The scary hidden costs of buying and selling your home
First time home buyers have it tough. Many people in the real estate industry know how little most first-timers know about their first purchase, so they take advantage of you (and your wallet). Unfortunately, the same goes for first time sellers, as well.
The hidden and unexpected costs of buying or selling a home can be crippling, but as long as you know all of these lesser-known tricks, you can keep your costs at a minimum.
Your home could cost you upwards of DOUBLE your original buying price with hidden and unexpected costs
It’s the biggest investment you’ll ever make, it’s the most expensive thing you’ll ever own, and the first one is most likely going to be a lot of work to get perfect.
No, we aren’t talking about your marriage — we’re talking about buying a home, especially when it’s your first.
Although many people in major US cities choose to rent rather than buy, there comes a time in everyone’s life when buying a home is reasonable, possible, and, well, more cost-effective in the long run. There are hidden (or unexpected) costs that you need to consider when you’re ready to put that 20% down, so let us set up a possible scenario for you in this pretend home right here.
Meet your new (pretend) home, and follow along with us to see what hidden costs come from buying (and, later selling) your home
You’ve been searching Zillow for 1 month so far. You’re tired of seeing the same old homes, the same old styles, the same rotted exteriors with updated interiors. You go on the website one day with the same bored, apathetic facial expression, expecting nothing special — until you find the one.
It’s in an average sized city in Idaho, close to other major cities but far enough out to allow each property in the area to have a piece or two of land. The exterior is close to perfect, the interior is just unique enough to let your creative juices flow, but not weird enough to make people think they just walked into a circus. It has 5 bedrooms, 2.5 bathrooms, a basement, a fully fenced in private backyard (a half acre!), landscaping, and a covered front porch.
You make the offer for the asking price of $267,000 with a down payment of 15%….
Home inspections can cost you upwards of $350
And, you got the house! But now, you need a full home inspection (per the lender, and for your own peace of mind). These home inspections check your roof, exterior, interior, plumbing, electricity, heating, cooling, water, attic/basement, insulation, structure, termite/mold issues, and land grade for anywhere between $300 and $400. Be sure to consult friends and family for recommendations on a thorough home inspector.
So, there are two possible outcomes now: either your home is good to go, or it has a few minor issues with electricity and a shaky corner on the roof. Just for the sake of being as helpful as possible (which we always strive for here), we’re going with the latter.
So, you’ve got a wonky roof corner and a few small electricity issues that we can save for later down in this list.
You can expect to pay between $200 and $600 in appraisal fees
Home appraisals are a vital part of the home buying process, especially if you’re planning on getting a home loan. The lenders will most likely choose an appraiser to come out to your location, check the home to create a property value, and then return the information to the lender. Appraisers also collect information (often called “comps”) on recently sold homes in the area that have a comparable location and physical characteristics to get a better sense of the going rate for these type of properties.
This appraisal fee costs you around $320 due to your location, house size, and age of your home.
The lender then takes that appraised home value and compares it to the real value to both ensure you aren’t paying too much and to ensure that any changes made to the home can be well documented and compared to the original buying price for future buyers.
You can expect to pay around 1%-2% of your mortgage for escrow accounts
Escrow accounts are essentially middle-man accounts that stand between you and your lender. The account holds your payments and pays your lender on your behalf in order to ensure that the payments are made. If you put down less than 20% on the house, many lenders require an escrow account, but it’s not necessarily a bad thing to have.
Your escrow account would help you manage your annual expenses into easy monthly payments, as opposed to a big yearly fee. Escrow also pays your property taxes and insurance premiums, which can get confusing, and are often misunderstood on the borrower’s end. Escrow account managers often take around 1%-2% of your mortgage as payment, which would be around $5,340 at 2% for the home you just bought at $267,000.
You can expect to pay anywhere between 3%-6% of your purchase price in closing costs
During the closing of a real estate transaction, the closing costs are probably the most vaguely described fees out of the entire deal. Many people are rightfully frustrated at these surprise costs, but what many first-time buyers (or even second- and third-time buyers) don’t know, is that they can negotiate most of these costs with the lender/seller.
You might be thinking, is this perfect little home even worth it after all these closing costs? Well, yes. It is. Because first, don’t settle for anything, especially not a house. Second, all these prices can be lowered and negotiated with a little grit and perseverance. For clarity’s sake, your home (valued at $267,000) would have an estimated 4.5% closing cost rate, which would be around $12,015
Here’s a list of all the fees that could be included in these costs:
A list of potential closing costs that you could see on your statement
- Application fee —Lender’s processing fees for your application
- Attorney fee —Pays for an attorney to review closing documents for the buyer/lender
- Closing/Escrow fee —Paid to the title/escrow company or attorney to conduct the closing
- Courier fee —The cost of transporting the documents to complete the loan transaction
- Credit report —To check your credit score
- Escrow deposit for property taxes and mortgage insurance — 2 months of property tax and mortgage insurance down payment
- FHA upfront mortgage insurance premium (UPMIP) — If you have an FHA loan, you must pay 1.75% of the base loan amount
- Flood determination or life of loan coverage —To determine if the property is located in a flood zone
A few more…
- Homeowner’s association transfer fees — Usually the seller will pay this, but if not, you can negotiate it
- Homeowners insurance — Your first year’s insurance is paid at closing
- Lender’s policy title insurance —This insurance shows the lender that you own the home and that the mortgage is valid
- Lead-based paint inspection — In older homes, this fee covers the cost of detecting lead in a home’s paint
- Owners policy title insurance — An insurance policy that protects the homeowner in case someone tries to challenge the ownership
- Origination fee —Covers lender’s admin costs, which is around 1% of the loan
- Pest inspection — Covers the cost of pest inspection which is required for many mortgage loans
And some more…
- Prepaid interest —The interest that accrues between closing and your first mortgage payment
- Recording fees — A fee for the recording of public land records
- Survey fee — Some states require a surveyor to verify property lines and shared fences
- Title company title search or exam fee —Fee to cover the thorough search of property records to ensure no one else has claims on the land
- Underwriting fee — This covers the cost of research for approval or denial of the loan
- VA funding fee — If you have a VA loan, this is the funding fee which is a percentage based on the type of service and the down payment
How to negotiate your closing costs
You can always shop around for a lender that offers the lowest closing costs by getting multiple quotes and estimates, which also allows you to shop around for the lowest service fees.
By negotiating directly with the seller, you can possibly lower the purchase price to cover some of the closing costs, as well.
Another way to negotiate these fees is by requesting the Closing Disclosure Form as soon as it is available so that you can compare that form to what was on the loan estimate. If there are discrepancies, you can ask your lender to justify them and to knock off the more obscure fees from the final price tag.
You can expect to pay around $2,101 per year in property taxes
One type of tax you’re required to pay every year as a homeowner is the property tax, which pays the government for your ownership of a piece of their land. This value ranges depending on location and home value. For your (pretend) house, the tax rate is 0.787%, which equates to around $2,101 per year in property taxes. The state average of Idaho is around $2,059, and the national average is around $3,233.
Another tax you may be required to pay is a transfer tax. This tax is set by each state and each county, but while some states don’t require any transfer taxes, other states charge flat fees or exorbitant percentages (like New York, which charges around 2.65% in some parts of the state).
If your location charges transfer taxes, you can always negotiate it with the seller, lender, or escrow officer. There are no requirements on who pays it, as long as it gets paid.
You can expect to pay around $1,722.96 per year for required insurance
Home Insurance is for your home’s protection against damage, theft, natural disasters, etc. For your home in Idaho, it would cost around $49 a month, which is the second cheapest state for homeowner’s insurance. Just for reference, Florida’s average homeowners’ insurance is around $171 per month.
Private Mortgage Insurance (PMI) protects lenders from default or foreclosure risks when the buyer puts down 0%-19.99%. Typically, this will cost you between .5% to 1% of the loan. For your new home, you use a conventional loan and put down less than 20%, with plans to refinance in about 2 years. At an interest rate of 4.710%, your monthly payments would be around $1,178.68, with the PMI cost at $94.58 per month.
You can expect to pay around $90 for title insurance
Mortgage Insurance Premium (MIP) is a mortgage insurance policy used with FHA loans when your down payment is less than 20%. The rate is decided based on an assessment of the length of the loan and the loan-to-value ratio. But since you used a conventional loan rather than a FHA loan, you don’t have to worry about this one!
Title insurance, as listed a few slides above, is used to insure the homeowner against any challenges or claims that the property belongs to someone else, or to no one at all. This is going to end up costing around you around $90 for your home, but don’t worry! It’s a one-time payment for the entirety of your home ownership.
You can expect to pay around $197,322.14 in interest over 30 years
As stated above, the interest rate for your home is around 4.71%. This may seem pretty low (and trust me, it is), but this equates to around $548.11 per month in interest and $197,322.14 over the course of your home ownership. The real cost of your home per month without any interest would have been around $630.57.
Fortunately, if you have good or excellent credit, you can lower this interest rate! Other ways to lower it include putting down more than 20% of the purchase price or refinancing when you achieve at least 20% equity of the house (typically through a combination of making payments and the home value increasing). Just keep in mind that it’s next to impossible to get an interest rate below 2% unless you put down around 70% in your initial down payment and you have the best credit score your lender has ever seen.
You can expect to pay around $359 to repair your roof
Well, now that you’ve gotten this far, a congratulations is in order for the brand new homeowner (you)! After sorting out those closing costs, you signed the official papers to own your dream home. But, if you remember from earlier, we had a shaky roof corner and a few weird electrical issues to deal with.
After getting a few quotes from some reputable roof repair services, you found that the cost of repairing those funky asphalt shingles and putting in little waterproof additions in that corner would cost you around $359. Turns out, if you had wood shingles, it would cost you around double this price to repair, or a few thousand dollars to replace your wood shingles with fire-retardant wood shingles.
You can expect to pay around $1,735 to fix your electrical issues
The electrical issues, however, are a different story. Turns out, whoever wired the house when it was built was a complete nincompoop. Your electrician looked a lot more confused than he thought he would be, and described your house’s wiring as looking like “a cat ran around with a loose ball of electrical wires, with someone following behind it, blindfolded, connecting them to the sort-of-correct places.”
Uh-oh. Looks like this is going to cost you around $1,735 to rewire your entire home, which came highly suggested from the stupified electrician. However, if you didn’t agree to purchase the house as-is, your seller may cover the cost of making these repairs. All of this is part of the negotiation.
All in all, you’re paying almost double the amount of your loan in hidden, unexpected, and extra costs
If you add all of these together, you’re paying around $209,340.10 in hidden costs. If you don’t want to count the mortgage interest in that price, the hidden costs would be a grand total $12,017.96, and since Idaho is one of the cheapest places to live, this cost is most likely a lot higher for whatever state you’re planning on buying a home in.
All in all, buying a home is a difficult process with a lot of unexpected costs, but a few good ways to lower these costs are to put more than 20% down, have great credit scores, negotiate as many costs as possible with the lender/seller, and to protect yourself by getting multiple estimates and quotes.
Selling a home has even more hidden costs than buying a home
So, maybe you’re on the other end of the spectrum and you’re selling a home. If you’re a first-time seller, you at least know what first time buyers are going through and you can predict some of the costs you negotiated for your home when you bought it from the seller.
However, the hidden costs of selling a home aren’t as widely talked about as the hidden costs of buying a home, which is why we included our research, expertise, and personal tips in this article. Selling costs depend heavily on your location, which means selling a house in San Jose can cost you as much as $81,000, while selling a home in Indianapolis can cost you around $8,200
Painting your home can cost you around $2,581
Painting the outside of your home, according to Consumer Reports, can increase the value of your home by 2%-5%, and painting it an off-white, yellow, or light blue color will further help your home sell better. When painting your home, don’t forget about window trim, door trim, and door color because homes with a charcoal, smoky, or jet-black door can sell for up to $6,300 more than any other color door.
Painting the inside is important as well in order to cover up any scratches, stains, and to make it amicable for potential buyers. Turns out, even though you and all your friends love your canary yellow kitchen walls with baby blue cabinets, not all buyers would agree.
Window washing is around $266, but window replacement is around $5,000
Did you know that, psychologically, windows can make or break a home? Single pane windows nowadays can tell buyers that your home is old, not well taken care of, cold, and inhospitable while double pane (or newer model) windows can indicate warmth, protection, cleanliness (to keep out bugs and dirt), and hospitality.
Oddly enough, clean windows and screens can heavily affect a potential buyer’s opinions on a home. On average, hiring someone to wash your home’s windows (inside and out) can cost around $200-$300. However, if you’re updating your windows to a double pane, replacement can cost anywhere between $3,000 and $7,000.
Fixups can cost you anywhere from $300 to $35,000
These may seem obvious (like covering up that hole in the wall or fixing the water stain in the ceiling), but more often than not, a second pair of eyes is necessary when trying to spot areas of your home that need a quick fix. Your real estate agent will be able to tell you what minor fixes need to be made to the inside and outside of your home.
If there are any significant upgrades that need to be done, your agent will advise you on whether or not they think you will be able to get your money back for the upgrade in the sale.
Some of these upgrades and fix-ups can include exterior wall damage or stains, kitchen repairs/upgrades, toilets, sinks/faucets, grout, tiles, flooring, lighting fixtures, doors, knobs, garage doors, and concrete cleaning.
Pre-inspection reports can cost you an average of $650
Of course, these aren’t required — but after discussing how important home repairs are before listing your home, a pre-inspection can save you money in the long run. Not only does it help you predict what issues a home inspector might catch, but it helps give potential buyers peace of mind in seeing what was fixed/upgraded on your behalf if you choose to do so.
This inspection also lessens the likelihood of buyers negotiating the purchase price down to a less-than-preferred number if they know you put money into fixing known issues before selling. You are also able to get quotes from a variety of repairmen to find the cheapest option (or even do the repairs yourself!).
Professional photographs can cost you around $270 per shoot
First and foremost, real estate photography is a skilled discipline, and not just something your photographer niece can do for you for a discount. A professional photographer will be able to capture all the right angles in your home, create full-room photos, adjust lighting to create the right atmosphere, and edit photos as necessary to attract your ideal buyers.
Depending on your home size and selling price, a real estate photographer (like the one who shot the above-right photo) can cost as much as $2,500. The left-hand side was taken by an average semi-professional photographer charging around $500 for the shoot.
Landscaping can cost you anywhere between 3% to 8.5% of your home’s value
Did you know a well-landscaped home can add up to 5.5% to 20.7% to your home value? Due to these numbers, spending around 3%-8.5% of your home value on good landscaping can increase your home value by up to $60,000.
Although this photo is an extreme example of a landscaping project, it can increase this home’s value by almost $100,000 with the porch, outside seating, outdoor fireplace, and the installed barbecue. The landscaping itself also increased the value of this home with the new grass, shrubs, mulch, and trees giving this house some added vitality. Although porch additions aren’t required for selling a home, the grass and greenery can increase a home’s purchase price immensely if done right.
Staging can cost you around $4,000
Staging a home is one of the pricier hidden costs of selling a home. Fortunately, you have a few options depending on your preferred budget, but if your real estate agent is a strong advocate of an option that is out of your budget, you might have to bite the bullet and head the professional advice.
One option you have is to hire someone who takes care of everything, which can cost you upwards of $5,000 for a medium size home. A slightly more budget-friendly option is to hire a savvy professional who knows how to use pre-existing furniture, thrifted items, and faux furniture (like using moving boxes to shape a bed in place of a mattress, and a strategically placed blanket hung on the wall in place of a headboard). You can also search the internet for DIY home staging ideas for under $1,000, which is more doable than you’d think, but very time-consuming.
Utilities and home warranty
Many people don’t realize that after you move out of a house, there are still payments on utilities that you are required to cover the cost of. From the moment you leave the house vacant, you are required to have a home warranty to insure protection for the house in case of any sort of mishap. This protects you as the seller, as well as the buyer, from having to pay for anything that is unavoidable or unexpected like a natural disaster, a break-in, or a flood up to a year after the closing date.
You are also required to pay for any utilities that are used after you are gone from the house but before the buyer moves in. These utilities can vary widely depending on water, electricity, and gas usage, but most people can expect to have a water bill for watering your landscaped lawns, an electricity bill to keep your home lit for potential buyers, and trash/sewage costs.
With some due diligence and research, I found this description of capital gains from TurboTax that make this complicated tax as understandable as possible:
“If you are single and have lived in a house for two of the previous five years, you owe no taxes if you make $250,000 or less in profit. For married couples filing jointly, if both of you have lived in the house for two of the previous five years, then the limit is $500,000 in profit.
“For any profits that exceed the ceiling for your filing status, you will typically pay the capital gains tax rate, generally 0, 15, or 20 percent depending on your tax bracket as of 2017. There are exceptions, though. For example, if you have to move because of a lost job or illness, you might not have to pay that tax, Levine said. If you lose money on the sale, the tax laws don’t help you.
Closing costs can cost you anywhere between $5,000 and $12,000
Transfer Fees: These fees (ranging from $100-$400) come from transferring the name and property ownership to a new owner, which is typically paid by the seller or negotiated by the buyer to be paid by the seller.
Loan Payoff Costs: If your home is not paid off by the time you sell it, you may be faced with a loan payoff statement in order to close out the loan or transfer it. Some lenders penalize you up to a 3% charge for prepayment
Attorney Fees: Some states require an attorney to be present at closing either for the seller and buyer individually, or to represent both. Most attorneys charge anywhere between $150-$300 per hour, so expect to pay anywhere between $500-$2,000 depending on the complexity of the closing.
Real estate commissions cost, on average, around $30,000
The most expensive part of selling a home is, unfortunately, paying someone else to sell your home. Real Estate agents typically get a 6% commission off the purchase price, which can be a hefty price anywhere from $12,000 to $75,000.
What most people don’t know is that you can negotiate costs with a real estate agent by getting quotes and letting them know they’re competing with each other to sell your home. You can also easily hold out to sell your home for the full asking price. An extra $10,000 for your home is only an extra $300 for them, but if you make your motives clear on exactly how much you want to sell your home for, your agent should comply.
Moving costs can be anywhere from 150 hours to $4,000
Ever hear the saying, “Time is money?” Well, when you’re moving, it really does ring true.
Recently, I moved from a 5 bedroom house with an ocean view to a 2 bedroom apartment in the middle of a big city, and we chose to save money by moving ourselves — that means packing all of our things, shoving it into two small sedans, carrying it up 9 floors, and trying to rebuild our lives in a significantly smaller space. It took us approximately 40 hours to move every single item from our old place to our new apartment, and it took around 3 months to finally unpack every box and find a place for every item (for some items, that place was the dumpster).
At the end of these exhausting 3 months, we vowed to save up enough money by the time our lease is up so that we could afford a moving company that packs, moves, and unpacks our items for us. For some, the act of moving isn’t a huge burden — but for others, it takes a serious toll on your mental and physical health in a short amount of time. This is a highly personal decision, but luckily, the moving options are also highly customizable so you can choose what help you pay for, and what you chose to do yourself.