Let’s face it, contracts are scary no matter what they are. It’s akin to when your brother or sister offered you that cookie a with sly look on their face, and you though “hmm, what are they not telling me?” The good part about Florida real estate contracts is that it does not have to be scary. There are a few main areas that you need to be really aware of and the rest of the language describes how a conflict is going to be resolved if an issue comes up and what each party’s obligations are under those circumstances.
The area that I want to focus on today is closing costs. The closing costs are important because those costs along with the price equate to the true cost of buying the home.
The first page of the Florida Bar Association Real Estate Contract (FARBAR contract) has the most important basic items on the contract, which are 1)who is buying, 2) who is selling, 3) what you are buying or selling, 4) for what price, 5) how much money you are going to put into escrow to entice the seller to take the property off the market and give you the time to find financing as well as do inspections, 6) what is the expected closing date, and the sneaky one 7) the “effective date.” I will not get into dates too much here, but the effective date is very important because it is the date for which all the other time frame terms are based. If you do not follow the time frames based on the proper effective date, then you can lose your money and the house.
That is a lot of information for one page, which is why they need all the other pages to hammer out the details such as closing costs. Closing costs are difficult because most people (including a lot of agents) do not understand or agree upon what is considered closing costs and what is not. The only actual “closing cost” is the deed stamp transfer tax (also called doc stamps) and the recording of the new deed. The reason this is the only real closing cost is because if you had $100,000 and wanted to buy a seller’s property for $100,000, then all you need to do is go to the clerk of court, sign a quit claim deed, pay the seller, and then pay the clerk of court the tax necessary to change the deed and it. This is a very important technicality to remember because when your agent says “We’ll just write down for the seller to pay ‘ALL CLOSING COSTS’,” then you need to say no and ask them to spell it out and negotiate what you are intending to achieve.
Luckily, on the FARBAR contract, there are sections that more fully describe the costs and help agents be more clear on who is paying for what. The FARBAR contract is written to default into the seller paying for the deed stamp tax, cost to clear title, and record the new deed; and it defaults to the buyer paying for their mortgage related costs. Any item can be changed on a contract to ask the buyer or seller to absorb those costs, but they need to be written out in the additional terms at the end.
Typically, first time home buyers and people using the VA loan program either need or want the seller to pay for more than just the deed stamp tax. Other costs to consider having the seller pay are mortgage related and title insurance fees. The mortgage related costs can be origination fees, funding fees, appraisals, pre-paids for taxes and insurance, or anything else the bank has on their end. The tough part here is that a lot of time you do not know what those costs are when making the offer. I encourage people to write down that the seller will in addition to paying for the seller’s cost in section 9(a), they will also contribute up to “X” dollars towards the buyers closing costs including but not limited to origination fees, prepaids for taxes and insurance, appraisals, or other mortgage related fees as indicated by the bank. This allows the buyer to receive some help, and a few quick calls to some lenders should give you a fair idea of what that estimate should be beyond your downpayment amount.
Next is title insurance. The section below the seller vs buyer costs covers this, and it allows the buyer to select either to have the seller select and pay for the “owners title policy” and closing agent fee or that the buyer will select the agent and pay the fees. Nine times
out of ten, first time home buyers will elect for the seller to pick the closing agent and pay this cost. However, this section does not cover mortgage title insurance, which will be required by your lender. This item would need to be included in the additional terms or be absorbed in the seller’s contribution to buyers closing costs up to “X” dollars.
I get asked by buyers why they would ever elect to choose and pay for the policies, and the answer to that is market driven. If you are in a hot market, then you are going to need to present your best offer, which the seller is going to want to get the most out of his or her sale; and you may end up not asking the seller to pay any of the closing costs. If you do not have the cash to come to closing for all of these items, then many first time home buyers and VA buyers end up offering full price or more than asking price to encourage the seller to work with them and contribute to their total closing costs.
In all, remember that there is no such thing as a free lunch. If you have the cash, then it is in your best interest to shop around for the best rates, terms and fees on your mortgage and pay your costs up front rather than finance it in the form of a higher purchase price to the seller. However, if you need or want to negotiate all of the closing costs then remember they are separate items and the big ones are 1) actual closing costs, 2) mortgage related costs, and 3) title/closing agent and title insurance costs.