Nearly any expense that's associated with transferring a property can be classified as a closing cost. Most buyer closing costs are associated with requirements to obtain a loan, to verify the value of a property, and to assess the property's components. The seller's most significant closing cost is often the real-estate commission, unless the seller has agreed to pay all or a portion of the buyer's expenses.

The lender will require a title examination to make sure there are no problems associated with the property's deed. Depending on where you live, a title examination might be done by an attorney or by a company that specializes in title work. The examiner looks back at the history of the deed to make sure that it has passed from one owner to another in the correct way, examining old liens on the property to determine that they were paid and that the deed reflects the payment. Buyers usually pay for the title examination fee.

If you are using a loan to buy real estate, your lender will expect you to purchase title insurance, a special type of insurance that covers losses that can occur when the title examiner fails to find problems with the deed. Buyers usually purchase two title insurance policies, one for the lender and one for themselves. Title searches and insurance are covered in more depth later in this chapter.

Closing Agent Fees

The closing agent might be an attorney, the lender, an escrow company, or even a real-estate brokerage. The closing agent prepares the HUD-1 settlement statement, analyzes and explains the buyer's loan documents, makes sure all documents required for closing are signed by the buyer and seller, makes all required payments from closing funds, and takes care of any document that must be recorded in public records. The buyer should plan to pay a fee for these services.

The agent usually charges a separate fee for recording of documents, sending overnight mail packages, making wire transfers to pay off existing mortgages, and other similar costs.

Preparing the Deed for Transfer

The seller is usually responsible for preparing the new deed that transfers the property to the buyer. The seller typically signs the deed in front of a notary public, someone who verifies that the person signing the document is the person whose name appears on it. The buyer's name is shown on the new deed, but the buyer's signature is not required.

Boundary Surveys

A survey involves permanently marking the boundary lines of a property with concrete posts, iron stakes, or other markers. Natural landmarks, such as trees and rocks, are sometimes used to identify points along a line. A licensed surveyor completes the survey and converts the findings into a paper document. Structures and topographical elements of the property are usually drawn to scale inside the image of the tract.

In some areas, lenders require a boundary survey before making a loan. In other states, a survey is optional and only done at the request of the buyer. The convention of who pays for a survey varies around the United States, but even if it's regarded as a buyer expense, the buyer can ask a seller to pay for all or part of the process. Surveys are often paid for at or shortly before closing.

Propane and Other Fuels in Storage Tanks

Every offer to purchase contract should have a provision that states what happens to unused fuels. Sellers are usually reimbursed at closing for propane and other fuels that remain in storage tanks when the property changes hands.

The buyer should find out if the seller owns or rents the tank. If it's a rental, the buyer must likely buy future fuel from the company that owns it. If the buyer does not wish to keep a rented tank, seller and buyer should coordinate a removal and replacement date just prior to closing.

Excise Taxes

The seller might be required to pay an excise tax based on the sales price of the property — a charge that is sometimes called tax stamps. In some cases, buyers are asked to pay the fee for the sellers. The amounts due for this type of expense vary quite a bit from state to state.

Hazard Insurance

Buyers who are using a loan to buy real estate with a house or other buildings on it are required to pay for a hazard insurance policy at or prior to closing. No insurance, no loan — the lender wants to make sure its interests are protected if the structure is damaged two minutes after closing. Flood insurance or other types of special policies might be required for properties in your specific area.

Fees Paid Outside of Closing

Appraisal fees, charges for credit reports, loan application fees, and other similar expenses are part of your closing costs, even though they might have been paid prior to closing. They should be recorded on your settlement statement as “POC,” paid outside of closing. The same is true for payments you made directly to service providers, such as home inspectors, pest inspection companies, and water-testing services.

The settlement statement is your permanent record of the transaction, and you will likely need it for future income tax returns, so it's handy if every expense associated with purchasing the property is listed in one spot. Be sure to tell your closing agent about all fees paid outside of closing.

Prorated Closing Costs

Some costs of property ownership must be shared at closing to make sure each person who owns the property during the current billing period pays his share of the expense. Property taxes, homeowner association fees, and rent for a fuel storage tank that a buyer leaves in place at closing are three examples of expenses that are split, or prorated. Ownership share is calculated by determining the length of time each party owns the property during the billing cycle.

Suppose a bill is paid annually, and is due on January 1 of each year. If closing takes place on April 1, the seller is the owner of the property for three months of the year, or one-fourth of the billing period, so the seller owes one-fourth of the annual bill. The buyer's ownership runs from April 1 through December 31, making her responsible for three-fourths of the expense.

If the seller has already paid an expense at the time of closing, the buyer's share is paid back to the seller. If the seller has not paid the bill by the time closing takes place, but the bill has been issued, both buyer and seller must pay their share and the closing agent pays the bill. If the bill has not been issued, the seller's share can be paid to the buyer at closing, and the buyer is responsible for paying the bill when it arrives.

The closing agent calculates how much each party owes for this type of bill and enters it on the settlement statement, but it's always a good idea to check the figures.

What Can the Seller Pay?

Buyers can often work out a deal in which sellers agree to pay for at least a portion of the buyer's closing costs. Just how much a buyer can obtain depends on the seller's motivation and how much the buyer offers for the property. Sellers might ask for a higher offer to offset the paid expenses, but that can be a win-win solution for both parties. The seller gets the property sold, and the buyer has long-term financing for some of the costs of closing.

The lender expects the property to appraise at or above the amount of the sales price, not the amount of the loan, so this technique might not work for properties that are borderline when it comes to meeting appraisal requirements. If you inflate the price too much, and the property doesn't appraise for an amount the lender feels is suitable, the loan might be denied.

Talk to your lender to find out exactly how much the seller is allowed to pay at closing. The maximum amount the seller can pay differs depending on the type of loan used.