Closing Costs Explained: Amount, Types & How Much They Cost

Investing in and selling real estate offers a great passive income opportunity for doctors.

However, before you make your first sale, there are expenses you must pay before closing the deal.

These expenses are called closing costs, and their amount varies by state and transaction.

If you want to learn more about these costs, this guide provides everything you need to know about seller closing costs, from how much to pay to how to reduce them!

What Are Closing Costs?

Closing costs refer to fees and expenses buyers and sellers must pay before completing a real estate transaction.

For buyers, these are expenses paid on top of a home purchase price. On the other hand, closing costs for sellers are deducted from the property’s sale proceeds.

You and the buyer will receive a closing disclosure from the lender three business days before closing. The closing disclosure provides the actual sale numbers, including the closing fees and loan estimate.

You may compare your initial loan estimate with the final fees to correct any errors or have the lender explain changes in cost.

Who Pays the Closing Costs?

Both the seller and buyer pay the closing costs. However, buyers typically cover closing costs more than sellers, so some negotiate with sellers to potentially reduce expenses.

You can negotiate which fees to pay to reduce your expenses or help the seller. Note that negotiations may also depend on current market conditions.

If you have more competitive offers for the property, you have more leverage over which closing costs to pay, as the buyer might have fewer concession requests.

However, if you’re hurrying to sell your real estate, you can shoulder the fees to speed up the closing process.

How Much Will Sellers Pay for Closing Costs?

Sellers pay roughly six to ten percent of the sale price. If the median price of existing home prices for Q3 of 2024 is $413,000, the average closing costs for sellers will range from $24,780 (six percent) to $41,300 (ten percent).

Meanwhile, closing costs for buyers range from less than one percent to more than five percent.

Average closing costs can also vary depending on your location. A 2021 report by CoreLogic’s ClosingCorp listed the following states with the highest average closing costs:

• Washington, D.C. ($29,888)
• Delaware ($17,859)
• New York ($16,849)
• Maryland ($14,721)
• Washington ($13,927)

Meanwhile, the states with the lowest average closing costs include:

• Missouri ($2,061)
• Indiana ($2,200)
• North Dakota ($2,501)
• Wyoming ($2,589)
• Mississippi ($2,756)

These data may not reflect the exact closing costs for sellers, but they can give you an idea of the average closing costs in your state.

What Factors Determine Closing Costs for Sellers?

Sellers pay different closing costs than buyers. These costs are then deducted from the home’s purchase price, lowering your net proceeds. Learn more about some of the expenses you may have to pay.

Real Estate Agent Commissions

Sellers traditionally pay the commission fees for their listing agent and the buyer’s agent. Commissions range from three percent to six percent of the final purchase price, with an average commission rate of 5.32%, making it the largest portion of the seller’s closing costs.

However, new rules resulting from a class-action lawsuit against the National Association of Realtors offer buyers and sellers additional choice and transparency with agent commissions. Buyers can now set their agent’s fees, while sellers can negotiate or refuse to pay the buyer’s agent.

Title Search and Insurance

Before selling, you must pay a title search fee to verify that you own the property. Some states even require an attorney to review the title, adding to your costs.

During this step, it’s also recommended to have title insurance to protect the lender or home buyer from any possible property disputes that might arise later on.

The title insurance can cover the lender (lender’s title insurance) or the buyer (owner’s title insurance) and costs between 0.5 and one percent of the home purchase price. However, note that the insurance policy for lenders requires the mortgage loan to close.

The practice for buying this insurance varies per location. Some states let the home buyer insure the lender while the seller insures the home buyer.

Attorney Fees

Some states require sellers to pay attorney fees to protect the buyer and seller during the title search. The fee covers reviewing the title, paperwork, and other closing documents.

Escrow Fees

Depending on your agreement with the buyer, you may also pay the escrow fee to the escrow company, title company, or real estate attorney. The escrow company then handles the closing, covers paperwork, and implements the disbursement of funds to all the parties involved in the transaction.

Transfer Taxes

Transferring property ownership requires you to pay the state a transfer tax. The cost depends on your state’s laws and the home’s sale price.

However, some states charge little to no transfer taxes, such as:

• Arizona (only charges $2)
• Idaho
• Indiana
• Louisiana
• Kansas
• Mississippi
• Missouri
• Montana
• New Mexico
• North Dakota
• Oregon (free of charge unless transferring to Washington County)
• Texas
• Utah
• Wyoming

Property Taxes

If you have any unpaid property taxes on closing day, they will also be deducted from your sale proceeds, reducing your profits.

Property taxes vary depending on your property and state laws. The median property tax price paid in 2022 is $1,815, according to the Tax Foundation. Consider hiring a tax strategist if you want to reduce your tax liabilities.

Homeowners Association Fees

If the property is in a community with a homeowners association, sellers are generally responsible for paying the homeowners association transfer fee and any unpaid dues.

The fee covers costs related to processing the documents, updating names in the association’s database, changing passes and security codes, and other administrative expenses.

Mortgage Payoff

It’s common for some sellers to still have unpaid mortgages. However, if you have an outstanding mortgage payment, you must pay for it before finalizing a sale.

If you plan to sell your current property or another property in the future, remember that it’s worth paying off your mortgage early to maximize your profit.

Seller Concessions

The buyer may ask you to cover costs that buyers usually pay, such as the appraisal fee, loan origination fee, and home inspection fees. Whether you pay for these fully or partially will depend on your negotiations.

How to Calculate Closing Costs for Sellers

Many factors can impact closing costs for sellers, and you need to consider each factor to know how much you might pay. To help you estimate closing costs, you may use a calculator.

For example, MortgageCalcultor.org is an online closing costs calculator that lets you estimate the seller’s closing costs by inputting your purchase price, mortgage price, and closing date.

You may also expand each section of the calculator to enter details, such as the date you paid property taxes and mortgage insurance, broker commission fee, transfer tax, transfer fee, inspection fee, survey fee, and other miscellaneous fees.

After entering the details, click the ‘Calculate’ button to get an idea of the total closing costs you’ll pay as the seller.

You may also ask your agent to calculate an estimate. Remember that you’ll only know your actual closing costs on your closing date.

Ways to Reduce Your Closing Costs as the Seller

Try the following tips and strategies to lower the closing costs you will pay.

1. Discuss Closing Costs with the Buyer: Most buyers ask sellers to pay certain closing costs. Use this opportunity to discuss which expenses to pay, and split the closing costs that will help both parties. You may also refuse to pay the buyer’s agent fees to lower costs. However, note that this may turn away potential buyers unless your property is in demand.
2. Negotiate with Your Agent: Lowering the rate to just 0.5% can make a difference in your total closing costs. You may also consider working with agents offering discount services or a flat fee to save on expenses.
3. Bargain with Service Providers: You can still negotiate miscellaneous fees for title companies, attorneys, and other providers. Although this might not always work, it’s still worth a try to slightly lower your closing costs.
4. Don’t Hire an Agent: Some sellers act as their own agents, eliminating commission fees. This is called listing properties for sale by the owner. However, only consider this option if you have a background in dealing with property sales and have the time to go through the tedious process of finding a buyer and selling a house.
5. Find a Cash Buyer: Cash buyers are companies or individuals that can pay for your home directly with cash. You can sell your property through online platforms like iBuyer.com, ‘we buy houses’ companies, realtors, or people you know. This process also eliminates the need for agents, lowering your closing costs.

Frequently Asked Questions

Are Closing Costs the Same as Real Estate Commissions?

Closing costs are not the same as real estate commissions, but the commissions are a part of closing costs. The closing costs consist of different fees, while commissions are paid to the agents you work with. Sometimes, sellers may also pay for the buyer’s agent commissions.

When Do Sellers Pay Closing Costs?

Buyers and sellers pay the closing fee on the day sellers close the sale of the property and hand over the rights and keys to the home. All transactions will be exchanged during the closing date, and necessary documents will be signed to complete the sale.

Do Sellers Pay More Closing Costs than Buyers?

Although buyers may cover more fees and pay them out of pocket, sellers typically pay a higher price since they cover the real estate agent’s commission fees.

What are the Mortgage Closing Costs that Buyers Pay?

Common inclusions in mortgage closing costs for buyers are the appraisal fee, homeowners insurance, home inspection, prepaid interest, private mortgage insurance (PMI), and lender-related fees, such as the origination fee, credit report fee, application fee, and underwriting fee.

Grow Your Wealth With the Right Financial Advice

Investing in real estate offers physicians and medical practitioners a diversified portfolio, passive income, tax benefits, and the opportunity to build generational wealth. However, going into real estate can be risky without the right guidance.

To help you choose the right properties and maximize your investments, consider the help of a Financial Advisor. Financial advisors help people make informed financial decisions by helping them plan, save, assess risks, and more.

Unlike other general financial consultants, Physicians Thrive’s Financial Advisors understand your background, needs, goals, and challenges as a medical professional, equipping you with appropriate advice to help you refinance your medical student loans, plan your finances, save for major purchases, and build your wealth.

If you have concerns with your current finances as a doctor or want to learn more about our services, feel free to talk to our Financial Advisors today!