Q: How do I know what is "customary" when it comes to what the buyer pays vs. what the seller pays in a transaction? How and why did these local "customs" originate, and is it taboo to request to bend or break them? Also, how can consumers know if their agent is just feeding them a line about the existence of these customs? –Glenn
A: When it comes down to the standard practices in an area with respect to how closing costs are allocated between buyer and seller, customs definitely exist everywhere. A couple of the normal fees incurred in a transaction are allocated according to custom pretty much the same everywhere.
For example, sellers customarily pay broker commissions, and very often pay for the buyer’s home warranty. On the other side of the bargaining table, buyers traditionally pay for their own appraisal, inspections and their own loan origination fee — the fee that their loan broker or mortgage representative charges for their services in finding the loan.
Other fees, like the escrow fees, title insurance, repairs to the home required by law or lender, and the various taxes and fees involved are allocated very differently in different states, counties and even cities within a county. I’m not sure anyone knows exactly how these local customs originated to be so different in different places, but they have.
Whether it’s taboo or not to request a closing-cost allocation different than the local norm depends heavily on the situation. When we were in a strong seller’s market, it was not only not taboo — it was virtually required to be successful among many multiple offers for every property — for the buyer to offer to take on closing costs that would normally be allocated to the seller.
With the market dynamics we’ve had over the last couple of years, I wouldn’t say that I’ve necessarily seen many transactions where the closing costs are allocated in a manner exceptional to the norm.
But what I have seen is many transactions involving a motivated seller, or a buyer with the weight of the bargaining power, in which the seller agrees to pay some amount of credit to be applied to defray the buyer’s closing costs.
In any event, the acceptability of a detour from the customary closing-cost allocation is more dependent on the individual situation than the market factors at play.
For example, when it comes to bank-owned properties and short sales, the chances of getting the bank to pay, or to allow the seller to pay anything beyond the local norm, in terms of transaction costs and any normal credit, are unlikely — no matter what.
Similarly, even though we’ve had a relatively strong buyer’s market, sellers of properties on which there are multiple offers are unlikely to pay above-normal closing costs — no matter what.
Mindset Management
It sounds like you might be in the midst of a trust crisis on some levels — wondering how you could ever trust an agent to tell you whether any given custom exists.
First, let me say this: Most agents are more interested in helping you get the deal closed than in bamboozling you into believing that some fee or other is your responsibility, according to local custom, when it’s actually the other side’s.
Many times, listing agents want very traditional allocations of closing costs, and will counter or reject offers where the allocation is unusual.
That is, it weighs in an agent’s best interests to advise their client in line with the true local norms, if for no reason other than that makes it more likely that their client’s offer will be accepted, even if their client is not inclined to act in concert with local standard practices.
But, of course, there are many other reasons an agent would be honest with their client regarding local customary closing costs and who pays what. First, reputable, career agents simply want to build a reputation and relationship of trust and honesty with their clients, which is a cornerstone of a business based on repeat and referral business.
This is why I strongly recommend that consumers find and select their agents based on the referrals of trusted family members, friends and colleagues who LOVE and trust their agent.
Because, honestly, this matter of closing-cost customs is one of the more minor items you’ll need to trust your agent’s advice on. So, if you can’t or don’t trust your agent on this single issue, for whatever reason, chances are that you’re working with the wrong agent for you. It’s time to find one you do trust.
Action Steps
As a final check, or even to help you plan the amount of cash you’ll need to come up with to close before you find and begin working with any particular real estate agent, some local title and escrow providers offer printed brochures that break down the local closing-cost customs. Most local mortgage brokers can also brief you on these standard practices.
In fact, this issue vividly illustrates why working with local lenders is key — I’ve actually seen transactions fouled up when a buyer took the estimated closing-cost allocations of a non-local loan professional to heart — lenders from out of town can overlook or simply not know about various transfer taxes, stamps and local inspections or repairs required by your town.
