Crash Course in Closing Costs

Chances are you have heard the term “closing costs” even if you’ve never purchased a home before, but if you have paid them in the past, did you really understand what they are and how to know if you’re getting a good deal? Thanks to laws passed over the last decade or so, mortgage lenders are required to provide you with a Good Faith Estimate (GFE) detailing all of the potential costs of a mortgage, so it’s easier than ever to compare estimates from multiple lenders. But let’s start with understanding what they are in the first place: closing costs are everything you need to pay, above and beyond your down payment, in order to purchase a home.

• Loan Charges: Lenders charge certain fees to process your loan. These services often include pulling your credit report, getting a flood certification for the property, processing your application, underwriting the loan, paying the appraiser (sometimes you pay for the appraisal when it’s ordered rather than at closing), and recording the mortgage. Other loan charges that are more common now are “points,” essentially pre-paid interest to lower the interest rate for the overall term of the mortgage.

• Impounds: These costs are directly related to setting up your escrow account — that’s the portion of your mortgage payment that goes toward taxes and insurance. I usually see my clients pay at closing three months of their annual homeowner’s insurance, one to six months of property taxes depending on the time of year the closing takes place, and about three months of mortgage insurance if applicable. These amounts may be adjusted if the total impound amount is above the lender’s threshold, noted as an “aggregate adjustment” on the GFE, closing disclosure (CD) and/or settlement statement.

• Title & Settlement Charges: In Ohio and Kentucky, most real estate closings are handled via third party companies called title agencies. They charge fees to both buyers and sellers for guaranteeing the property is transferred with a clean title and that the monies are disbursed appropriately. Buyers usually pay for a portion of the settlement fee, closing protection coverage for the lender, a lender’s policy of title insurance or a title commitment, sometimes an attorney fee, certain endorsements that your lender requests, and an owner’s policy of title insurance if you choose to purchase one. Also, if you can’t be present for the closing, the title company may send you a mobile notary and there will usually be a fee for that service.

• Commission: Depending on your buyer agency agreement and the terms of your purchase contract, you might pay commission to the broker who represented you. Some brokers also charge administration fees that are separate from commission, and if you purchase homes from certain corporate sellers you might have to pay a “buyer premium” or “technology fee”. You should always verify that the amount of commission paid, whether by you or by the seller, matches the buyer agency agreement you have signed: if it’s higher, that is prohibited by law, and if it’s lower, you might be responsible for paying the balance outside of closing.

• Government Recording and Transfer Charges: In Ohio and Kentucky, the buyer is traditionally responsible for the cost of recording the mortgage and the new deed with the county in which the property is located. This fee varies by county but is usually dependent on the number of pages recorded. Some lenders have a standard mortgage on file in some counties to minimize the number of pages that need to be recorded for individual transactions.

• Homeowner’s Insurance Premium: If you didn’t already pay your first year of homeowner’s insurance when you ordered the policy, this will be included in your closing costs.

Depending on the lender, local and state regulations and customs, and your specific situation, your closing costs can vary quite a bit which is why it’s so important to ask about them when you are evaluating which lender to use. You can offset these costs in a few ways: gift funds from a family member or friend, local grants, or contributions from the seller. Knowing your financial needs and limitations up front will help you and your real estate agent negotiate the best terms possible, and help you avoid an unpleasant surprise when it comes time to close the deal.

What To Know When You're Relocating

Over the years, I have worked with several clients who are moving to (or out of) the greater Cincinnati area from another state. Some of them also have homes to sell, and are worried about how to manage the process of buying and selling at the same time. Another concern is how to act fast on a home in the current market when, in most cases, they won’t be available to see it in person. Luckily, today’s technology offers many potential solutions to these problems! Here are some things you should remember when moving long distance:

• Get to know your agents, and introduce them to each other. You’ll need everyone to be comfortable communicating throughout the process of listing your home and purchasing a new one, and your honesty and openness with both agents will ensure that they truly understand your needs. Plus, with your agents already in communication, any last minute hiccups or changes can be quickly communicated without you having to be the go-between.

• Ask ALL the questions. Real estate terms, customs and laws vary greatly between states and even regions within states. If you aren’t sure you understand something your agent said, don’t be afraid to ask for clarification. Let your agents know about any and all concerns you have about a property. Find out what areas of town your agent knows best, what they like to do in their spare time, where their kids go to school or what sports they play, and share as much information about yourself and your family as you can! Agents can be great resources for you beyond real estate, and you’re going to be depending on yours a lot in the near future.

• Do your own research. The internet is a wonderful place, full of free information on property records, individual sellers, historical photos, and more. If you see a home that meets your needs, look at the location on a map, use the street view to take a walk down the street, check out crime statistics and local schools (even if you don’t have children in school, the quality of schools available can directly affect home values). Find the closest grocery store, gas station, gym, park, bourbon bar or cat cafe (whatever you’re into!). Join a Facebook group or two and connect with people in your desired neighborhoods for perspectives that your agent might not be legally or ethically able to provide.

• If you don’t mesh well with your buyer agent, find a better one. Viewing properties over a video call, or with videos created by your agent, can be a little intimidating. You’re about to make a huge decision, and you need to feel comfortable that your agent has your best interests at heart, knows enough about potential issues with a property to gather additional information for you, can give you a clear picture of the local market and the value of any homes you view, and helps you find the right home no matter how many offers it might take. (Note: As of August 17, 2024, agents in Ohio are required to have a signed buyer brokerage agreement before showing any property listed in the MLS. These agreements can be for one property or for a predetermined amount of time. If you desire to cancel that contract, ask the agent directly. If you can’t agree, it’s a good idea to seek legal advice before working with a new agent.)

• Ask if you can send a friend. If you already have a connection in your destination city, ask if they would walk through a property with your agent. Most people love touring homes even when they’re not in the market, and it can be helpful to have a second set of eyes on the home who isn’t a professional — they might ask questions your agent wouldn’t anticipate. Agents love meeting new people, and should understand that having another opinion on the property should make you feel more comfortable whether you make an offer or keep looking. (Note: As of August 17, 2024, you may need to give advance written permission for this person to represent your interests during the showing. Ask your agent for clarification.)

• Don’t waive inspections — do more of them. Your agent probably knows to look out for many signs that a home has some underlying conditions, but they are not usually inspectors. If you can’t tour a home in person, get a professional opinion about every major system in the home. Don’t skimp on separate inspections for the pool, septic, chimney, sewer lines, etc. While you might have had to give up your right to request repairs from the seller to secure a contract, you still have the right to renegotiate the price in most cases, and you definitely will be better off losing $1,000 in inspections than buying a home with serious underlying issues that could cost much more.

• Your listing agent can be the caretaker of your home. If you have to move out of the area before your home is sold, chances are you will need someone to check your mail, take out your trash, make sure the lawn gets mowed, return your internet equipment, and relate information to the new owners at closing (keypad codes, security system information, smart home apps, etc). Your agent can help with a lot of these things, so make sure they have a key, the code for your garage, and the contact information for a neighbor or relative that you can trust to assist as well.

I’m sure there are more factors to consider depending on your situation, but these tips should apply to nearly everyone. Let me know if I’ve missed something in the comments! (Rev. 8-30-2024)

What Do Sellers Have to Disclose?

Ohio and Kentucky both have laws regarding what a seller needs to disclose about a residential (1-4 family) property when selling, which types of sellers are exempt from those disclosures, and specific forms with detailed questions about the property. There are also several misconceptions about what a seller has to share, and about the consequences for doing so. Before I get too deep into this, please note that I am not an attorney, so what follows is not intended to be legal advice — just what I would advise any real estate client based on my experience.

The point of a property disclosure from the seller is to share any relevant material facts about the property, especially those which might not be obvious at first glance or even during an inspection. As I tell all of my sellers, it’s also the perfect opportunity to show that you fixed the issues that came up, developing some trust with the buyers that you’re not trying to hide anything. Leaky roof? That’s fine, you replaced it with new 30 year shingles. Heat pump failed? No worries, you replaced it with a more efficient one. Bathroom sink leaked into the room below? You had everything fixed professionally, some drywall replaced, and everything repainted.

Something I see often that concerns me are disclosures from non-occupant owners (usually investors) with the phrase “never occupied the property” and sometimes “seller has no knowledge about the property". What a ridiculous thing to say! Unless you only owned this for a short time and never had anyone lay eyes on it, you definitely know something about the property, such as whether it’s on public water and sewer — pretty sure you know which bills you had to pay, so why not answer that question? Many investment properties have been in the same hands for years, though, so if you’re a landlord who has had any work done to your investment property, speak up. You’re just leaving yourself open to potential lawsuits if you don’t, and making it harder for buyers to evaluate your property. If you made any repairs or upgrades, brag about it! If you get that boiler serviced annually, tell the world! You will automatically sound more responsible and respectable than other sellers.

I mentioned earlier that some sellers are exempt from completing the property disclosure form, which is true. The Ohio Association of REALTORS lists the following conditions as possibilities:

1. A transfer pursuant to a court order, such as probate or bankruptcy court;

2. A transfer by a lender who has acquired the property by deed in lieu of foreclosure;

3. A transfer by an executor, a guardian, a conservator, or a trustee;

4. A transfer of new construction that has never been lived in;

5. A transfer to a buyer who has lived in the property for at least one year immediately prior to the sale;

6. A transfer from an owner who both has inherited the property and has not lived in the property within one year immediately prior to the sale;

7. A transfer where either the owner or buyer is a government entity.

Kentucky doesn’t allow for quite as many exemptions. According to their Seller’s Disclosure of Property Condition, the only situations in which the form is not required is if the property is new construction and being sold with a warranty, or it is being sold at auction, or it is a court supervised foreclosure. It’s also worth noting that the Kentucky form is much more thorough than Ohio’s, and many of the questions are very specific with follow-up questions where applicable. While you always have the option to not complete these disclosure forms (we can’t force you), failure to disclose a material defect in a property leaves you open to legal consequences. Also, if you tell your licensed real estate agent about a material defect that you don’t include on the disclosure form, they are legally and ethically bound to share that with any potential buyer, so you might as well err on the side of honesty.

Last week a buyer asked me whether a seller in Ohio needed to disclose any deaths in the home. It’s not the first time I’ve been asked this! The short answer is no, there is no question on the property disclosure form that covers this and for most deaths that occur in the home (the peaceful passing of an elderly person, for example), there would be no material issue with the property as a result. However, a seller should probably disclose if there was a more unusual situation — suicide, murder, accident, etc. I had a listing a few years ago that was next door to another active listing where a well-publicized kidnapping and murder had taken place. I don’t know whether it affected my client’s sale, but I am sure that many prospective buyers of that neighboring home would have been very upset to not be informed about the history of that home before they moved in.

I’ve heard many questions that no seller has to answer, although it can’t hurt to ask the question if it’s important enough to my client. Examples include the sellers’ reason for moving, where they sent their kids to school, whether there is good wireless service in the house, how often (if ever) the ductwork gets cleaned, whether the sellers have noticed any ghosts, what the neighbors are like, and so much more. As a seller, be ready to answer as many questions as you can, especially if it gives you positive information to share — buyers feel more confident about making an offer and more understanding about their home inspection results when they have as much information as possible from you. This means quicker offers and a smoother transaction!

P.S. Every state has different laws, so it’s important to consult a licensed real estate agent and/or an attorney who specializes in real estate law if you have any questions or concerns about what you should share about any property you are selling.

What Happened to Affordable Homes?

If you’ve been paying attention to home prices in greater Cincinnati over the past few years, you’ve probably noticed a trend: homes that were selling for around $150,000 in 2018 are now selling for well over $200,000. In fact, in many areas it is nearly impossible to find a move-in ready home for under $200,000. So, what happened?

The short answer is that we have been dealing with a shortage of homes for sale since 2012 or so. Remember that mortgage crisis circa 2008 - 2011? Many builders didn’t survive the sudden influx of foreclosed homes for sale, and others became much more conservative about building on spec (i.e. without a ready buyer) and financing terms.

As you can see in the chart above, newly completed single family homes haven’t even returned to half of the levels we were seeing in 2005. Think about it this way: over the past 18 years of population growth, not to mention the normal major life events that usually result in a move, builders in the Midwest have not built even half of the number of homes they had built prior to that. Could this have just been a market correction, though? Were builders in 2005 building way too many homes?

Nope. Over the same 20 year period, new household formation in the USA shows an obvious and steady increase (I’m very curious to know what that spike in 2020 was…maybe in a later post!). So, we saw an increase in demand for housing that was not compatible with supply levels that were not growing at the same rate. This led to increasing home prices in many markets, which was great for existing homeowners, many of whom had built more equity than they expected and continue to do so. For first time buyers the situation was a little more complex, but that’s a whole other post.

At the same time, many older homeowners were facing tough decisions about their long-term housing needs in the face of a struggling stock market and increasing long-term care costs. Some chose to age in place, so they opted to improve or adapt their homes to their changing needs. First floor bedroom suite additions, elevators, in-home caregivers, and inviting extended family to move in were all strategies for retirees who felt they had no great options. More recently, we’ve seen them reconsider moving because they don’t want to give up their attractive mortgage interest rates (assuming they refinanced within the past 4-5 years). This has further affected the number of homes available for sale.

The moral of the story is this: don’t wait for home prices to go down if you need to move. There is no reason for prices to drop until our supply issue is resolved, and that will take years (construction takes time, and good quality construction takes even more time). Interest rates will probably decrease over time, but I also wouldn’t recommend waiting around for those sub-3% rates we were seeing during the height of the pandemic. Focus on your needs today instead: if you need to buy, sell, or both, work with a professional to determine what your options are.