Homes For Sale By Owners are more common than they once were, but many of us are still unfamiliar with the details of the process. One common question is whether or not there are closing costs on a for sale by owner home.
Are There Closing Costs On A For Sale By Owner Home?
Yes, just as with other home sales, there are closing costs on a for sale by owner home. And just as with other home sales, who pays for what is up for negotiation.
Are There Closing Costs On A For Sale By Owner Home?
The sales process on a For Sale By Owner home is much the same as it is for a home where a real estate agent represents the buyer. The only difference is that there is no seller’s agent, and the buyer may or may not have a real estate agent.
That is why there are still closing costs in a for sale by owner sale. The transaction process is the same; it is just the people involved, who are different.
What Are Closing Costs?
Closing costs are the charges incurred throughout the purchasing process, over and above the price of the home. These costs are paid at the closing meeting. Either the buyer or the seller may be responsible for the closing costs, and they usually come to between 3% and 6% of the final sales price of the property.
These can include, but are not limited to:
- Title searches
- Property transfer taxes
- Recording fees
- Commissions for the real estate agents
- Loan origination fees
- Private mortgage insurance
- Appraisal fees
- Escrow fees
Who Pays The Closing Costs?
The buyer is usually responsible for certain closing costs, such as loan origination fees, private mortgage insurance, and home inspection costs. Buyers and sellers typically negotiate the payment of expenses, such as the escrow fee, and the property sales taxes as part of the sales contract.
The seller usually pays their agent a commission, which the buyer’s agent then splits between the sellers and the buyer’s agents.
None of this is set in stone, and the buyer and the seller can negotiate almost any payment agreement they wish.
Possibilities For Closing Costs
How the closing costs are split and paid for depends on the terms the buyer and seller agree to in the sales contract and some of the “who pays for what” can come down to standard practice where you live.
For example, in the State of New Jersey, it is standard practice for the buyer to pay the title-related fees. Meanwhile, in Florida, it is usually the seller who pays for the title abstract.
Having said that…….
The buyer and seller are at liberty to negotiate any agreement for the payment of closing costs they choose. As long as that agreement falls within the laws of the state in which the property is located, and any limitations written into contracts with the lenders.
Closing Costs Include Payments To Real Estate Agents
In a sale where both the buyer and the seller have real estate agents, the seller usually pays a commission to the seller’s agent. The seller’s agent then splits the commission with the buyer’s agent.
This is the standard way in which real estate agents are paid for the work they do.
The buyer does not usually pay their own agent. Instead, the seller pays the seller’s agent a commission, and the seller’s agent pays the buyer’s agent.
Agent’s Commissions In A For Sale By Owner Home Sale
In the case of a For Sale By Owner transaction, the seller does not have an agent.
As a result, there is no seller’s commission from which the buyer’s agent can be paid. This can make some buyers agents reluctant to show their clients For Sale By Owner homes.
In A For Sale By Owner Transaction, Who Pays The Buyer’s Real Estate Agent?
The biggest stumbling block for many buyers in a For Sale By Owner transaction is usually real estate agent fees.
Obviously, if neither the buyer or the seller uses a real estate agent, this isn’t a problem, but in the majority of transactions, the buyers have an agent. This poses the question – How does the buyer’s agent gets paid, in a For Sale By Owner transaction?
Unfortunately, there are no hard and fast rules in place for this situation. Whereas some aspects of a home sale are covered by national, state, or regional legislation, this is one area that is not.
Assuming the buyer’s agent, quite reasonably, expects some payment in return for their labors, this situation can be resolved in one of three ways:
The seller negotiates a commission with the buyer’s agent.
In this situation, the seller would agree to make a payment to the buyer’s real estate agent instead of a commission. This payment might be the same amount the buyer’s real estate agent would expect to receive in commission if the seller had an agent. But it does not have to be.
The buyer’s agent would inform the buyer how much they require, and the buyer would convey this to the seller. If everyone is in agreement, this payment is written into the sales contract. The seller does not negotiate directly with the buyer’s agent, as this could give rise to a conflict of interest for the buyer’s real estate agent.
The buyer pays their real estate agent out of the buyer’s own pocket.
This keeps the solution in the buyer’s purview but is only a solution if the buyer can afford it.
The seller raises the purchase price of the home to cover the cost of the commission for the buyer’s real estate agent.
If you are a buyer who does not have the cash on hand to pay your agent AND the seller is unwilling to make concessions or pay the agent, this may seem to be the best solution.
On the face of it, it appears that you have persuaded the seller to pay a commission to your real estate agent. But what is actually happening is that you, the buyer, are paying your real estate agent. It’s just that the payment is being made indirectly.
So, not only are you, the buyer, paying your real estate agent but by increasing the size of your mortgage to cover the higher sales price, you will have a more significant mortgage payment each month.
And that’s if you can persuade your lender to increase the size of your mortgage in the first place. Your lender may not agree to increase the amount of your mortgage because:
- The appraised value of the home may not be high enough to qualify for the higher mortgage.
- Your income may not qualify you for a higher mortgage.
There is no way of getting away with it. There will always be closing costs to pay at the end of a home sale process. Whether the home is For Sale BY Owner, or not. Even for cash buyers, there are costs for items such as the title and the legal transfer of the property.
The buyer and seller can negotiate who pays which closing costs. There are no hard and fast rules to say how closing costs should be split. However, in some parts of the country, there is a “standard” way of doing things. This doesn’t mean the closing costs have to be split in a particular way. It is just that some people may expect a specific break down of the closing costs.
In the case of a For Sale By Owner home, there is usually one big issue. And that is how the buyer’s real estate agent will be paid.
Buyers in this situation should be cautious when working out how to pay their real estate agent. Sellers may suggest raising the sale price by an amount to cover the real estate agents’ commission. But this can be problematic for buyers.
About The Author
Geoff Southworth is the creator of RealEstateInfoGuide.com, the site that helps new homeowners, investors, and homeowners-to-be successfully navigate the complex world of property ownership. Geoff is a real estate investor of 8 years has had experience as a manager of a debt-free, private real estate equity fund, as well as a Registered Nurse in Emergency Trauma and Cardiac Cath Lab Care. As a result, he has developed a unique “people first, business second” approach to real estate.
This article has been reviewed by our editorial board and has been approved for publication in accordance with our editorial policy.