WHAT IS A HOME WARRANTY

Many Buyers know and believe that Sellers delay maintenance when they anticipate that they will be selling their home soon. Since home buyers hope to minimize the financial impact after closing related to malfunctions with the components in their new home most will ask the Seller to pay for a home warranty. First time home buyers with no experience maintaining a home may consider having a home warranty a critical piece of their offer on a property.

Home Warranty plans provide for specific types of coverage, be sure to fully evaluate the coverage in each policy before selecting a plan.

• • • If a home system or appliance breaks or stops working, the homeowner calls the home warranty company.
    • The home warranty company calls a provider with which it has a business arrangement.
    • The specific provider calls the homeowner to make an appointment.
    • The provider fixes the problem. If an appliance is malfunctioning and cannot be repaired, depending on contract coverage, the home warranty company will pay to replace and install the appliance.
    • The homeowner pays a small deductible usually $75- $100.

Home warranty plans will run $350 - $600 with most plans costing $450 to $550. Except for in extremely aggressive Seller's markets, most Buyers will ask for the Seller to pay for the plan. Still, like most things, this is 100% negotiable.

If the Many seller feel if they are selling the home for less than they expected they will generally try to exclude this expense. However, the benefit for Sellers to offer a home warranty are noteworthy too since the many firms also offer the exact same coverage for the seller for little or no extra dollars during the time the property is for sale. This means if before closing the AC, Furnace, Water Heater or even appliance dies the Sellers cost to replace/repair the item is typically limited to the $100.00 deductible! Additionally, if defects with mechanicals or appliances surface as part of an inspection then most times the home warranty can also be used to address these items.

Mitch strongly encourages Sellers to include a home warranty for these and other equally compelling reasons.

What Is Seller's Title Insurance?

Unlike health, car, or home insurance that insure against what may happen in the future, title insurance is insuring the buyer and a buyer's lender against what has already happened in the past. Specifically title insurance makes sure the seller's have the legal ability to sell the property. That the property hasn't already been sold to someone else or that that ownership has not changed away from the seller due to divorce, litigation, foreclosure, real estate tax sales, gifting of the property etc.

Since most buyers have lenders and most lenders require a title insurance policy to protect the lender against an error in the results of the title search this is an extremely common expense. If a problem arises after the closing, the insurance covers the lender's investment in the mortgage. 

There are typically two title insurance policies. Both are one-time premiums are usually based on the purchase price. One is typically provided at an expense to the seller showing that the seller can sell the home without any issues like mentioned above. The second policy, which is the less expensive cost, is for the benefit of the lender who is extending a new mortgage to a buyer. Because the buyer chooses to have a mortgage, versus paying cash for the property, this 2nd policy is typically paid for by the buyer.

The Seller's policy, as the more expensive of the polices, will typically run $300-$1500 and is mostly based on the sales price of the property.

A closing protection letter (sometimes “insured closing letter” or “CPL”) forms a contract between a title insurance underwriter and a lender, in which the underwriter agrees to protect the lender for actual losses caused by certain kinds of misconduct by the closing agent. Examples would be a failure to follow written closing instructions or fraud or dishonesty in handling the lender’s funds or documents. The typical cost for the CPL is $25-$50. There are usually three "letters" (one for the seller, one for the buyer's lender & one for the buyer.) As A Seller, you would typically pay only the one $25-$50 fee and again because the buyer chooses to have a mortgage, versus paying cash for the property, the buyer would pay for their buyer's lender and the buyer's own CPL fees. 

Property Taxes

Real estate property taxes are typically calculated as a percentage of the property's total assessed value based on both the value of the land and any improvements including the structure(s) that are in place. This is determined by a local tax assessor. These taxes are assessed on virtual all real estate (excluding government owned land and many properties owned by Federal Exempt Nonprofit organizations) This tax is paid to state and local governments. The funds generated from real estate taxes (or real property taxes) are typically used to help pay for local and state services.

In Indiana real estate taxes are paid in two payments each year. The 1st half of the taxes are paid based on an invoice from the taxing authority that's due May 10th. The 2nd payment covering the 2nd half of the year is due November 10th. However, real estate taxes in Indiana are paid one year in arrears. This means the May invoice is actually paying the first half of the PRIOR year and the November invoice is paying  taxes due the 2nd half of the year. Said another way an Invoice that's due on 5/10/21 is actually paying the real estate taxes for the first half of 2020.

Typically most purchase agreements  require the Sellers to pay the real estate taxes on the property for when the Seller actually owned the land even though the taxes are not due to the taxing authority yet. So, this means that sellers will almost always owe taxes at closing that often times might not even have been billed by the taxing authority yet.  In some instances the Buyer’s lender may require these taxes be paid at closing to the city while at other times, since there will be enough time for the Buyer to escrow or build up the amount that will be due, the lender will allow these taxes to be given to the buyer in the form of a Credit against what the buyer would otherwise bring to closing.

As a general rule the amount of this expense at closing, on homes being resold vs new construction, will be either just over or just under one full year’s worth of real estate taxes. The exception to this would happen if the seller's either don't have a mortgage in place or aren't escrowing the tax payment through a lender. This means the sellers pay real estate taxes directly via either though one or two payments to the taxing authority. If the seller's pay the taxes though one payment then typically the only real estate taxes paid by the seller at closing will be a proration of the annual real estate tax bill prorated from January 1st through the day of closing.

This means If the seller is paying taxes directly when due, and the closing happens on January 2, the seller's lowest expense at closing would be the real estate taxes for the prior year plus a credit to the buyer of  only 2/365 ths of the seller's annual tax bill that covers the real estate taxes owed for the current year although not due till May 10th of the following year. 

What is Buyer's Assistance

Lenders will typically allow you as the seller to pay up to 3% of the Sales price as Buyer’s Closing costs and pre-paids.

Doing this means that the purchase price should be increased by the amount of the Buyer's Assistance which means these amounts are then included in an increased mortgage amount for the Buyer.

While including Seller assistance may help a buyer be able to afford the home they want, because we are adding up to 3% to the net purchase price, the sellers literally must be willing to sell the home upto 3% below the appraised value. Typically this will only happen in Buyer's markets or when the seller is extremely motivated.

Real Estate Broker Fees & Commissions

Typically a  listing agreement between a seller and the seller's agent/broker gives the broker the right to exclusively market the home. In return for bringing a buyer to the table, the seller agrees to pay a commission to the broker.

Most real estate agents charge a commission based both on the sales price of the property as well as on the level of services the agent will provide. For example “full-service” listing agents typically cover all marketing expenses, photography, sign costs and similar expenses as part of their commission. Additionally, this fee is usually split between the sales agent (listing agent) and the buyer's agent. Not all Listing agents though split this fee equally with the buyer’s agents. Lastly, the listing broker and buyer's agent's broker typically also take a share of each agent’s  commission. 

While brokerage fees are 100% negotiable, locally in the Greater Indianapolis market “Full Service” real estate agents seem to charge around 7% (including the seller also paying buyer's agent commisssion) to sell homes priced below $300,000 and around 6% (including the seller also paying buyer's agent commisssion) for homes priced above $300,000. As the price of the home increases though the percentage charged typically decreases. Also some brokers charge a lower percentage or even a flat fee but also typically provide a lower level of service.

This means that for the listing brokerage alone, not including the buyer's agent commission, in the Greater Indianapolis market “Full Service” real estate agents seem to charge around 3.5% to sell homes priced below $300,000 and around 3% for homes priced above $300,000. Again, as the price of the home increases though the percentage charged typically decreases

Mitch encourages sellers to ask about, and look closely at, the combination of sales price (typically as dollars per square foot as a comparison between agents,) the days on Market and the sales to list price ratio to determine the agent with the best value vs the agent’s charging the lowest fee. For example as a listing agent most of Mitch’s client’s get a substantially greater amount in sales price (often even exceeding the full commission) in fewer days with less surprises. So, while Mitch does not discount his services, Mitch’s expertise and experience means his seller’s pay little or no fees due to the higher sales price when compared with other agents.  

• READ 10 QUESTIONS/ANSWERS REGARDING AGENT COMMISSIONS,
  Two Recent Changes Including the new law requiring Buyer Agent Agreements, & More on Dual/Limited Agency And Home Warranties

Many Brokerages also charge a Transaction or Commission fee attributed to Document Management or some other for "need." While Mitch does not charge any extra transaction or other similar fee many agents charge anywhere from $150 to $300 in addition to the brokerage commision.

Note: There is a movement spreading across the country to eliminate the seller from paying the Buyer’s Agents Fees from the Seller's proceeds. Ultimately, however, the buyer, not the seller is paying all of the seller’s and buyer’s agent fees as part of a higher sales price! Sellers who want to NOT pay the buyer’s agent fail to realize that the comparable sales they are basing their home’s value on were sales price amounts where that seller was paying the buyer’s agent’s fees. So, these buyer’s are effectively wanting to make the buyer pay the buyer’s agent’s fees twice! Once to the Buyer’s agents directly as part of closing costs and a second time via an inflated sales price that includes an amount that in the comparable sales was previously used to pay the Buyer’s agents.  

Additionally, if the buyer’s were unable to include their buyer agent fees into their sales price of the property, then the buying power of buyers would instantly decrease by 3% -3.5% since the buyer would have less money to use for down payment... since they would need to pay their buyer’s agents at closing 3% to 3.5% of the sales price.

What Are Government Recording Fees

Recording is the act of putting a document into official county records, especially for real estate and property transactions, that provides a traceable chain of title. Specifically for Sellers, this would include the fees to release the mortgage and deed recorded in the seller’s name. This will generally run $80 -$100.

Seller Fees Resulting From a Buyer with VA or FHA Financing

One of the advantages for Veteran buyers is that is that the VA limits the amount of fees the lender and title company is allowed to charge the buyer. However, if you are selling your home to a veteran through a VA loan, you need to be aware of these “Non-Allowable Fees” though because the lender and title company will typically make the seller pay the non allowable fees.

These fees will vary between lenders and title companies, there are two primary fees you as the seller should be aware of. Most lenders charge a fee called a processing or underwriting fee. This is different from the origination fee. It is typically between $300 and $900. The is a non-allowable cost. Some lenders waive it on VA loans, but many will charge it to the seller. The other fee is from the title company and will be called an escrow, settlement or closing fee. Not to be confused with the title insurance cost (which the buyer will pay) this escrow fee is also a non-allowable cost. This is typically a $350 - $450 fee that’s usually shared equally though. So for Sellers this means an additional $175 - $225.

FHA loans may also have some ”Non-allowable Fees. A tax service fee for managing an escrow impound account is one example of a non-allowable that fee FHA homebuyers may not pay. A tax service fee directly benefits the loan servicing company or the lender, and not the homebuyer. Lenders may not pass a tax service fee on to a homebuyer at closing, but the seller can be asked to pay the tax service fee if agreed to in advance. So, if you know that you are selling your home to a veteran or an FHA buyer, keep these costs in mind during negotiations. Do not let this discourage you from accepting their offer. It is within your rights to negotiate based on any added cost you know you will incur. Your realtor should speak directly with the buyer’s loan officer to get a list in writing of exactly what if any non-allowable fees will be charged by the lender to you as the Seller.

Another way a FHA or VA buyer can impact the Seller is in required inspection repairs. VA has established Minimum Property Requirements (MPRs) to protect the interests of Veterans, lenders, servicers, and VA. Similarly, FHA loans have Minimum Property Standards. The bottom line is with both types of buyers, a seller may be required to complete repairs before closing that a non VA or FHA buyer would be willing to take on themselves after closing at the buyer’s own expense. This is why particularly in seller markets with multiple offers it can be virtually impossible to be the winning offer if you are a VA or FHA buyer especially on an older home or a property that needs more TLC.