Spring Has Sprung!
Despite the rainfall this week, spring officially arrived at 2:58 pm on Wednesday. Of course, here in the East Bay, we didn't need an announcement to tell us the seasons were changing, we could see it in the blooming Magnolias, the sunny daffodils, and the stunning cherry blossoms scattered throughout town. As an avid gardener, watching my roses, hydrangeas, and clematis seemingly sprout overnight and come back to life makes this my favorite time of year. Every day, it's a new surprise; a fresh unfurling, and a not-so-subtle reminder of the cycle of life.
Not only has the spring arrived in our gardens, parks and hillsides, it's also arrived with respect to the real estate "Spring Market" which is typically the most active time of year. Thus, every day, new listings are "springing" up, posting onto the MLS (Multiple Listing Service) and then populating to your favorite search engines, whatever they may be. It's also the time of year when new Buyers arrive in force, hoping to establish residency before the next school year.
Working with these fresh new faces, I'm reminded that while Buyers are nearly fluent on searching the Internet for that "Pinterest-perfect" home, AND are surprisingly knowledgeable about the list-to-sales price many properties have experienced, they're often far less well-informed about the costs of buying a home (closing costs) or the ongoing costs of ownership (annual property taxes and maintenance)!
Before we explore "closing costs" in more detail, I should preface my remarks by saying that different counties have different standards of practice. In other words, depending on whether you are buying a home in Oakland, Lafayette, San Francisco, or Marin, your closing costs may differ considerably; ditto for Sacramento or San Diego. It's important to note that many of the terms within the purchase contract are negotiable, which can change the ending point dramatically. Still, nearly all of the California Purchase Agreements I come across (in Alameda County at least), follow appropriately set patterns for customary point-of-sale ordinances.
"Point-of-sale ordinances" are non-negotiable items like permit histories and sidewalk inspections (required in Piedmont, but not Oakland or Berkeley), energy conservation ordinances (required in Berkeley only and formally known as RECO), and sewer lateral certification (required throughout the county). While some of these ordinances are primarily meant to inform or suggest, sewer lateral replacements MUST happen within 180 days of the transfer of ownership (unless already compliant) and average between $5,000 - $8,000. These costs are typically passed along to the Buyers when in competitive bidding.
Buyers will also absorb the full cost of title and escrow insurance which your lender will require in order to ensure clean title on the property, meaning that all liens have been paid off and most importantly, that the Sellers are actually the owners of the property and have the authority to sell it. (Yes, nefarious types have tried to sell properties they don't own!)
Additionally, the title officer will collect pro-rated property taxes, the first year of homeowners' insurance (also required by the lender), loan origination fees and other minor expenses such as notary and recording fees. Total these up and you've added a good chunk of change to the purchase. In fact, all together, you may be increasing the amount of money you need to close by as much as 3%. In short, on a $1 million purchase, your closing fees could be as much as $30,000 and that's NOT money the lender folds into the loan, so budget accordingly.
Finally, property taxes increased significantly in many cities this year, based on a sliding scale of the purchase price (ouch!) and nearly all homeowners took a BIG hit on the amount of state and local taxes they can write off which have been capped at $10,000. Roughly translated, that means that many of us are going to fill the pinch on this year's tax returns. In other words, owning a home has become more expensive as the write-offs have been decreased substantially. (Please consult your tax advisor or CPA for more information.)
What does the Seller pay? More than twice as much at about 8% in closing costs as they are usually paying BOTH sides of the commission as well. This doesn't include their costs to paint, stage and prep the property for sale which can easily add $25,000 - $50,000 to their out-of-pocket expenses, but that's another column for another day. No one is feeling sorry for the Sellers in today's marketplace where they are generally reaping huge dividends, and often, in very little time.
So yes, buying or selling a home can be expensive, daunting and a bit overwhelming, but it's also the best way for average Americans to accumulate wealth over time. (Maybe VAST INHERITANCE is the best way, but that's hard to count on for most of us common folk.) In any case, I'm here to help you navigate the process from beginning to end and I'm going to spell out these costs in detail before you begin your search - not after - which is what you'd expect from your trusted Real Estate advisor, wouldn't you? (BTW, if your Agent hasn't had this talk with you, you may need to question their experience.)
Hey, I've got some daffodils to cut and bring inside now that there's a break in the rain. What's more cheerful than a freshly-cut garden bouquet on a rainy day? (Nothing.)
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Julie Gardner, has been writing The Perspective for 18 years and has published more than 670 essays on life and real estate.