Everyone understands the sale price in a real estate contract. Most people remember they signed an agreement to pay a sales commission. However, unless you read the contract, you might not know there are other costs from contract to closing.
Let’s start with the big one, sales commission. Commission is usually paid by the seller, but in some cases, the buyer pays a sales commission. The commission is set by contract between real estate broker and customer. Most local commission agreements range between 4% and 7% of the sale price. Commission is one of the few expenses that are not allocated by the sales contract, since the obligation to pay a commission established by a separate agreement between customer and broker.
Most of the remaining expenses associated with the purchase and sale of real estate are allocated by contract. For purposes of this article, I will address expenses in accordance with the local sales contract prepared by the Legal Resources Committee of the Naples Area Board of Realtors (NABOR). That contract may differ from practice contracts in other areas or other contracts.
Florida does not have an income tax on individuals. One of the ways the state makes up for that is with a rather hefty documentary stamp tax on deeds. The tax is $0.70 per $100 of consideration. Consideration is anything of value given in exchange for the conveyance of real estate. Consideration for documentary stamp tax calculation is not limited to cash. It can include trade property or anything else, even agreement to forgive a debt. If the property is conveyed that has a mortgage on it, the mortgage is consideration and documentary stamp taxes must be paid on the amount of the mortgage, even if the property is transferred as a gift.
It is customary in Florida for the seller to pay documentary stamp taxes on the deed. NABOR contract is consistent with that custom. The tax is usually deducted from the seller proceeds at closing by the closing agent and paid to the Clerk when the deed is recorded. If one of the entities exempt from documentary stamp tax (such as a governmental agency or educational institution) the non–exempt party is required to pay the tax.
The seller has responsibility for other expenses under the NABOR contract. Seller pays the seller’s attorney fees and the buyer pays those of the buyer. The attorney’s fees for a party in a normal residential closing range anywhere from $800-$2000 or more. Although a title company cannot represent a seller, it can issue title insurance and be the closing agent for a buyer. Buyers using a title company do not usually pay an attorney fee, but pay a settlement or closing fee (or both) to the title company which is generally the same or more than a buyer’s attorney fee.
The seller also pays the cost of estoppel letters from lenders, lienholders and associations to confirm the status of accounts and balance due. Cost for a condominium or homeowner association estoppel letter capped by statute at $250, and almost all associations charge that amount. Other entities generally charge less.
A buyer’s biggest expense is usually title insurance. Title insurance premiums are set by the State of Florida and the established premiums are known as the promulgated rate. The current promulgated rate for an owner’s title insurance policy is $5.75 per thousand for the first $100,000, $5 per thousand for the next $900,000, $2.50 for the portion over $1 million and up to $5 million, $2.25 per thousand for the portion over $5 million up to $10 million, and $2 per thousand for the portion over $10 million. The same rates apply to a lender policy, but if a lender policy is issued at the same time as an owner’s policy, the additional fee is a minimum of $25, in large part because the title insurance underwriter is not really assuming any additional risk. When both an owner policy and a lender policy are issued, maximum exposure for the underwriter is the larger amount of the two policies and it will not be subject to paying twice for the same loss. If a mortgage is obtained, some lenders require endorsements and additional coverages which can increase the borrowers’ title insurance expense by up to 25%.
The NABOR contract assigns the buyer expenses that are associated with protecting a buyer’s interest. That means a buyer pays for the title search, which usually runs $100 to $150. The buyer also pays for permit and lien search, which searches for open or expired building permits and governmental levies which would not necessarily show up in a title search. Charge for that searches is usually between $100 and $150. Someone buying a condominium unit usually does not need a survey, because a survey is recorded with the declaration of condominium. However, buyers of a vacant lot or standalone residence are well advised to order a survey. Most surveys for single-family homes and vacant lots cost between $500 and $1000, with cost depending upon the difficulty of topography, detail and complexity.
Buyers also pay the cost of any inspections commissioned by the buyer to make sure the condition of the property is as it appears to be. Those inspections can include structural, electrical, wood–destroying organisms, radon and mold. Inspections cost $200 for the most basic to a few thousand dollars or more if an engineer is retained. The NABOR contract requires inspections to be done by a person or entity licensed to repair or inspect the subject of the inspection.
Buyers pay application or processing/approval fees in connection with any associations or clubs. These fees can range from minimal to hundreds of dollars. In some cases, there is also a capital contribution or similar fee which can be $15,000 or more. Buyers pay to record the deed and other documents needed for marketable title, with the exception of any satisfactions of mortgages or other liens which are the seller’s responsibility. Clerk recording fee is $10 for the first page and $8.50 for each additional page, plus an indexing fee when there are more than four names.
There are almost always some additional charges such as wire transfer fees, express delivery, courier, copying and postage but the charges are not usually significant. The cost will vary from closing to closing and from law firm to law firm.
Taxes, rentals and assessments are generally prorated between the parties. Seller is charged with the expense and income through the day before closing and the buyer gets the benefit and burden of the closing date. When there is a capital assessment or special assessment due to a governmental entity, community development district or the like, the contract generally makes the remaining capital portion a buyer obligation. Condominium or governmental special assessments adopted after the contract date are the responsibility of the buyer. If adopted prior to the contract date, they are the responsibility of the seller, even if payable in installments after closing.
There are a lot of expense items associated with a typical residential real estate closing. In a good contract, expenses are clearly allocated between the parties. That makes it important to utilize a good contract. Even with a form contract, it is important that a buyer or seller read and understand the contract and expense associated with it, before signing.
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.