We're asked this question quite often, so you're not alone.
"Closing costs" is a term that you will likely hear often in your real estate transaction, whether you are buying or selling a home. The "closing costs" are the costs paid for at the end of the transaction at your lawyer's office. Many of them are directly related to the legal fees, property tax adjustments, land transfer fees, mortgage fees, etc. and generally add up to between $800 and $2,000 for the Buyer and $600 to $1,500 for the Seller - depending upon the transaction and the legal firm selected.
Other jurisdictions may have additional costs or may not involve lawyers in the real estate transaction (they use "Title Companies" and refer to a concept of "Escrow"). As always, you should verify this discussion within the context or your own jurisdiction.
A much better discussion involves the total costs included in buying or selling real estate. These costs are many and which is why it is not advisable to be "flipping" houses or looking at buying a home as strictly an investment. The typical real estate consumer also has their real estate as... well, a place to live!
Many of the costs involved in buying and selling resale residential real estate are:
- Home Inspection - A review of the property by a licensed Home Inspector is always recommended. The home inspection cost is usually based on the size of the home and starts at about $375. If there is a suite in the home, expect the cost to be substantially higher. The home inspection is usually paid for by the Buyer.
- Other Inspections - The licensed Home Inspector is a generalist and may suggest further inspections for specific home systems - furnace, roof, electrical, plumbing, fireplace, structural engineer, etc. if the situation warrants it, or if you wish repair estimates. These inspections usually paid for by the Buyer.
- Condominium Documents - A review of the condominium documents by a Buyer is usually a condition of a resale of condominium property. The supply of the documents is a responsibility and paid for by the Seller, but could be also paid for by the Buyer if the Seller refuses to provide them. I have seen the cost of these documents be as high as $550 for a complete set. I have also seen the cost be as little as $50 when the Sellers had saved the assorted documents as they were provided to them by their condo corporation through the property management firm.
- Condominium Document Review - Paid for by the Buyer - A review by an appropriate professional is always recommended. This fee depends on the firm being used and runs between $350 and $450. If the lawyer is going to review them, expect these amounts to be doubled. The Listing real estate agent will also review the documents prior to listing the home for sale to help the Seller determine the probable selling price and a list price.
- Legal Fees and Disbursements - Another amount paid for by both the Buyer and Seller - usually legal fees for real estate are about $550 but depending upon the complications of the contract or the situation, and can add up quickly if the contract is not written to address the situation. In addition, lawyers also charge for their direct expenses and disbursements - like tax adjustments, or a condominium estople certificate.
- Land Transfer Fees - These fees are paid for by the Buyers at their lawyers' offices. They are based on the amount of the sales price of the property and the amount of the mortgage to be registered - if any. These amount to only a few hundred dollars in most cases.
- Land Transfer Taxes - Not applicable in Alberta.
- Tax and Condo Fees Adjustments - the Seller pays these adjustments up to the transaction's "Date of the Completion" and the Buyer pays for them from the Date of Completion. If the Seller has prepaid their taxes or their condo fees, then the buyer should expect that the Seller will be reimbursed for the portion which is the Buyer should pay.
- Appraisal Fees- Appraisals are ordered by lenders in a significant number of all transactions, depending upon the amount they are lending and their perceived risk. The fee is about $300 for a typical house and is usually paid for by the borrower (the potential Buyer) although I have seen lenders absorb the cost. If you are not borrowing money for a home, it is recommended that you have an appraisal completed - it just makes good sense to confirm your estimation of the property's value.
- Mortgage Bonus Fees - this is the cost to the Seller for breaking their mortgage agreement with their lender early (the mortgage documents call it a BONUS... to the Seller it's clearly a substantial cost.) This cost is detailed in your mortgage documents. Sometimes this fee is waived by the lender if you are buying another home and using the same lender for the mortgage loan. The amount can be anywhere from a few hundred dollars to tens of thousands of dollars. With the current low interest rates, these costs are often quite high. The highest I have heard of was in the neighbourhood of $35,000. This is not something to guess at. Investigate this cost BEFORE you list your home for sale.
- Real Estate Marketing and Contingency Based Service Fees (commissions) - these are paid for by the Buyer and are almost always included in the purchase price paid to the Seller. As a result, Sellers believe that they are paying the commissions since it reduces the amount they receive from the final selling price. However, keep in mind that the Seller doesn't get any money unless it originates in the Buyer's (or the Buyer's lender's) pocket first. If the Seller is marketing their own home without Agency representation of a real estate professional (an unrepresented seller), expect that they will likely also not wish to pay the Buyer Agent's fee from the proceeds of the sale. As a result, the Buyer should expect to pay less for the home, since they'll have their Agent's fees added to their closing costs. Sometimes an unrepresented Seller will offer to pay the Buyer's Agent's fee. If this is the case, it is up to the Buyer to direct their agent to ensure the fees are recorded as "included" on the purchase contract or if they may end up assuming the fees are in the purchase price only to have them added to their closing costs because the Seller refused to pay them. It should be noted that, when real estate agents and appraisers determine value of a home, it always includes a fair and reasonable amount for real estate commissions in the sales price for both the Buyer's Agent and the Seller's Agent.
- Real estate consulting fees - are not transaction dependent and are therefore are not generally closing costs, but are paid for in advance or at the time the service is provided. Some direct consulting fees include: "Comparative Market Analyses", "Stay versus Move" consultations, MLS® System inclusion, marketing services, etc. If there is a completed transaction involved, you may get a credit for some of these fees that you have directly paid depending upon the agreement struck between the client and the Agent.
- Real Property Report - A real property report is a requirement of the standard real estate contract in Alberta and is much more than a property survey. It should be completed prior to listing a home for sale so that any sale is not delayed due to problems identified on it. This is obviously an expense paid for by the Seller. The listing agent will always ask to see it and will review it with you at the property. Should they see issues, they will recommend an update or for you contact your lawyer PRIOR to listing your home for sale. Costs are generally based on the size of the property but don't usually go above $650 for a typically-sized lot. If changes are made to the property outside of the home, or the neighbour's home near the property line, a real property report update is required. Adding or modifying a deck or a fence - will require an update! Real estate lawyer's generally will not transfer the title of a property into the Buyer's name until the real property report (with evidence of compliance with city bylaws) has been reviewed and been determined to be satisfactory by the Buyer and their lawyer. Condominium apartments and most condominium townhouses do not require Real Property Reports.
- Title Insurance - Often a requirement of the lender (the bank) and paid for by the borrower (the Buyer). This insurance pays to rectify any defect in the property's title and protect the insured (the bank and/or the borrower).
- Home Insurance - It is always wise to insure your property, but fire insurance is a requirement of any mortgage to protect the lender in case of a loss due to a fire. It also makes sense to have liability insurance and to insure your contents.
- Mortgage Default Insurance - an insurance required by law for any mortgage with a mortgage-to-value ratio of greater than 80% (i.e. less than 20% down). This insurance premium is paid by the borrower (the Buyer) and can be either paid in one lump sum (as a closing cost) or paid with the monthly mortgage premiums. This insurance protects the lender should the borrower default. This is one of the reasons we don't see shortsales or strategic defaults in Canada.
- Mortgage Life Insurance - an optional insurance to ensure that the mortgage is paid off in the case of the death of the borrower. This is for the protection from the mortgage's financial obligation of co-borrowers, the spouse or other family, or the estate of the deceased.
Many of these fees are paid for at the time the services are provided, but some only occur when a transaction occurs - lawyer's fees, real estate commissions, etc.
Common Misconceptions for Buyers and Seller regarding real estate commissions:
A common misconception is that real estate fees are fixed at 5%, 6% or 7%. This is completely untrue - they are completely negotiable. It is up to you and your real estate professional to determine how much their service and experience is worth. Obviously a consideration is if the agent can directly negotiate the fees or if that is determined by their office; and, another consideration is how much their office and team fees slice directly off the top of any commission that the agent can negotiate. If the client's election is to have their fees paid on a contingency basis (similar to trial lawyers and, historically, residential real estate sales - although times are changing) then the fees should be expected to be high since the agents are not guaranteed a pay cheque until the home sells. (Should the house not sell, the Seller should be prepared to reimbursement of the listing agent for their direct expenses.) If the client and their Agent elect for the Agency representation fees to be paid in advance or as the work is performed, there could be a substantial savings to both the Buyer and Seller.
Another misconception that has been around for years and has been propagated by many, is that the Buyer does not pay real estate commissions. Yes, they do - indirectly - since the commissions are almost always included in the sales price as determined by the Seller and the Listing Agent. (If there is no listing agent involved - i.e. an unrepresented seller - then the homes price would obviously be reduced). The Seller receives the proceeds of the sale (less any real estate commissions, and their legal fees and expenses) upon the sale. The Buyer seldom pays for their real estate representation directly, however, this could benefit the Buyer in some cases should they elect to do so, or if they limit the maximum commissions paid in a sale through a Buyer's Brokerage Agreement with their agent. Again, the commissions are negotiable, but at least the Buyer has control over the maximum compensation and commission incentives that they would be paying through the Seller's Listing Contract -- any excess as a result of the listing contract will be reimbursed directly to the Buyer. This is one of several reasons the provincial and state licensing bodies are forcing Buyer Brokerage/Representation Agreements on the real estate industry in almost every justisdiction.