who pays which closing costs

Closing costs add up quickly, for both the buyer and the seller. 

To put it simply, closing costs include all those extra fees and taxes in a property transaction. They usually range from three to five percent of the sales price of the property for the buyer, and even more for the seller, who pays for real estate agent fees on both sides of the transaction. 

But who pays which closing costs? Is that negotiable? How can buyers and real estate investors reduce the amount of cash they need to bring to the settlement table?

The better you understand closing costs, the better you can reduce them, and anticipate exactly how much cash you need to buy a property. 


Who Pays Closing Costs?

Buyers pay certain closing costs, while sellers pay others. 

In some instances however, the buyer and seller split specific costs. Each purchasing contract varies, because everything in real estate is negotiable. You can even negotiate who pays which closing costs, the buyer or seller.

Make sure you understand exactly what you’re financially responsible for prior to signing the contract of sale. At the settlement table, you’ll sign a ALTA Settlement Statement, designed by the American Land Title Association. Also known as a closing statement or closing document, it breaks down all closing costs for both the buyer and seller. Try to get a copy of the settlement statement the day before closing, so you can review it for errors. 


Buyer Closing Costs

Generally speaking, all costs related to the mortgage loan, title, and insurance policies are paid for by the buyer. These include (but aren’t limited to) the following settlement costs. 


1. Mortgage Costs

Usually, about three days prior to closing, the lender provides a Closing Disclosure to the buyer. This includes the final financial breakdown of all fees associated with the mortgage loan. The buyer/borrower pays all fees associated with the mortgage.


2. Title Fees

When real estate changes ownership, a title company usually researches the property’s title history. They check for outstanding liens against the property, unpaid taxes, and any other potential clouds on the title that could come back to haunt the buyer later. Mortgage lenders require a title search and a title insurance policy that protects against future title disputes or undiscovered liens. 

Because these services primarily serve the buyer, the buyer pays for them. 


3. Insurance Fees

Buyers nearly always purchase a property insurance policy to protect against fire, storm, and other damage. Known as homeowner’s insurance or landlord insurance, mortgage lenders require it, and responsible property owners buy a policy even if they buy the property in cash. 

You can also choose to buy your own title insurance policy that protects you against future title problems. 

If you buy a property with a Fannie Mae or Freddie Mac mortgage, such as by house hacking, and put down less than 20%, you will have to pay for private mortgage insurance (PMI). In addition to ongoing monthly payments, you must pay a fee up front. Federal Housing Administration (FHA), United States Department of Agriculture (USDA), or Veteran’s Affairs (VA) mortgages require an up-front payment of 1.75% and then will continue with a monthly payment for the mortgage insurance premium (MIP). 


4. Taxes

The government always gets their share.

When a property changes hands, both state and local governments typically charge transfer taxes on it. Usually, both the buyer and seller pay a portion of these. 

Local governments also charge recordation taxes and fees to record the new deed and mortgage note. 

The buyer also becomes liable for their portion of the annual property tax bill, as of the day of settlement. In most cases, the seller has already paid for property taxes for the year, so the buyer owes prorated property taxes to reimburse the seller. 

In some instances, property taxes are deductible within your federal income tax statement. However, this varies, so be sure to consult with a tax professional prior to purchasing to see how you will be financially affected.

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Seller Closing Costs

Sellers owe their own set of costs during the property selling process as well.


1. Real Estate Commission

Generally, sellers pay 5-6% of the total purchase price to cover the average real estate agents’ commissions. The seller pays for both the listing agent’s fee and the buyer’s agent fee, normally around 3% to each.


2. Unpaid Bills & Taxes

The seller owes the local municipality for any unpaid water bills, fines, or other fees at the time of settlement.

Additionally, the seller must pay their portion of the year’s property taxes if that year’s tax bill has yet to be paid.


Seller Concessions

Most buyers would rather negotiate a seller concession than a lower purchase price. The purchase price is mostly borrowed from a mortgage lender; the closing costs must be paid for out of pocket.

A seller concession occurs when the seller agrees to pay a certain amount of money to help the buyer cover closing costs. Sellers don’t have to offer them, of course, but it can help them move their property faster. Consider it just another part of the sales negotiation — everything in real estate is negotiable!

While many sellers refuse to offer any help toward the buyer’s closing costs, seller concessions become far more common during buyer’s markets. In a seller’s market, sellers have little incentive to offer extra perks like money toward the buyer’s closing costs.

Most homeowner loan types, such as conventional, 203K, USDA, FHA, and VA loans, limit the maximum seller contribution to 6% of the purchase price. While portfolio loans and other privately-held investment property loans don’t limit seller concessions, they’re far less common in investment property transactions between professional investors.

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Escrow Fees

Because the property exchange is complicated, there is a third party involved that oversees all finances until the closing of the property.

Escrow fees consist of all the fees surrounding paperwork, recording of the deed, and the exchange of funds. These fees are typically split equally between the buyer and the seller. These fees vary in price; some come at a flat rate, usually anywhere between $200 to $500. However, others set a percentage rate of the property.


What Closing Costs Are Tax Deductible vs. Depreciable?

For real estate investors, all closing costs are either deductible or depreciated as part of the property’s cost basis. (Quick refresher: deductible expenses come directly off your taxable income for this year; depreciable expenses must be spread over 27.5 years along the building’s value.)

Landlords can deduct loan-related expenses such as prepaid interest and lender fees. Likewise, they can deduct property taxes and landlord insurance from this year’s taxable income. See a full breakdown of rental property tax deductions to make sure you don’t miss any.

Most other closing costs get added to your cost basis, and must be depreciated over 27.5 years. For example, real estate investors can depreciate the following costs:

    • Abstract fees
    • Charges for installing utility services
    • Legal fees
    • Recording fees
    • Surveys
    • Transfer taxes
    • Title insurance

Many real estate investors don’t fully understand depreciation. If you’re a buy-and-hold real estate investor, read up on how rental property depreciation is calculated and use our free rental property depreciation calculator to run the numbers for your own properties.

Keep in mind you can only depreciate properties with buildings on them. The IRS does not allow depreciation for undeveloped land, as it does not deteriorate over time. That said, land investing comes with many other advantages, such as not having to hassle with tenants or clogged toilets.


Ways to Lower Investment Property Closing Costs

At the end of the day, we all want to save as much money as possible. That can feel hard to do when going through a property purchasing process, but both the seller and the buyer have a few ways in which they can “cut corners” in order to save!

Remember that everything in real estate is negotiable. Ask the escrow officer for an investor discount of the title company fees. If the property changed hands within the last few years, request that the new owner’s title insurance policy be reissued.

The process of selling or purchasing a home or property is stressful. Make sure, prior to jumping in head first, to learn about not only ways you can save over time but how to proactively save during the process itself. If you are thinking of buying a new property, understand the pros and cons. Consider if this is a smart investment decision for you at this time.


How do you plan to lower your closing costs on your real estate transaction?



More Real Estate Investing Reads:

About the Author

Emma Dudley headshot

Emma Dudley is a data marketer by day and financial writer by night, early on her journey to financial independence. She lives in Baltimore but loves international travel, and enjoys the challenge of cutting-edge fashion on a cut-down budget.

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