Unanticipated Closing Costs

How would you react if you sold property under an agreement that called for the buyer to pay all his own closing costs, waited a month for the buyer to get financing, and then at the closing found the following charges assessed against you?

(All the above fees were charged to sellers in actual closing statements, in contradiction to the terms of the original purchase agreement.)

You may rightly protest that the contract said the costs of the loan and closing were to be paid by the buyer. Chances are, though, that the closing or escrow agent - who usually represents neither the interests of the seller or buyer - will say, "Oh, HUD [or FHA or VA] requires the seller to pay these charges."

Well, it ain't necessarily so.

In reality, neither the Federal Housing Administration (or its parent organization, the Department of Housing and Urban Development) nor the Veterans' Administration requires the seller to pay anything. Nor do they have the authority to require payment.

To be accurate, the closing agent should tell you, "The government agency doesn't allow these charges to be made to the borrower, but it will allow them to be charged to the seller."

Plan of Action

What if the seller doesn't care to pay for these expenses - which the lender supposedly incurred in making a loan to the buyer - because he feels both buyer and seller negotiated a contract in good faith? Typically, the seller has agreed to pay:

• The sales commission, if an agent is involved
• The cost of preparing the deed
• Pest inspection and clearance letter
• Possibly a title search
• Half of the reasonable and customary attorney's closing fee.

Even these items are negotiable. The buyer could agree to pay any and all expenses involved with the transfer of ownership.

But the law requires nothing except that the agreement:

• Is in writing
• Reflects the true intent of the parties
• Is signed by competent people

Why, then, do we find even carefully negotiated and expressly written purchase agreements being flagrantly misapplied by some lenders?

While the federal government requires that lenders provide the buyer with a "good faith estimate of closing costs" well before the closing date, the seller gets no such estimate until the closing.

The real estate agent may offer an estimate, but usually doesn't know what, if any, cryptic "fees and inspections" may be added later because there is no consistency among lenders regarding fees assessed to the seller.

Shop Around

To appear more competitive, lenders give buyers a good faith estimate that leaves out several of their expenses.

Rather than absorbing these expenses as overhead, they've discovered that most sellers are either simply naive about closing costs or aren't about to kill the sale at the last minute because of a couple hundred dollars in excess charges they're bullied into paying.

In defense of many lenders that charge nothing that isn't agreed upon in the purchase contract, it must be noted that the practice is rare or absent with banks and savings and loan associations. It is the far less regulated mortgage companies abusing the system, though some have managed to avoid the temptation.

Matt Ward has 20 years of experience in real estate. His experience ranges from building houses, developing land into subdivisions and selling residential and commercial properties.

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