5 Big Closing Cost Mistakes Sellers Make

Most buyers are surprised by the amount they receive at closing for the sale of their house. It’s…less than they expected. Sometimes far less. Where did all the money go?

While sellers don’t have a lot of different closing costs to consider, their few costs can be substantial. And they aren’t always discussed upfront because, frankly, a few sellers may decide not to sell after seeing the amounts. No one wants to break that news to a potential seller. Especially a listing agent who could potentially lose your listing.

But I’m not that listing agent! I’m the listing agent who’s going to be straight with you so you know what to expect and how to prepare for your closing. And ok, I’m also hoping all this transparency and putting your needs ahead of my own might result in a future referral or two (*wink*).

So in the spirit of building a mutually-beneficial relationship based on trust, let’s talk about the closing costs for sellers. Then we’ll discuss common mistakes sellers make when it comes to closing costs.

Closing Costs for Sellers

Here are the costs you should be prepared for when selling your house:

  • Real estate agent commission
  • Any property taxes, insurance, and HOA fees through the closing date
  • Concessions to buyers to cover some of their closing costs
  • Title Insurance for the buyers (in some cases)

The amounts of these costs will be unique to each transaction. So, while I can’t give you specifics on your closing costs without researching your unique circumstances, I can offer you some guidance on how to handle them. And that’s exactly what we’ll do now through our discussion of the most common mistakes sellers make with their closing costs.

Mistake #1. Trying to eliminate real estate agent fees completely

This is probably the most tempting cost to try to avoid because it’s the largest.

As a Realtor, I may be slightly biased in favor of using the services of real estate agents. After all, I believe so much in the value of the service agents provide that I’ve made it my life’s work! But I also understand that much of the work is behind the scenes, so I understand why some sellers think agents can be completely eliminated from the transaction.

To explain why this is problematic for sellers, we first need to consider your potential buyers.

In the US real estate industry, it is standard practice for sellers to pay the full real estate commission, which is split between the listing agent and the buyer’s agent. So if you agree to a 6% commission, your agent will get 3% and the buyer’s agent will get 3%.

Now, if you try to completely eliminate real estate agent fees, you’re forcing your buyers to either 1) close the deal without agent representation, or 2) pay their agent out of their own pocket. Either way, you are dramatically shrinking your pool of potential buyers! Why would a buyer purchase your house without an agent (or by paying their own agent) when they can purchase almost any other house with free agent representation?

And if you’re thinking you could slightly reduce the price to make it worth their while, you’re still going to be limiting yourself to an extremely small percentage of buyers.

Mistake #2. Going “For Sale By Owner” to at least eliminate the Listing Agent’s commission

So, to attract a qualified buyer, you know you’re going to at least need to pay the buyer’s agent’s commission. But what if you opted to sell the home without a listing agent? You could list the home For Sale By Owner (FSBO) and only pay 3% instead of 6%, right?

Give me chance to explain why I think this is a poor decision:

  • Without an agent in your corner, it’s surprisingly difficult to establish an accurate asking price. Want to know exactly how the pros determine the fair market value of each property? Check out my post, How do I Know How Much My Home is Worth [link redacted]?
  • Agents have networks of buyers (plus other agents and their buyers!). I may already have a buyer in the pipeline for a property just like yours. And it could take you months to find them on your own. And cost you a fair bit in advertising dollars.
  • Agents also have networks of the many other professionals necessary to close a real estate transaction. Escrow officers, lenders for the buyer’s financing, title companies, appraisers, inspectors, surveyors, etc. Don’t spend your time trying to find the best professionals for your situation when agents already know them!
  • Agents know the paperwork and the legal issues. You can run into serious legal issues if the paperwork is not completed correctly. And it could take months of your life plus thousands of your dollars to sort out a legal mess.

But I certainly don’t expect you to take my word for it. Here are the statistics to support my conclusion:

So statistically speaking, spending the money to hire a real estate agent actually leaves you in a better financial position at the end of the deal.

Mistake #3. Negotiating a lower commission rate as part of the listing

Once you’ve resigned yourself to paying both agents, you might be tempted to negotiate a lower commission rate. And on the surface, this sounds like a great idea!

Real estate agent fees are always negotiable, so why not offer your listing to the agent willing to settle for 1-2% less than the generally-accepted local standard? The listing agent could split the reduction with the buyer’s agent, so both agents would just take a small hit.

There are a couple problems with this when you dig a little deeper.

First, buyers’ agents are less motivated to show your house to their buyers when the commission is lower. Why would they promote your house with a 5% total commission over a similar house with a 6% total commission? I’m not implying that an agent would steer clients away from a low-commission deal, but they might not be as excited about going out of their way to promote your house to everyone in the area.

Ok, so what if we ask the listing agent to agree to take the full hit on the reduced commission? If you agree to a 5% commission instead of 6%, have the listing agent work for 2% of that 5, and the buyer’s agent can still get their full 3% rate. If the Listing Agent wants the listing badly enough, they’ll agree to that, right?

Again, this initially sounds like a good solution. But it could actually be even riskier for you.

See, one of your agent’s greatest responsibilities is negotiating. Your agent (with all their specialized knowledge of the intricacies of an ever-evolving market) should be advising you on when to push for a better deal, and how to go about it. If your potential agent doesn’t have the skill or hunger to negotiate for his or her own paycheck, how hard do you think they’re going to fight to get you the best terms possible on your deal?

I would be extremely wary of any listing agent willing to take a reduced commission.

Mistake #4. Miscalculating the need to pay some of the buyers’ closing costs

It’s actually quite common for sellers to pay a portion of the buyer’s closing costs.

Think back to your first property purchase. You had to spend a large sum on the down payment, then you also got nickel-and-dimed on tons of different closing costs. Then you still needed money left over to cover the move itself, plus any renovating or repairs the home needed. And as a first-time buyer, this was all coming out of your pocket; you didn’t have proceeds from the sale of another home to cover all these costs.

Cash flow is a problem for many (maybe even most) buyers. And because sellers will usually be gaining money from the sale, they’re often willing to help cover some of the buyer’s closing costs if it will help close the deal.

Sellers can get themselves into trouble on both sides of the buyer’s-closing-costs coin. They might offer concessions upfront even though they aren’t necessary. Or they might refuse to cover some of the costs when it is necessary. It’s a difficult balance for sellers to strike because they don’t have their finger on the pulse on the market. They don’t have hundreds of colleagues comparing notes on what it takes to get a house under contract, and across the closing line. So yes, I sound like a broken record, but real estate agents do understand the fluctuating market, and they know when it’s necessary to cover some of the buyer’s closing costs, and when that would just be throwing away money.

A concrete tip for paying buyer’s closing costs

There’s one solid tip I can offer regarding paying the buyer’s closing costs that will fit most situations. If buyers ask for a $5,000 credit toward their closing costs, counter with a $5,000 price increase. As in, we’ll cover $5,000 of your closing costs now, but in exchange, we’re going to add that amount to your loan. Most buyers will accept because, again, this is a cash flow problem for them. They’d usually rather add $5,000 to their loan than pay that $5,000 out of pocket at closing.

Mistake #5. Failing to ask for a title insurance reissue date

Most sellers in the position of paying for the buyer’s title insurance pay the full amount of a new title insurance policy, no questions asked. But sellers should ask questions!

The best question sellers can ask regarding title insurance is, “can we get a reissue date for the existing title insurance policy?” This means the existing policy would be redated instead of creating a new policy. So instead of being charged the full amount, you may be able to pay a discounted “reissue rate”.

In most states, a reissue date is only available if you’ve owned the home for less than 10 years. But you’ll never know what you might be able to get if you don’t ask. Reissuances are typically not advertised and are only available on request. So make sure you ask!

I hope you found this list of closing costs for sellers and common closing cost mistakes useful!

When you’re ready to sell your house, please contact me. I’d be happy to walk you through the listing process and tell you about the many services I offer as a Listing Agent. Can’t wait to hear from you!

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