Tuesday, September 17, 2019

Closing Costs

LAW MATTERS

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Sale price of real estate is not the only expense in a sale. There are a lot of expenses associated with buying or selling real estate and they can add up. Residential buyers and sellers are often surprised when presented with these costs at closing.

The seller’s most expensive closing cost is usually sales commission to the real estate broker. Commission rates vary from broker to broker, but most commonly are 5% or 6%. For some transactions, buyers also pay a brokerage fee if they entered a contract with a broker to represent them in connection with the transaction as a buyer’s broker.

The second biggest expense in a real estate sale in Southwest Florida is probably documentary stamps on the deed. Florida does not have a personal income tax, so it looks for other ways to generate revenue. A good example of that effort is the documentary stamp tax of $0.70 cents per $100 of consideration on a real estate sale. The tax is paid to and collected by the clerk at the time the deed is recorded and the clerk sends the tax to the Florida Department of Revenue.

Consideration includes cash paid for the property and anything else of value given in exchange for the conveyance. If property is encumbered by a mortgage and it is conveyed, if the mortgage is not paid off as part of the transfer the mortgage is treated as consideration and documentary stamp tax is calculated by including the amount of the mortgage remaining on the property. That has often surprised people making gifts, even between husband and wife, as a gift of property with a mortgage on it is subject to the documentary stamp tax based upon the amount of the mortgage. That can make it expensive when someone decides to add a spouse or even children to title.

There is no law that states whether buyer or seller must pay the documentary stamp tax. The law requires it be paid when the deed is recorded, so if the seller does not pay it the buyer ends up paying it at time of recordation. It is customary in Florida that the seller pays the documentary stamp tax, although all closing expenses can be allocated by agreement in the contract.

The next largest closing cost is usually title insurance. Title insurance is set by statute with what is known as a promulgated rate. The promulgated rate for title insurance is $5.75 per thousand dollars for the first $100,000, $5.00 per thousand dollars for the next $900,000, with progressively discounted rate per thousand dollars as the purchase price increases. In Collier County, it is customary for the buyer to pay for title insurance. In Lee County and Charlotte County it is customary for the seller to pay title insurance. The parties can agree otherwise by contract.

In Collier County, our standard sales contract allocates expenses between buyer and seller. A seller generally pays transaction expenses related to actual or potential liens, preparation of documents to convey title and the documentary stamps for the deed. Buyer generally pays costs to protect a buyer, including all inspections, surveys, and title insurance. Each party pays its own attorney fees. Customary allocation of closing expenses and other variance may not be the same. The remainder of this article will address expenses as they are allocated by the standard sales contract used in Collier County.

The seller is responsible for preparation of a warranty deed and bill of sale (if personal property is involved). The seller is also responsible for providing an affidavit regarding liens and possession under which the seller confirms that there is no unpaid work or potential liens against the property as sole possession of the property without claims of others. The affidavit is known as a GAP Affidavit. It allows title insurance to protect a buyer at time of closing through recordation of deed (the gap). Preparation of the closing documents is included within the fee charged by the seller’s attorney.

The seller is required to pay for and obtain all estoppel letters. An estoppel letter is a letter from an association, lender or other party with right to payment related to the property. It is known as an estoppel letter because once the letter is issued, the party issuing the letter is “stuck” with the figure and the buyer relies on it. Rationale for making estoppel letters a seller responsibility is that the seller is best situated to have the contact information for condominium or homeowner association, mortgage holder, other lien holders and even tenants. The other reason for allocating this obligation is because most associations charge $250 for an estoppel letter, and it would be a waste of money to require both a buyer and seller to obtain the same information and incur that expense. By statute, association estoppel letters are valid for 30 days.

Buyers are not off the hook on transaction expenses. In fact, buyers have a lot of expenses to be paid even if the transaction falls through. A buyer is charged with the expense of inspections to make sure the property is in acceptable condition. Inspections generally have to be done by a person licensed to inspect or repair the item being inspected, including the structure, electrical, plumbing, air conditioning/heating; in short, the property in general. Most buyers want a wood destroying organism inspection and many also hire an inspector to confirm mold and radon are at acceptable levels. Inspection costs generally range between $400 and $1,100 in a typical residential purchase.

If the buyer is acquiring a free standing property, the buyer is also likely to order a survey by a licensed Florida surveyor. The survey confirms that the property does not encroach into any set back required by zoning or private deed restriction. Survey cost for a typical residential sale ranges between $400 and $850. As part of survey, many buyers will also request a flood elevation certificate to confirm elevation of the home if it is in a flood zone. The flood elevation certificate is required for flood insurance and actual elevation of the home can affect availability of insurance and rate.

The buyer pays application and approval fees for condominium and homeowner association and any transfer fee. Application fees are generally capped by statute at $100, but many associations have a transfer fee or capital contribution which can be significantly more. The buyer also pays to record all documents (except lien releases, which are the seller’s responsibility). Clerk recording expense is $10 for the first page and $8.50 for each additional page of the document. There is also an indexing fee of $1 for every name more than four appearing on the document.

Buyers and sellers prorate various items at closing. Property taxes, association assessments, rents and even governmental assessments can be prorated and terms of the proration are set by contract. If the items are prepaid, the seller might be getting a big credit. If not yet paid, the buyer can get a credit to pay the bill that will later come due (i.e. tax bill for the current year is not available until the end of October).

If the buyer is obtaining a loan, there are a myriad of additional expenses. Those vary from lender to lender and can include an appraisal, processing fee, origination and even a tax service fee to be sure the property taxes are paid. There will also be an additional title insurance charge for the simultaneous issuance of the lender’s title insurance policy.

Net proceeds to a seller and amount needed from a buyer cannot be determined by simply reviewing the sales price in a residential sale. True picture of the financials associated with real estate sales require review of transaction expenses and not merely sale price.

William G. Morris is the principal of William G. Morris, P.A. William G. Morris and his firm have represented clients in Collier County for over 30 years. His practice includes litigation and divorce, business law, estate planning, associations and real estate. The information in this column is general in nature and not intended as legal advice.

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