seller might reason that as long as he is countering on closing costs, he might as well ask for a higher price, too. After all, no extra effort is required to slip the price into the same counteroffer. Suppose you, the buyer, are not offering full price. In that case, the seller may factor in your unequal cost-sharing proposal and “take it out on you” on price.
As a buyer, you want to fly under the radar. You want your first proposal on how to share closing costs to seem fair and reasonable. You want the listing agent to take your offer to the seller and describe it as “clean.” You hope the agent will recommend that her client accept it as written. The best way to increase the likelihood of that is to propose sharing all costs 50-50.
Here is an example illustrating the issues: California land buyer Sally calls her agent. She wants to submit an offer of $13,000 on another agent’s land listing priced at $13,000. Sally’s agent reminds Buyer Sally that she must also pay closing costs. Her part of the closing costs would be approximately $850. Buyer Sally replies that she only has $13,000 and does not have $13,850. Buyer Sally wonders aloud whether she should ask the seller to pay all closing costs. The wise agent recommends that Sally not do that. She suggests that Sally submit an offer at $12,000 and offer to pay half of all closing costs. Sally does that. The seller counters at $12,500, Buyer Sally counters at $12,150, and the seller accepts. Sally pays a price of $12,150 plus $850 in closing costs for a total of $13,000. Both the buyer and seller are happy.
Now imagine if Buyer Sally had submitted an offer at $13,000 and asked the seller to pay 100% of closing costs. The seller would be pleased with the full-price offer, but he might have countered by asking Sally to pay her own darn closing costs. Then Sally would have had to back-peddle on her offered price to afford her part of the closing costs. The seller would have felt annoyed at Buyer Sally for walking back on the price, and the deal might have fallen through.
This hypothetical example demonstrates why buyers should offer to split closing costs. That way, the buyer and seller can negotiate on one thing, price, not two things, price and closing costs.
Advice to Sellers
You should agree to either of the two cost-sharing patterns described above. Both are common and customary.
If the offer is less than full price, do not negotiate closing costs—negotiate on price only. Why negotiate two things (price and closing costs) when you can negotiate one thing (price)? It all comes out the same in the end, anyway. Don’t nitpick over details.
Here is an example: Seller John has his parcel listed for $100,000. Suppose Buyer Mark offers $70,000 and proposes that John pay most of the closing costs. Seller John will be tempted to reply, “Well, I’ll accept Buyer Mark’s (low) price if Mark pays 100% of all closing costs. But, John’s savvy agent knows that Buyer Mark may balk at a request to pay what Mark perceives as Seller John’s part. The negotiation will become all about the principle of the thing. If John were to pay the bulk of the closing costs as the buyer requested, his costs would be $3000. So, the listing agent advises John to give Mark a counteroffer of $75,000 and agree to share closing costs as proposed. Buyer Mark feels the counteroffer is quite reasonable in light of his low offer. He accepts the counteroffer. Seller John admires his competent agent, whose advice got him more money than expected. Both the buyer and seller are happy.
Advice to Agents
As a good fiduciary, you’re likely thinking that when you represent sellers, you want the buyers to pay, and when you represent buyers, you want sellers to pay. Remember, though, that you don’t want to win the battle on closing costs only to lose the war on price.
A good fiduciary should tell both buyers and sellers that they should carry their own weight.
Don’t sweat the details on closing costs. Negotiate only on price
