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Closing Costs: What They Are and How to Negotiate Them

Some call closing costs an inherent evil. I don't know whether they are evil, but I do know that closing costs are something you need to consider when you think about saving money to buy real estate. Although coming up with the down payment is understandably at the top of buyers' minds, they shouldn't forget about the money they will need for closing costs.

Closing costs pay for services of third parties who directly or indirectly participate in the sales process. To understand these closing costs, let's first review who these people are, what they do, and how much they charge for their services. There are required services and optional services. The following are required services:

• Appraisal

• Credit Report

• Application Fee

• Tax Service

• Flood Certificate

• Lender Fees

• Mortgage Broker Fees

• Settlement or Closing Fee

• Title Insurance

• Document Fees

• HOA Fees

• Attorney Fees

• Courier Fees

• Government Fees


The appraisal, performed by an individual appraiser, is a report that attempts to determine current market value by comparing the sales price of the property with recent sales of other units in your project or ones nearby.

An appraiser will review the sales contract on the property, note how many bedrooms the unit has, how many square feet there are, and so on; then he'll search public records and the multiple-listing service, or MLS, for sales of similar size and features.

The condo appraisal will also review information similar to what a lender will address regarding the number of units, how many are rented out, amount of commercial space, and so on.

Condos are relatively easier to appraise than single-family homes. Single-family, detached homes — especially in suburban areas — are rarely exactly alike in terms of square footage and design. Not so for projects, where most of the units are built exactly alike. Generally speaking, whether it has one, two, or three bedrooms, a condo, co-op, or townhouse usually has the same basic design as other units in the project. (One exception: High-rise condos will typically have their premium units at or near the very top of the building.)

It's easy to determine if the sales price of the unit meets current market activity by comparing the sales price of units that have sold in the most recent 12-month period. An appraiser will be required to find at minimum three comparable sales — called “comps” — in the complex, and typically one unit outside the project but nearby.

The lender will review the appraisal before making any loan decision. That's to make certain the property is marketable, that is, that in an open market the unit could sell in a reasonable period of time for at least the current purchase price.

In a balanced market, the appraised value will typically come in at the sales price. When Realtors do their market analysis at the very beginning, they can determine the price at which the unit should sell based on the sales price of other units in the project.

Sometimes, though, in a softer market, the appraisal will come in below the sales price. That means other units in the project have sold for less than the sales price.

When a unit comes in lower than the sales price, the buyer has a decision to make; do I continue with this purchase, or not? Lenders base mortgage loans on the lower of the sales price or appraised value and can have an effect on how much money you'll need to come up with at the closing table.

For instance, a property sells for $300,000, the appraisal comes in at $290,000, and you had planned on putting 10 percent down. Because the appraisal came in low, the lender will use the $290,000 as the loan basis.

You will first pay for the difference in values, or $10,000, then factor in your 10 percent down payment on $290,000, or $29,000. With a $300,000 sales price you would need to pay 10 percent of $300,000, or $30,000. In this example, you would need to come in with $39,000.

If this happens to you, you're not stuck. Sales contracts typically have language built in that protects you, essentially saying, “If the appraisal comes back lower than the sales price the deal's off and the buyer gets his earnest money back.”

Then the seller regroups and rethinks the sales price. If the appraised value is, in fact, valid and substantiated by comps in the project, then it's hard to hold on to the original selling price. This instance is not very common but can be seen with more frequency in depressed areas where values are falling.

Even though you pay for an appraisal, it doesn't belong to you. The appraisal will be performed on behalf of the lender. It is part of your loan package, and you do have a right to receive a copy of the appraisal when it's completed and paid for.

Appraisals can cost anywhere from $350 to $600. For properties that sell for more than $650,000, expect to pay $450 to $600. For units that sell for $1 million and up, the lender may require two appraisals.

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