This article will provide a complete overview of closing costs in California: the peculiarities, the most common types, and how much you can generally expect to pay. In order to determine your overall net proceeds as a seller or investor, it is essential to consider all costs involved in a real estate transaction. As the name implies, closing costs are paid at the end or closing of the property transfer. We’ll show you what you can expect to pay as closing costs in California.
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What Are Closing Costs?
Closing costs are the various fees and taxes paid at the closing of a real estate transaction. Closing costs include fees paid to the government, realtors, title search companies, and mortgage providers. Closing costs can range from 2-15% of the property price.
The closing costs of a home purchase are shared between buyers and sellers during the escrow stage of the process. Who foots what is generally a matter of the rules that apply in your location. In California, closing costs such as county transfer taxes, reconveyance fees, and the realtor’s commission are commonly paid by the seller while the title insurance, concessions, HOAs, and city transfer taxes are paid by the buyer.
Note that closing costs can occur at the beginning or end of escrow (a third-party account set up to hold the good faith deposit) and can be either recurring or one-time. So before looking into how much are closing costs in California? Let’s consider what’s to be expected at stages of the escrow process and who pays closing costs in California?
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Beginning of Escrow
Closing costs are incurred prior to and after conveyance. Once an agreement is made and signed, the Realtor collects a good faith deposit (earnest money deposit) which is placed in an escrow account with details already specified in the purchase agreement. This deposit shows the seller that the buyer is serious about purchasing the property. In California, the earnest money deposit ranges from 1% to 3% of the purchase price of the home. Keep in mind that earnest money is often refunded or goes towards the home’s purchase.
Home appraisal and inspection are also paid for at this stage to evaluate the house. A home appraisal and inspection is standard procedure before finalizing a home deal but they are not completely necessary.
Close of Escrow
Closing is the part of the real estate transaction where ownership is transferred to the buyer. Close of escrow happens after the earnest money deposit and all other contingencies have been met. The necessary documents are signed and transferred and all applicable fees, down-payment, and closing costs are paid.
Related: Escrow in Real Estate Investing: Everything You Need to Know
Who Pays Closing Costs in California?
Closing costs in California typically range from 6% to 8% of the total home sale price. Some closing costs are negotiable while others are non-negotiable. Generally, real estate agents’ commissions are the largest portion of the closing costs.
Who pays closing costs in California would depend on the local market conditions. There may be instances when a seller might be able to convince a buyer to pay a big portion of the closing costs in a seller’s market. In a buyer’s market, the situation is reversed and the seller may have to cover most of the closing costs.
Sellers Closing Costs in California
- Broker commissions: In California, the average agent commission is 6%. The buyer’s agent and seller’s agent share the commission. The 6% commission is usually paid by the seller. Evidently, the agent’s commission takes a sizable portion of the closing costs. This is why some sellers prefer to forego the broker and declare the home as For Sale by Owner (FSBO) but that isn’t a convenient option for most people.
- Seller concessions: Concessions are closing costs the seller agrees to pay. In a market where there are more sellers than buyers, this could be a way to close on homes faster. A seller could agree to pay for title insurance, property taxes, appraisal fees, and attorney fees. Alternatively, they might just agree to pay a percentage of the total closing costs.
- Escrow fee: These fees are paid directly to an escrow firm, real estate attorney, or title company to handle the closing and disburse monies to the various parties involved in the transaction. The cost of escrow fees is determined by the price and location of the home. In most cases, it is 1-2% of the selling price of the home but some companies charge a flat fee. Hence, you may have to pay $5,000 in escrow fees for a $500,000 house. In California, the custom on who pays escrow fees differs from city to city. In Southern cities like Los Angeles and San Diego, the seller pays the fees while in Northern California, the buyer and the seller split the fee.
- Title Insurance: This is to protect the homeowner if his claim to the property is challenged. The purpose of a title search is to ensure that the title is clear of liens and encumbrances and to confirm legal ownership. According to ValuePenguin, the average cost of title insurance for California home purchases is $544
- Documentary transfer tax: Also known as a real estate transfer tax, the documentary transfer tax is the state government’s tax on the transfer of property. It is imposed on documents that record the transfer of real estate. The documentary transfer tax in California allows counties to impose tax at a rate of $1.10 per $1,000 of value (exclusive of liens existing at the time of property transfer)or consideration paid.
- Attorney fees: These fees are paid to the attorney representing the seller. A real estate attorney isn’t required to close a property transaction in California but you may require one anyway if there are legal intricacies surrounding your real estate. The average cost of hiring a real estate attorney is $150 to $250 per hour.
- Loan reconveyance fee: A reconveyance deed is provided by a mortgage lender and is issued to certify that the mortgage has been completely paid off. Lenders usually charge around $100 for this documentation. The reconveyance deed ensures that your property is no longer subject to foreclosure. The deed of reconveyance must be notarized and filed in public records.
Now you know what closing costs to expect as a buyer, seller, or investor in California. However, understand that a bit of wiggle room is afforded when dealing with closing costs in California. It is not mandatory that closing costs be the sole responsibility of the buyer or the seller. The majority of closing costs can be negotiated, so you don’t end up paying more than you should.
The Bottom Line
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