Closing Costs In California: Who Pays & How Much?

Navigating the California real estate market promises opportunities for traditional buyers and real estate investors. However, before the California dream can be unlocked, it's crucial to understand the financial landscape. Closing costs in the Golden State, in particular, can require more capital than most people realize. As a result, anyone involved in a transaction needs to understand the closing costs California has become synonymous with.

This comprehensive walkthrough was designed to shed light on the closing costs California levies on those involved in real estate transactions, providing valuable insights on who foots the bill and how much they can expect to pay. Whether you're a first-time homebuyer, a seasoned investor, or simply curious about the real estate process in California, this article will simultaneously answer the question, “How much are closing costs in California?” and help demystify who pays closing costs in California. In doing so, we’ll cover everything you need to know about closing costs in California, starting with the following:

• What Are Closing Costs In Real Estate?
• How Much Are Closing Costs In California?
• Who Pays Closing Costs In California?
• Who Pays Closing Costs For Cash Buyer Deals?
• Who Pays Closing Costs For Wholesale Deals?
• How To Lower Closing Costs In California
• Final Thoughts On California Closing Costs

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What Are Closing Costs In Real Estate?

Closing costs in real estate transactions refer to the various fees, charges, and expenses incurred by buyers and sellers at the culmination of a property sale. These costs are integral to the property transaction process, ensuring that all necessary legal and financial requirements are met for a smooth and legally binding real estate exchange.

Closing costs encompass a wide range of charges, including but not limited to:

• Lender Fees: These are charges levied by the mortgage lender for processing the loan application, conducting credit checks, and originating the mortgage.
• Title & Escrow Fees: Title companies and escrow services oversee the transfer of the respective title and hold funds in escrow until all conditions are met.
• Appraisal Fees: Appraisals help determine the property's fair market value. The cost of this appraisal is typically included in closing costs.
• Property Taxes: A portion of the annual property taxes may need to be prepaid by the buyer to cover the period between the closing date and the end of the tax year.
• Insurance Costs: This includes homeowner's insurance and private mortgage insurance (PMI) when the down payment doesn’t exceed 20%.
• Attorney Fees: Legal professionals will make sure everything is in order for a fee.
• Recording Fees: These are charges associated with recording the new deed and mortgage with the county or city.
• Home Inspection Fees: If the buyer opts for a home inspection, this cost may be included in the closing expenses.

Closing costs serve several essential purposes in real estate transactions. They help finalize the deal by ensuring all necessary legal documents are correctly executed, funds are appropriately distributed, and titles are transferred without disputes.

Moreover, they provide transparency by outlining the various expenses associated with the transaction, allowing both parties to understand their financial obligations. Overall, closing costs are crucial in the smooth and secure transfer of real estate ownership.

How Much Are Closing Costs In California?

Closing costs in California can be as diverse as the state itself. With its vast geography, ranging from the bustling neighborhoods of Los Angeles to the serene coastal towns in Northern California, your closing costs may vary widely. These costs encompass fees, taxes, and expenses for finalizing your real estate transaction.

According to a 2021 CoreLogic Closing Cost Report, closing costs in California typically amount to approximately 1% of the sale price of a home (excluding Realtor’s fees). So, for a home with the state's median sales price of $794,300 in 2023, you can expect to pay around $7,943 in closing costs (not adjusted for inflation).

However, it's essential to note that the specific amount you'll pay can fluctuate based on various factors. These factors include your location within California, the property's price, the type of mortgage you secure, and the negotiated terms of your real estate deal. To gain a more accurate estimate of your closing costs, it's advisable to consult with your real estate agent or lender, who can provide a breakdown of the expenses you'll incur during the transaction.

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 Who Pays Closing Costs In California?

When it comes to the closing costs California buyers and sellers can expect to encounter, it's a common understanding that both parties are responsible for paying their fair share. However, the distribution of these costs isn't always equal, and it's typical for sellers to bear a more significant portion of the financial burden. If for nothing else, the seller’s willingness to pay the larger tab is an attractive selling point for most buyers and can help with demand.

While it may be the norm for sellers to pay more in closing costs, however, it's crucial to note that almost everything in a real estate deal is negotiable. The specific arrangements regarding who pays what can vary depending on the terms negotiated between the buyer and seller. Buyers and sellers, with the assistance of their real estate agents and legal counsel, can arrive at mutually agreed-upon terms that specify how the closing costs will be divided between the parties.

Therefore, while there are general guidelines regarding who pays closing costs in California, the specifics can be tailored to meet the buyer's and seller's needs and preferences, allowing for a more flexible and personalized approach to this aspect of the transaction.

Buyer Closing Costs

Closing costs California buyers can expect to encounter include, but are not limited to:

• Lender Fees: Buyers are responsible for paying various fees associated with their mortgage loan, including loan origination fees, application fees, and credit report charges. These fees can add up, so buyers need to be aware of them.
• Title Insurance Premium (Partially): While sellers usually purchase title insurance for the buyer, buyers may also be responsible for a portion of the title insurance premium, depending on the terms of the sale agreement.
• Escrow Fees: Buyers often pay the escrow fees, which cover the cost of the escrow company's services in managing the transaction, including holding and disbursing funds.
• Prepaid Property Taxes & Insurance: Buyers must prepay property taxes and homeowners insurance for the initial months after closing. These prepayments are held in an escrow account and used to cover future expenses.
• Appraisal Fees: If the buyer's lender requires an appraisal of the property to determine its value, the buyer is responsible for covering the cost of this appraisal.

Seller Closing Costs

Closing costs California sellers can expect to encounter include, but are not limited to:

• Real Estate Commissions: One of the highest costs for sellers is the payment of real estate commissions. These commissions are typically divided between the seller's and buyer's agents and are based on a percentage of the final sale price. This cost can be substantial, often representing a significant portion of the seller's closing expenses.
• Title Insurance Premiums: Sellers are usually responsible for purchasing a title insurance policy for the buyer, which protects the buyer from any unforeseen issues with the property title. The cost of this insurance is based on the sale price and can be a substantial part of the seller's expenses.
• Preparing The Deed: Sellers often pay for the preparation of the deed, which is the legal document that transfers ownership of the property to the buyer. This expense includes notary fees and document preparation charges.
• Document Transfer Taxes: In some California counties, sellers must pay a transfer tax when the property changes ownership. The amount of this tax varies by location and can be significant.
• Property Tax Prorations: Sellers typically credit the buyer for a portion of the property taxes that have been pre-paid for the year. This proration ensures the buyer is responsible for their share of property taxes from the closing date forward.

Who Pays Closing Costs For Cash Buyer Deals?

In California, closing costs can significantly change when the buyer opts for a cash purchase rather than an institutional or traditional loan. The primary reason for this shift is that many closing costs associated with mortgage loans are eliminated in cash-buyer deals.

Here's why cash buyer deals in California often involve fewer closing costs:

• Mortgage-Related Costs: When a buyer secures a mortgage, various fees are associated with the loan, such as loan origination fees, credit report charges, and application fees. These fees are not applicable in cash transactions since no mortgage financing is involved.
• Lender-Required Costs: Lenders typically require buyers to purchase certain services, such as an appraisal, to assess the property's value and ensure it meets lending criteria. In cash deals, these lender-required services are unnecessary, reducing associated costs.
• Mortgage Insurance: Buyers securing a mortgage often must pay for private mortgage insurance if their down payment is less than 20% of the purchase price. Cash buyers don't have this expense because they're not taking out a loan.
• Escrow Fees: Escrow services manage and disburse funds in mortgage transactions. Cash buyers may still use escrow services, but the fees are typically lower since there's no mortgage lender involved.

So, who pays the closing costs in California in this situation?

In cash transactions, the division of closing costs is often more negotiable between the buyer and seller. Here's a general breakdown of what buyers and sellers can expect to pay in an all-cash transaction:

• Buyer Responsibilities: Buyers in cash deals are commonly tasked with prorated property taxes from the closing date onwards, shouldering applicable homeowners association fees, and covering the expenses associated with inspections. Additionally, the buyer may be responsible for specific costs or fees mutually agreed upon in the purchase contract. These responsibilities allow buyers to ensure that the property meets their expectations and requirements.
• What Closing Costs Do Sellers Pay: Sellers typically take on several key responsibilities in cash transactions. These include paying real estate commissions to the seller's and buyer's agents unless alternative arrangements have been negotiated. Sellers also bear the cost of title insurance premiums, fees for document preparation, and transfer taxes if local regulations require. Furthermore, the seller generally covers any additional fees discussed and agreed upon during the negotiation process. This clear division of responsibilities helps facilitate the closing process for cash buyers and sellers in California.

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 Who Pays Closing Costs For Wholesale Deals?

In a wholesale real estate deal in California, the distribution of closing costs can vary depending on the agreements and negotiations between the parties involved. Here's a general breakdown of who may be responsible for what in a wholesale deal:

• Estimated Closing Costs For Buyer: In a wholesale deal, the buyer, often another real estate investor or a wholesaler, typically bears the brunt of the closing costs. These costs may include the property's purchase price, assignment fees, and any fees associated with the transaction. Since the buyer intends to profit from the wholesale deal, they are usually responsible for most of the financial aspects of closing.
• Estimated Closing Costs For Seller: The seller in a wholesale transaction usually has a more straightforward set of responsibilities regarding closing costs. They may be responsible for paying their share of closing costs, including real estate agent commissions and any other fees negotiated as part of the wholesale agreement. However, the seller's overall financial obligation for closing costs is often lower than the buyer's.
• Estimated Closing Costs For Wholesaler: The wholesaler, who acts as the intermediary facilitating the wholesale deal, may also have a role in the distribution of closing costs. Depending on the agreement between the wholesaler and the buyer, the wholesaler may receive an assignment fee for their efforts. The buyer typically pays this fee and is factored into the closing costs.

It's essential to recognize that the specific allocation of closing costs in a wholesale deal can be flexible and negotiated. The buyer, seller, and wholesaler can collectively determine how these costs are distributed based on their respective roles and agreements, making each wholesale transaction unique in its financial arrangements.

Read Also: How To Wholesale Real Estate In California: Step-By-Step

 How To Lower Closing Costs In California

Taking proactive steps to reduce closing costs in California is a wise strategy for buyers and sellers in real estate transactions. While certain costs are traditionally associated with each party, negotiations and better decisions can help mitigate the financial impact of closing expenses. In this section, we'll explore how both buyers and sellers can work together to find common ground and lower the overall closing costs, making the transaction more favorable for all parties involved.

How To Lower Closing Costs As A Seller

Sellers in a real estate transaction can take several strategic steps to lower the closing costs they are responsible for in California. While some expenses are typically associated with the seller's side of the deal, savvy sellers can explore these options to reduce their financial burden:

• Negotiate With The Buyer: One of the most effective ways for sellers to lower closing costs is through negotiation with the buyer. Sellers can propose that the buyer assumes some of the traditional seller's expenses, such as title insurance premiums or document preparation fees; this can be especially effective in a buyer's market, where buyers may be more willing to agree to such terms.
• Shop Around For Service Providers: Sellers can research and select their service providers, such as title companies and escrow services. By shopping around and obtaining multiple quotes, sellers can find more competitive rates and lower closing costs.
• Prepay Some Costs: Sellers can prepay some costs traditionally due at closing, such as property taxes or homeowners association dues; this may reduce the cash needed at closing and can be negotiated with the buyer.
• Opt For A Flat-Fee Real Estate Agent: Sellers can work with a flat-fee agent instead of a traditional percentage-based commission model; this can help control the commission expenses associated with the sale.
• Timing The Sale: Timing can impact closing costs. Sellers who plan to sell when property tax prorations are lower may reduce their share of closing costs.

How To Lower Closing Costs As A Buyer

Buyers can take proactive steps to lower the closing costs California levies on buyers. While some expenses are standard, there are strategies that buyers can employ to reduce their financial burden:

• Negotiate With The Seller: Negotiation is a powerful tool in real estate transactions. Buyers can discuss with the seller about sharing some of the closing costs. For example, buyers can propose that the seller cover a portion of the title insurance premium or other fees traditionally borne by the buyer.
• Shop For Lenders: Mortgage lenders have different fee structures, and buyers can shop around for lenders who offer competitive closing costs and interest rates. Comparing loan estimates from multiple lenders can help buyers find the best financing deal.
• Request Lender Credits: Buyers can request lender credits, where the lender covers some closing costs in exchange for a slightly higher interest rate. This option can reduce the upfront cash needed at closing.
• Utilize Down Payment Assistance Programs: Some buyers may qualify for down payment assistance programs that offer grants or loans to cover a portion of their down payment and closing costs. These programs are often provided by state or local governments or nonprofit organizations.
• Negotiate With Service Providers: Buyers can negotiate fees with various service providers involved in the transaction, such as title companies, appraisers, and inspectors. While some costs may be non-negotiable, others may have some flexibility.
• Consider A No-Closing-Cost Loan: Some lenders offer no-closing-cost loans where the closing costs are rolled into the loan principal or absorbed in the interest rate. While this can increase the overall loan amount, it reduces upfront costs.

Read Also: 9 Best Hard Money Lenders For Beginners & First-Time Investors

Final Thoughts On California Closing Costs

Understanding the closing costs California levies on each side of a transaction is essential. While a general framework dictates who typically pays for specific expenses, flexibility and negotiation tactics can alter California's closing costs landscape. Buyers can expect to cover certain costs, such as loan-related fees, while sellers often handle commissions and title insurance premiums. On average, these closing costs amount to approximately 1% of the home's sale price in California.

Ultimately, however, the division of closing costs can vary, and creative negotiations can lead to a more equitable arrangement between the parties involved. By staying informed, discussing expectations, and sharing some costs, buyers and sellers can work together to navigate the closing process smoothly and achieve a successful real estate transaction.

Ready to Take the Next Step in Real Estate Investing? Join our FREE live webinar and discover the proven strategies to build lasting wealth through real estate.

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*Disclosure: Real Estate Skills is not a law firm, and the information contained here does not constitute legal advice. You should consult with an attorney before making any legal conclusions. The information presented here is educational in nature. All investments involve risks, and the past performance of an investment, industry, sector, and/or market does not guarantee future returns or results. Investors are responsible for any investment decision they make. Such decisions should be based on an evaluation of their financial situation, investment objectives, risk tolerance, and liquidity needs.