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2	Seller Costs When a Seller sells real property there are certain expenses of sale that are involved in the sale. Additionally there are often outstanding loan balances that are changing monthly, taxes that have been paid, or have to be paid, as well as Insurance Policies that may have a credit to the seller. Termite clearance is often the last cost, which makes estimation of sale proceeds difficult until the last few days of the escrow.
3	Selling Picture In our example we will have the seller selling their property for $600,000 with $120,000 down, 20% Down, and the buyer getting a new 1^st Trust Deed and Not in the amount of $480,000 at 7% interest, and payable in equal monthly installments of $3,193.45. The seller will pay their normal fees, and a full commission, 6% of the selling price.
4	Their Gross Equity The Sellers Gross Equity will be; Selling Price $600,000.00 Less Underlying Loans $ 85,283.49 Gross Equity $514,715.51 The seller will still have approximately 7.392% in disposition costs, or selling costs. This will amount to $44,352.
5	Seller Financial Picture Our seller purchased this home 12 years ago for $100,000. They put 5% down, and got a new 1^st Trust Deed and note in the amount of $95,000 at 9% interest, and payable in equal monthly installments of $798.63. They have made payments on this loan for 144 months. The current loan balance is $85,283.49
6	Sellers Estimated After Sale Net When we first meet the Sellers we will not figure a definite after sale net. This is because the loan will be paid down by one, two, or three payments, we don’t know what the termite costs will be, and we don’t what the accepted offer will be.
7	Sellers Estimated Net at Listing Selling Price $ 600,000.00 Less loans of record ($ 85, 283.49) Less Estimated Expenses of Sale ($ 44,352.00) Estimated net from sale $ 470,364.51 We simply use a percentage for the costs of sale because we don’t know what the acceptable offer will be at this point.
8	Escrow Fees Basic escrow fees are many and varied. We need to know the costs and who pays them. The costs are usually the same from escrow company to escrow company. In our example we will use a basic set up fee of $250 for each side, in other words the Buyer will pay $250, and the Seller will pay $250. Then we will have an additional fee of $2 per $1,000 of value
9	Escrow Fee 2 Our sale is for $600,000. If we divide $600,000 by $1,000 we have $600,000 divided by $1,000 = 600. There are 600 one thousand dollar bills in $600,000. That will come to 600 X $2 and we come up with a total fee of $1,200. Some escrows have other fees to increase their profit margin.
10	Total Basic Fee Escrow 3 Buyer Seller Set Up Fee $ 250 $ 250 Cost Per $1,000 $1,200 $1,200 Total Costs $1,450 $1,450 Each side pays $1,450 for a $600,000 Escrow. It is good to note that either party could pay the entire amount. Generally each side pays ½ of the escrow fee. Also note that this is not a recurring cost, it is a non-recurring cost.
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12	Drawing, Recordings, Notary Fees Drawing loan docs, trust deeds, and notary fees. These are costs that the buyer will encounter. We are not certain at this point, but generally we will have a drawing fee of about $100. We will have the recording of the reconveyance fee, that will cost about $14, and we will have various notary fees of about $20. This takes us to total fees of $134.
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14	Title Insurance Title Insurance is unlike most insurance coverage, title insurance covers for the past. It covers the past from when God gave the land to people until the day you close escrow. Anything that happens after escrow is not covered by title insurance. Basically, title insurance makes sure that you have good title, to the right property, and if you don’t, they will pay you what you had in it or cure the problem
15	Title Insurance 2 Normally, in a purchase sale transaction there are two title insurance policies. One policy is purchased for the buyer, that is the more expensive policy. Normally the Seller pays for that policy. The logic is that the seller is trying to transfer clear title, or “good title” to the buyer. If the purchase involves a loan, then there is a concurrent policy for the lender. The buyer needs the loan, so the logic is that the buyer pays for the title insurance for the lender. Title insurance is non-recurring, so title insurance can be paid for by either the buyer or the seller.
16	Title Insurance 3 We use rate charts that are given to us by the title company that represents itself in our offices. Rates from title company to title company are basically the same. The reason we use a specific title company is that the title representatives are allowed to do certain things for us, such as colorful flyers, gas for balloons, balloons, and help us with promotional events, just to mention a few. The main policy for a $600,000 purchase is $1,950 And the concurrent policy for the lender would be $584 On $480,000. The Seller normally pays the larger policy for the buyer, and the buyer, because he is getting the loan, pays the smaller policy for the lender.
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18	Documentary Transfer Tax Stamps Documentary Tax Stamps were originally a federal fee, a tax, that was charged for each $500 of value, or fraction thereof, the Federal Government would charge 55¢. The Federal Government gave the tax up, and typically when the Government gives anything up they ask if the next lower branch of government wants it. States were asked, they didn’t want it, the Counties were asked, and they did want the tax.
19	Documentary Tax Stamps 3 Some instructors teach you to estimate or figure Documentary Tax Stamps at $1.10 per $1,000 of value. This method, though not classic, will work well enough that you could only be 55¢ off and that would be rare. Using this method we would have $600,000 ÷ $1000 = 600 X $1.10 = $660 Either method is acceptable, $1.10 per $1,000 or 55¢ per $500.
20	Documentary Tax Stamps 2 In our example, we have a $600,000 transfer, $600,000 ¸ $500 = 1,200 1,200 X 55¢ = $660. This is a legitimate chare, a one time fee, but it is normally paid by the Seller. In our example today we want to be aware of this cost, but we will leave it for the Seller to pay when we’re working on the Seller’s costs.
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22	Other Transfer Tax Fees Some cities, some counties, some jurisdictions have additional transfer tax fees to raise revenue upon the transfer of property. Normally, you will be aware of the any transfer fees. We usually get that information from the board of realtors, or from other brokers. In our example we will assume that the jurisdiction that we are selling this home in has no additional transfer tax fees.
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24	Pre-Payment Penalties Pre-Payment penalties are charged by lenders when a loan is paid off before it has been fully amortized, or before it reaches its’ termination date. The theory in the pre-payment penalty is that the lender will have funds that they will not be collecting interest on until they are able to place the money again.
25	Pre-Payment Penalties 2 Pre-payment penalties are based on many different methods of calculation. Some pre-payment fees are 6% of the unpaid balance. In some states there are restrictions, for example, 20% of any balance can be pre-paid in any given year. Some states restrict pre-payment fees on owner occupied loans on residential properties to 5 years.
26	Pre-Payment Penalties 3 The state of California restricts pre-payment fees to 5 years on residential loans. That simply means that if the loan is 5 years old the Trustor, or payee is not subject to any pre-payment penalties. In our example, we can have established that the loan is older than 5 years. There is no pre-payment penalty on this loan. Sometimes as a licensee, if there is a pre-payment penalty, you can get the pre-payment penalty waived. This can be done by asking, or sometimes by getting the new loan with the lender that was going to be paid off.
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28	Beneficiary Statement or Demand When a property with a loan is being sold, the escrow company will request a payoff statement from the lender, the beneficiary. The beneficiary has 30 days to get the payoff to the escrow. Currently, because of computer tracking on loans, the balance is known on a daily basis. Beneficiary Statement and Demand have come to mean the same thing in real estate today, the terms have become synonymous.
29	Beneficiary Statement or Demand 2 The Beneficiary's Statement and the demand are different. The Beneficiary’s Statement is a request for a written statement of the balance and payments of the loan to a certain date. The Demand is a request for the lender to send a request for the amount to pay off the loan. Beneficiary Statements and Demands are normally $100.
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31	Prorated Interest All loan interest is in the arrears. That is to say that when we get a loan, we make the first payment after 30 days. This means that we do not make a payment until we have had the use of the money for 30 days. At the end of the 30 days, the 1^st payment will first pay any accumulated interest, what is left of the payment, if anything, will reduce the principal amount of the loan.
32	Prorated Interest 2 When we are calculating the interest due on a loan being paid off, we can not be totally accurate. This is because we do not know the exact date that the escrow will close and the loan be paid off. For this reason we normally calculate one month of interest on the existing balance of the existing loans. In our example we have an existing loan of $85, 283.49 at 9% interest.
33	Prorated Interest 3 In this case we will calculate one months interest by multiplying the existing loan balance by 9%. That will give us one years interest, then we will divide the one years interest by 12 months to arrive at our 30 days of interest. $85, 283.49 X 9% = $7,675.51 Annual Interest We have to reduce the interest to the current monthly interest. $7,675.51 ¸ 12 Months = $639.63 We will deduct $639.63, for now, for pre-paid interest.
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35	Reconveyance Fee When a loan is paid off, the title company who is handling the Trustee, or lender, has to create a Reconveyance Deed, the Reconveyance Deed, gives constructive notice, when recorded to subsequent owners that this loan has been repaid. Normally, the seller who is responsible for the loan, is also responsible for the Reconveyance Fee. The normal drawing fee for creating a Reconveyance Deed is $100. The recording fee is separate from this fee.
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37	Miscellaneous Lenders Fees Miscellaneous Lender Fees are often called Junk Fees. That should lead you to the conclusion that the fees are unnecessary. That is, for all practical purposes, true. Lenders try and think of and add fees when making loans to create a greater income. We, as brokers and salespersons try and anticipate what these fees may be. Generally, the Miscellaneous lenders fees are a mystery to us.
38	Miscellaneous Lenders Fees 2 We use the Miscellaneous Lenders Fees to “Puff” or “Pad” the cost sheet so that the seller will not feel cheated at the close of escrow. This is not to imply that we create erroneous costs in escrow, but that we try and make sure that the seller will, honestly, get what we have estimated. If the seller gets more than we have estimated they will think us honest, if less, though an honest error the seller will think us dishonest.
39	Miscellaneous Lenders Fees You will see this Miscellaneous field filled with many different amounts. The important thing is that you give a reliable estimate of the seller’s proceeds. Make sure you read the Settlement Statement for errors, you will normally find errors. In our example we will give the Miscellaneous Lenders Fee $250.
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41	Appraisal Fee The appraisal fee is normal and necessary. The appraisal fees, for single family homes, run from $350 to as much as $1,200 depending on the size, price, and complexity of the appraisal assignment. A home like this would normally fall into the $400 to $500 range, today we will have the Buyer pay for the appraisal. It is normal for the buyer to pay for the appraisal. This logic being that the buyer is the one who needs the loan, and an appraisal wouldn’t be necessary unless there was an institutional loan.
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43	FHA and VA Discount Points When we sell property to FHA and VA Buyers, there are often Discount Fees or Points that the Buyer will request the Seller to pay. Each point will be equal to 1% of the loan amount for the FHA or VA Buyer. In our loan today FHA and VA are not involved so we will have no cost for FHA or VA Points in this example.
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45	Preparation of Documents Preparation of documents is a fee that some escrows try and charge. This is often added in in an attempt to increase the fees of the escrow company. You should be aware that escrow uses these fees to increase their profit. If you feel it is unnecessary, then question the fees and try and get them removed. Early in your career you will find an escrow company that you will continue your relationship with, because you feel their fees are justified, or fair.
46	Preparation of Documents Today, we will assume that the escrow company has a legitimate reason for charging the Preparation of Documents Fee. We will assume that this escrow company, as well as all others, charges $300 for a Preparation of Documents Fee.
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48	Miscellaneous FHA/VA Fees This is an attempt by the CAR to include two fees in one line and shorten the form. Miscellaneous Fees are one issue that we could have in this transaction. This Miscellaneous Fee category is used to puff fees, legitimately, when we are estimating the Seller’s Costs, so that they will know they have enough money at the close of escrow to do what it is they anticipate doing. We have no FHA/VA Fees in this transaction. We will use $300, for “Just In Case” fees.
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50	Prorated Taxes As we approach the close of escrow we can get very accurate with the proration of taxes. In California we have a Real Property Tax year that begins on July 1^st and ends on June 30^th. The taxes are normally paid on their last day, which is December 10^th for the 1^st half and April 10^th for the 2^nd half.
51	Proration of Real Property Taxes The next slide will give you an overview of the Real Property Tax Sequence in California. It shows when taxes are due, when they are delinquent, and the time periods that the taxes actually cover. As well as when the taxes are levied. Interestingly, if you think they are trying to confuse you, your correct.
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53	Proration of Taxes continued In our example we do not know the exact date the escrow will close. Some dates would mean a refund to the Seller, if their taxes were paid, some dates the Seller would owe additional taxes. We will use one whole year of taxes, as if they were not paid, then we will know that we have a great enough cushion to get the Seller out with the cash they need.
54	"Since our Seller purchased this..." Since our Seller purchased this home 12 years ago for $100,000.00, and assuming they have not made any additions, their taxes at the time of purchase were $1,000 a year. Then their taxes increased 2% annually for 12 years. You can calculate this a number of ways, but for now believe me when I say their current taxes are $1,268.24 a year this year.
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56	Structural Pest Control Report The Structural Pest Control Report is normally $100, or more, but that isn’t important. We normally have that Pest Control Company do the work. If they do the work, they wave the Pest Control Report Charge. The only time we normally have a Pest Control Report Charge is if there is “No Pest Control Work.” Today we will calculate $100
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58	Structural Pest Control Repairs You won’t know the Pest Control Repairs until you get the report. Then you usually bargain a little bit to get the repairs down. Pest Control is a greater expense than it used to be. The pesticides in the United States have been gradually denatured, or weakened. This leads to the fact that we are not killing pests for years, but for a couple of months.
59	Structural Pest Control Repairs I often get the report in within a week or two of when I get the listing. The reports help the Seller get adjusted to any surprises. If there is a work to be done I often have it done right away depending on the economic situation of the Seller. When you get the work done right away make sure you put that information in you listing.
60	Structural Pest Control Repairs Information like that shows that the Seller is very interested in Selling, it is re-bulletined with changes, and more brokers become aware of the listing as if it were new. Much like telephoning a friend to say “Hello”. In our costs today we won’t put any termite costs, because we don’t know if there are any at this time.
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62	Other Required Repairs We won’t normally know at this point if there are going to be additional repairs that are required in escrow because of findings with the different inspections that we encounter, encourage, and use today. Here we will put Zero again because we simply don’t know at this time.
63	Other Required Repairs If you are the listing agent, and the Seller is going to put a new screen door on the house and paint the house, plus put new carpeting in, that’s a very smart move. Getting the house in good condition, or prettying up the home for sale is a good idea. You never see a car lot but that the cars have all been hosed down, and dried shinny that day. Do the same with your listings.
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65	Natural Hazards Disclosures NHD’s where introduced in about 1998 and became very popular, almost mandatory, by 2000. The NHD’s are produced and supplied by companies who specialize in gathering, printing, and dissemination to the public, at a fee, to help better disclose to the buyer any Hazards that could be lurking at or in the area of their new home.
66	Natural Hazard Disclosures 2 They attempt to disclose any seismic activity areas, earthquake faults, former ammunition dumps, hazardous waste sites, on and on, any existence of any kind that might jeopardize the value of the property, the future value of the property, the health of the owners and so on. Title companies purchase these policies in bulk, then make them available to Realtors at a premium price of normally $50. This is normally paid for by the Seller. The logic is that if the buyer backs away for any reason, the Seller will still have the report.
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68	Home Protection Warranty The home protection warranty is normally paid for by the Seller. They can be paid for by the Buyer. The Home Warranty Protection Plan is used to try and deliver a superior product that will have favorable options should undeterminable situations present themselves. Home Warranty Protection Plans are sold by Insurance Companies to Sellers and Purchasers of Homes. The represent their policies to you as a possible source of business.
69	Home Warranty Protection Plans 2 The important thing for you to remember here is to get more coverage than you can imagine needing, make sure the Buyer is aware that they are covered under the Home Warranty Plan, and use the same representative and company as often as possible. Using the same company insures that you will have another source of assistance in your own business and that you will be able to provide superior service to your Buyer’s and Seller’s.
70	Home Protection Warranty Plan 3 The basic price for a Home Warranty Protection Policy is from $200 to $250. If you have forced air, it will cost you another $50, air conditioning another $50, roof coverage, $100. Water heater, plumbing etc., etc., etc. Here we would probably purchase a plan with a purchase price of about $600. This would cover most of the areas we need to cover.
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72	Brokerage Fees Brokerage fees have existed for over 115 years at a “normal” 6% of selling price. People have tried, unsuccessfully, to lower brokerage fees, but without good economic business success. In other words if a company is offering the many benefits enjoyed when a seller lists and sells through a broker, the broker needs to charge 6% or they will soon be out of business. Many of the “Help You Sell” offices and such charge a fixed fee. In a booming market they do alright, but as soon as the boom is over the 1% offices, the discount brokerage firms normally fail.
73	Normal Brokerage Fees We know statistically that we sell real property for 8% more than four sale by owners. You will need to learn to justify your commission. That’s not difficult but you have to be ready for people to ask you to reduce your commission. In our example today we will use a full 6% commission. 6% of a $600,000 selling price is $36,000.
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75	Buyer Closing Costs The Seller can help the buyer with some closing costs. Some markets demand that the Seller help the Buyer because there is a shortage of Buyers. When we are involved in a Buyer’s Market, we have to learn to ask the Seller to help the Buyer. Costs are classified as allowable and non-allowable. Allowables are normally non-recurring costs. The allowable, non-allowable refers to the legality of the Seller paying the costs. With some loans the Seller can pay only the non-recurring costs. In this example the Seller will pay none of the Buyers closing costs.
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77	Security Deposits Security deposits are tenant deposits kept by the owner of income producing properties or rental units. By law, there are only two things that you can do with security deposits when a building is sold. You can give the security deposits back to the tenant, or you can give the security deposit to the Buyer.
78	Security Deposits Continued When you give the security deposits to the buyer, it becomes a cost to the Seller, you have to debit the Seller’s escrow account in the amount of the security deposits. In our example the home we are estimating the costs on is not a rental. There are no security deposits to credit to the Buyer.
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80	Pro-Rated Rents When you sell an income producing building the escrow will normally close in the middle of the month. Most rents are paid on the first of the month. This makes it necessary to Pro-Rate the rents, and crediting the buyer. The rents would be pro-rated using a 30 day month.
81	Pro-Rated Rents Suppose you are selling a 4-Ples and the rents are $1,000 per month, $1,200 per month, $1,400 per month, and $1,800 per month. The escrow closes on the 9^th day of the month. You would make sure the rents have been paid, add all the rents up, coming to a total monthly rent of $5,400. You simply divide the monthly rent by 30 days and come up with $180 a day.
82	Pro-Rated Rents You close on the 9^th day, so the Seller will be credited with rent through the 9^th, and the buyer will be credited with the remainder. You determine the remainder by subtracting the 9 days from 30 days, coming up with 21 days. You then multiply 21 days by $180 a day and come up with $3,780 credit to the buyer, and the seller keeps the remainder, or 9 days times $180 or $1,620. This is done in the escrow, by the escrow company. You need to be able to explain the calculation.
83	Pro-Rated Rents Our example today is a single family, owner occupied home, there is no rent so there is no proration of rent. Your pro-rated rent line will have a zero.
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85	Administrative Transaction Fee The Administrative Transaction Fee became popular in the year 2,000. This fee involves an administrative assistant who is paid for handling the paperwork on each escrow that you are working on. The idea is to free your time so that you can sell more property. Concentrate the salespersons efforts on what the salesperson does best. This fee is paid by the Seller, and is normally $350. It can be more if the transaction is more complicated.
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87	Other Fees This is a chance for you to honestly run the fees up for emergency costs that can’t be anticipated. Here we will add $300. Make sure when you check the Settlement Statement that these fees were real and necessary. We have the problem of agents and escrow officers increasing their income by putting fees in an escrow that may not be legitimate. We will use $300 for this fee. If we don’t need it, and there are excessive termite fees or other fees, it will make this unpleasant surprise less painful for the Seller.
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89	Final Estimated Costs We see that our total estimated expenses of sale in this transaction is $44,351.87. This is a realistic and honest estimate. Hopefully the costs will be less. That is not likely. As the escrow progresses to an actual closing date, we can get more accurate with our estimates.
90	Estimating a Percentage When we estimate our closing costs in detail, we want to check the closing costs as a percentage of the Sales Price. This will give us the percentage that we can use to multiply the Gross Selling Price and come up with an estimation of the selling costs by using a percentage.
91	Estimating a Percentage We use these percentages to calculate our estimates at the beginning of our estimation of the Seller’s Net Proceeds from the sale. We use a percentage rather than a detailed cost sheet, because we do not know what the actual selling price will be until we get an offer. The loan will be paid down 2 or 3 payments which, because of the equity build-up will give the seller more net.
92	Estimating a Percentage Finally, we need to know the estimated closing costs as a percentage of the sale. In this instance we have the closing costs divided by the selling price, or $44,351 ¸ $600,000 = 7.392% We simply keep that in our bag of tricks for the next sale.
93	Calculations Get Easier and Easier With practice, we will be able to figure the estimated net proceeds very closely. When you are first learning these calculations you have to be very patient with yourself. If you are estimating enough transactions you will get extremely good at determining a very accurate net to the Seller.
94	Review Estimated Net Our final net comes out to $470,364.64 using the detailed estimation of net to the Seller. This is not bad at all. Our original percentage estimation, gotten from our last sale, was $470,364.51. We were 13¢ off. The Seller netted 13¢ less than we had originally estimated. A good days calculating.
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