Closing Costs for Home Sellers in 2020 [3 Options Compared]
In the United States, a homeowner has three main options to sell their home:
- Selling traditionally—with a real estate agent
- Selling “by owner” (FSBO)
- Selling to a real estate investor.
In each type of sale there are costs to pay in order to finalize the transaction, but their amount is different for each selling method. So in what type of transaction does a home seller pay less and get more? The answer is not so simple, as not every transaction is the same even within one selling method.
House Cashin asked the experienced Realtor Kristina Morales to explain our readers all possible costs associated with each selling scenario, as well as other considerations when choosing the best course of action for selling a home. With Kristina’s help, we created the series of four video guides:
- Cost of Selling a Home with a Realtor
- Cost to Sell a Home by Owner
- Cost to Sell a Home to a Real Estate Investor
- Closing Costs Comparison: Realtor vs. FSBO vs. Investor (presented on this page).
Typical Fees and Hidden Closing Costs for Home Sellers in 3 Transaction Types
Hi, my name is Kristina Morales and I'm a licensed real estate agent in the state of California. House Cashin has asked me to host a video series on what to expect in closing cost when selling a home.
In this series we are going to compare three common selling methodologies. In the first video we are going to talk about selling with a real estate agent. The second video is selling as a “for sale by owner”. And in the third video we'll talk about selling to an investor.
The fourth video will summarize it all up so we can compare typical closing costs for sellers across all 3 methods, and then I’m going to go a step further and we’ll talk about other considerations outside of closing costs. We are going to weigh the pros and cons of each selling methodology and you’ll have a really good understanding of those three options.
Now, this is aimed to give you a general idea of what you can expect in closing costs, and it is certainly not all-inclusive. Closing costs will vary depending on state and county in which you are selling your home. Nonetheless, I hope you find it informative and that it helps give you greater clarity over the options when you decide to sell your home.
Thank you so much and I hope you enjoy this series.
Closing Costs when Selling Your Home with a Real Estate Agent
Video #1 of our Closing Costs Series in which Kristina Morales breaks down all possible out-of-pocket expenses and costs paid at closing when selling a property with a real estate agent.
Cost of Selling Your House as a FSBO (For Sale By Owner)
Video #2 of our Closing Costs Series: the detailed analysis of the home seller’s expenses when selling their house “by owner” (FSBO).
Cost of Selling Your Home to a Real Estate Investor
Video #3 of the Closing Costs Series, where Kristina explains the closing costs and pros & cons of selling a home to a real estate investor.
Realtor vs FSBO vs Investor: Closing Costs Comparison
The fourth, and the final video from the Closing Costs Series by House Cashin: the overview of all three selling options and weighing their pros and cons.
Infographic: Closing Costs Summary: Agent vs. FSBO vs. Investor
To summarize the pros and cons of each selling method by visually comparing the approximate typical closing costs percentages for the seller in each of the three situations, we created this infographic. Feel free to share it with your friends and colleagues.
This is video four in the ‘Closing Cost’ series and this one is going to be a summary of the series and a wrap-up. Today we’re going to compare closing costs across all three methods as well as review and discuss some other considerations that should be contemplated before you make a decision on how you want to sell your home.
Real Estate Commissions
First things first: real estate commissions. Let’s compare it.
Real Estate Agent
First, we’ll discuss expecting to pay anywhere between five to six percent when selling with a real estate agent. Of course, I want to have a caveat here: this is assuming someone goes with the full-service brokerage.
There are definitely discount brokerages out there who will charge much less. Remember that commissions are always negotiable, so this is assuming a full-service brokerage, and that the brokerage chooses to charge between five and six percent.
What a brokerage charges is independent of another brokerage, so really they base their commissions on their own business model and their offerings to their clients. So, five to six percent is what we use in this case because that’s what I’m seeing in the marketplace right now.
For Sale By Owner (FSBO)
Selling as ‘For Sale by Owner’ will reduce the commissions paid by the seller, because they’re no longer hiring a listing agent. However, the likelihood is they’re still going to pay between two and three percent because most likely the buyer is going to have an agent that needs to be compensated.
Real Estate Investor
And last but not least, the investor. Typically, an investor won’t have any real estate agent commissions, so you can expect not to have to pay anything.
Next, we’re going to have a look at out-of-pocket expenses. Remember, these were expenses that a seller could potentially incur either before the home goes on the market or before it actually closes. So, let’s take a look.
Home Repairs (During Preparation)
With the real estate agent you may have to pay for some home repairs, same with a ‘For Sale by Owner’. And with an investor you won’t have that concern.
Staging, of course, is going to be recommended by a real estate agent if it needs to be done, and a FSBO seller might want to consider it as well. Remember that a staged home will typically sell for more and faster.
And an investor is not going to require that.
Request for Repairs (During the Contingency Period)
It’s likely you’re going to get a request for repairs from the buyers who put an offer on your home whether you sell with an agent or whether you sell as a ‘For Sale by Owner’. An investor’s not going to do that.
Point of Sale Inspections
For point of sale inspections, if your area requires them, as a seller, you’ll be expected to pay for some of those. And as a FSBO seller, of course that would still remain the same. But with an investor, typically you can negotiate with them to take care of that cost.
Remember, these are the documentation and transfer fees that HOAs will charge during the contingency period. If you’re working with a real estate agent, you’ll have to pay those, and most likely you’ll have to pay them as a FSBO. But an investor will probably cover that cost as well.
Typically, the seller will pay for termite inspections. Again, remember a lot of the stuff is negotiable. I’m just talking in general what we are seeing currently in the market, and sellers do pay for termite inspections whether you use an agent or you are selling ‘by owner’. But you could probably transfer that cost to an investor.
Closing Cost Comparison
Next, we’re going to look at closing costs. Those are costs that are netted from your proceeds on the day that you close.
With the real estate agent you were looking at anywhere between $20,140 or 8.1% of the purchase price.
As a FSBO, that was reduced to $12,640 and that’s 5.1% of the purchase price. And the difference between the two are commissions: with the real estate agent you are paying nearly six percent, and as a FSBO you’re paying three.
An investor, of course, is covering the majority, if not all of your closing costs. The only thing a seller could expect to have to pay are their prorations. So, that’s their prorated taxes, interests and any accrued HOA fees.
Now let’s talk about some other considerations outside of closing costs, and the reason we want to do that is because some of these other considerations can really outweigh the importance of closing costs. In order for us to do that, let’s talk about the pros and cons of each method.
Pros and Cons of Selling with a Real Estate Agent
First, we’re going to talk about the pros and cons of selling with a real estate agent.
Pro #1: Market Expertise
The first pro of selling with an agent is that you get their market expertise. They know the market better than anyone else because they’re living and breathing the market every day.
This is super important when it comes to pricing. Remember that pricing is key to selling your home for the most money and the quickest. An agent will be able to guide you based on their market knowledge. They also understand the market ebbs and flows, so from an advisory standpoint they can answer a lot of questions about timing and about what’s going on in the market while your house is actually for sale.
They also understand buyers’ preferences and behaviors and can prepare you for what buyers are going to ask for or what buyers are going to do. And they know what sells in your area, so they can save you time and money.
A lot of times, people will want to spend a lot of money before they put their home on the market. And an agent will be able to say “don’t invest there, definitely do this...” And in the end you want to be able to invest money and get the most back in your pocket when you go to sell it.
And sometimes it doesn’t require you to do a lot of work to still get a decent amount on your home. Agents know what sells in your area, and that can help you save time and money.
They can advise you on repairs and which ones to do and how much money to spend. That way you’re saving money and time. A lot of times, sellers will want to do these big remodels and hope that they’re going to get it on the back end when they go to sell their home, and it’s just not a worthy investment. So, bring your realtor in and let them advise you on where to put your money if you’re deciding to sell your home.
Pro #2: Access to Buyers
Two is buyers. So, a definite pro is that agents represent 87% of buyers in the market, so they’re going to have access to the majority of buyers either because they’re representing them or because through their agent-agent relationships they have access to other buyers in the marketplace. And, of course, they understand the type of buyer for your home, which is super-super important.
Last, but not least, they’re actively procuring buyers for you on a daily basis. They’re out there knocking on doors, holding open houses, making phone calls, paying for ads, doing your print campaigns. They’re trying to connect buyers to your home and they’re always doing that on your behalf.
Pro #3: Effective Marketing
Pro 3 of working with an agent is marketing. Exposure is key and it’s an important element to getting your home sold and all marketing costs are covered by the real estate agent.
That includes: photography, videography, online ads, open house events, print campaigns and more. And of course, because they know who your likely buyer will be, they can do strategic marketing campaigns that target that particular buyer.
Of course, we’re always marketing to the masses but when we know the likely buyer, we can do target marketing which is a very strategic marketing that’s done to who we think is most likely to buy your home.
Pro #4: Help with Contractors
Updates and/or repairs are often part of the home selling process whether that’s before you put it on the market or whether it’s after you receive an offer. They’ve accepted it and they’ve come back, done their inspections and they want certain things done.
Real estate agents are very well connected, and they can provide recommendations on vetted contractors. Contractors that they’ve used over and over again. They can help in coordinating contractors and if you have a really good agent, they’ll be present when you can’t be.
Pro #5: They Save You Time
Selling a home is very time intensive. There’s time planning, preparing and distributing marketing, time holding open houses, time showing the property to multiple buyers, time making follow-up calls to prospective buyers, time calling local agents to see if they have a buyer, time preparing required documentation, time coordinating the closing process, and much much more.
Pro #6: Legal Scrutiny
Pro #6 of working with an agent is the legal and paperwork aspect. There are a lot of paperwork and legalities involved with selling your home.
Realtors will have access to all the promulgated forms so that’s contracts, disclosures and addendums. They can provide guidance on helping you understand the paperwork that you’re signing. They’ll ensure that all proper documentation is collected and signed, and of course they help the owner avoid future liability.
Pro #7: Negotiation Advantage
Pro 7 is that they’re superior negotiators. You want a strong negotiator working on your behalf. They’re experienced, they’re trained, they know what techniques work, they have a fiduciary responsibility to put your needs above their own and get you the highest price that the market is willing to pay.
Their market knowledge gives them a leg up on negotiation powers compared to selling as a FSBO. If you’re selling on your own, you have to negotiate on your own and you have to negotiate against the buyer’s agent who understands the market. You’re really at a disadvantage. But if you hire an agent, they know the market and they know what techniques the buyer’s agent will use and can help combat that.
Of course, an important point is that they have no emotional ties to the property, so emotions don’t get in their way of their ability to negotiate.
Pro #8: Higher Final Price
Pro 8 and probably one of the most important pros is that they yield the highest final price, so all of these pros result in the highest final price, if you compare it to what a FSBO gets and what an investor option gets the seller.
Because of the market knowledge, because of the marketing exposure and because of their superior negotiation, in comparison to the other three methods, they will ultimately get you the highest final price for your home.
According to the 2018 NAR survey, which is the profile of buyers and sellers’ agent-assisted homes, the homes where the seller hired an agent sold at a median of $264,900. That’s compared to FSBO homes that sold at a median of $200,000.
What does that mean? That means when you hire an agent from day one, you can expect that you’re going to get 32% more by using an agent versus if you sold for yourself.
The number 1 con is that commissions have to be paid, and commissions directly hit a sellers’ bottom line. They’re the largest closing expense and of course sellers pay both buyer and seller commissions.
Pros and Cons of Selling as a ‘For Sale by Owner’
Now, let’s look at the pros and cons of selling as a ‘For Sale by Owner.’
Pro #1: No Agent Commissions
The number one pro is commissions. So, a FSBO has the potential of saving at least one agents commission and potentially avoiding paying any commission if the buyer that they find isn’t represented by an agent.
Pro #2: Selling Time (if You Already Know the Buyer)
Pro 2 is time on the market. According to the 2018 NAR profile of buyers and sellers research report, FSBO homes sold faster compared to agent-assisted sales. For FSBO on average across the country, a FSBO home sold in one week compared to an agent-assisted home that sold in three weeks. But you have to note that 73% of FSBO homes sold in less than two weeks often because the homes were sold to someone that the seller knew.
Con #1: No Benefits of Selling with a Realtor
Con 1 is that they lose the benefits, the many benefits of selling with a realtor. They lose market expertise and pricing expertise, they lose access to a majority of buyers, they have to pay for their own marketing, they don’t have contractor recommendations, they don’t have anyone helping them with the paperwork in understanding the legalities, they lose the negotiation skills that a realtor brings to the table.
And of course, they don’t save any time because they’re doing all of these activities on their own.
Con #2: Lower Final Price
And the biggest thing is that a higher final price is lost, because when you sell as a FSBO, statistics show that you’re going to sell for at least 32% less than what a real estate agent could have gotten you.
Con #3: Possibility of an Unsuccessful FSBO Sale (Losing More Time and Money)
Three is an unsuccessful FSBO sell. Many FSBO sellers end up using a real estate agent in the end. And what ends up happening is they get a lower final price. So, for instance, if you sold on your own and it was successful, you would get $200,000 according to what happened in 2018. If you sold right away using an agent, you could have gotten $264,900.
But if you convert going from first a FSBO then to an agent you’re going to make $227,900. That’s still more than a FSBO selling on his own, however, because of the time on market aspect. When you convert from being a FSBO and then going to an agent, you’re not getting as much as you would have gotten if you have just chosen an agent in the first place.
And of course, your time on market declines so, a FSBO would be selling in two weeks, an agent is selling in three weeks. At first FSBO and then converting to an agent-assisted—that time on market becomes 8 weeks.
Pros and Cons of Selling to an Investor
Next, we’re going to look at the pros and cons of selling your house to a real estate investor.
Pro #1: Minimal to Zero closing costs
Pro number 1 of selling to an investor is you’re going to have minimal to zero closing costs. Because it’s a big consideration for sellers, it’s important to know that investors will typically pay all closing costs. And there’s no real estate agent, so there are no real estate agent commissions that need to be paid.
Pro #2: Fast Closing
Pro 2 is fast closing. When you’re selling directly to an investor you can expect to close anywhere between 7 and 14 days after an offer is made. And that is typically because there’s no appraisal or finance contingencies, so that helps bring the closing window down to 7 to 14 days.
Investors will typically do informal inspection: they’ll do 1 to 2 walkthroughs, but they’re not having a licenced general inspector come in and look at every nook and cranny of the house. And of course, there are no requests for repairs because they’re truly searching for homeowners looking into selling their house AS IS.
Pro #3: Special Accommodations
Pro 3 are special accommodations. These are incentives that an investor will provide to a seller to add additional value. An example is assisted moving programs. Some investors will help pay for the costs for the seller to move. They also have seller lease backs. That means if they close on your house and you still need time to find your next home, they’ll lease the property back to you, that way you have time to find or buy your next home.
Another thing that investors can help with are difficult tenants. If you have an investment property and you have difficult tenants who don’t want to work with you while you sell the home, it could be really difficult to show the property. An investor is only going to come in and walk the property once or maybe twice, and then they’re going to be able to make an offer and close on that property.
Once the property closes, the investor takes that off the sellers’ hands and they take over evicting any tenants, so that’s a nice added bonus.
Pro #4: Quick Cash Payment
Cash is king. Sellers want cash, and they want it fast. By requesting a cash offer for your home, you can get cash from an investor fast, and that way you are able to buy another property quickly or just to move on with your life.
Pro #5: No Hassle
No hassle, that’s another pro of selling directly to an investor. You’re not going to have to worry about updating or doing any repairs, there’s no need for having someone come in and do videography or photography, there are no formal inspections, there are no multiple showings, there are no multiple open houses, so it really makes it easy.
Con: Below Market Offer
Now what’s the con of selling to an investor? It’s a big one. You’re probably going to sell below market value.
Investors are looking for good deals. You can expect to sell for 20 to 30% below market value if you choose to go with an investor.
Being able to close fast for cash and without hassle does come at a price.
The Final Review
When you’re looking at these methods of how you can sell your home, it’s important to go back to what your motivation is and what are you goals. And depending on what that is, decide which option will be best when you decide to sell your home.
Now we’re just going to do a final review of the pros and cons. And of course, I want to say that when I’m looking at these pros and cons, I’m looking at it from the perspective of the seller.
In which method is the seller going to get the highest final price? Well that’s going to be with the real estate agent.
In which method is the seller going to save on commissions? Well, it’s not with an agent. They will have some savings with a FSBO, because remember: they’re not paying for a listing agent and technically have the potential not to even pay a buyer’s agent if they can find a buyer that’s not represented. And of course, you’re not going to pay anything with an investor.
No hassle? Well you’re going to have some hassle if you sell with a real estate agent, the same as if you sell as ‘for sale by owner’. In fact, you’re probably going to have more hassle selling as a FSBO, but with an investor it’s pretty hassle-free compared to the other two methods.
A quick close. So, in which method can a seller have a quick close? In all three methods, right? Of course, you’re probably going to have the quickest close with the investor, because they just move much quicker. Again that’s coming out of price, because you’re going to get less for your home than you would in the other two cases.
However, if you price your home correctly, in any of these methods a quick close is possible. You can get a cash offer with an agent, as a FSBO, but you’re definitely more likely to get one with an investor.
In which method will a seller be able to leverage market expertise? That’s with the real estate agent. A FSBO seller is not going to have the same market expertise as a real estate agent unless that FSBO seller is an agent themselves or have some particular training in the market. And an investor, they do have market knowledge but it’s not for the benefit of the seller.
Marketing – agents, of course, are going to be paying the marketing costs and taking care of all of the marketing campaigns. A FSBO seller is not going to have that luxury. They’re going to have to do that on their own. And with an investor it’s just not applicable.
Access to buyers – with a real estate agent, of course, you’re going to have access to a ton of buyers. When selling as a FSBO, you’re going to lose the buyers that an agent brings. And with an investor that’s not applicable.
Legal and paperwork – yes, the real estate agent is going to take care of the paperwork and legalities for you. For a FSBO, you’re not going to really understand (unless, again, you’re an agent or an attorney) the paperwork that’s going to be required. So, you are going to want to probably outsource that to someone to take care of that for you. And then an investor, of course, is going to take care of the paperwork on an investor transaction.
Contractors – will you have access to a ton of contractors and get recommendations? With the real estate agent you will. As a FSBO seller, of course, it depends on your network, but in general you’re going to get more access if you go with a real estate agent. And with an investor it doesn’t matter because that’s not part of the equation when selling directly to an investor.
Last but not least – who is going to negotiate the best on the sellers’ behalf? Of course, that’s a real estate agent. A FSBO seller is not going to negotiate on their own behalf better than a real estate agent who knows the market. And of course, the investor is not negotiating on behalf of the seller, so that’s not applicable.
The Closing Costs Video Series
So, that ends our series, but before we go, let’s review all the videos that we discussed.
In the first video we discussed what to expect when selling your home with the real estate agent. Then we moved on to video 2 where we discussed what to expect in closing costs when you sell as a ‘For Sale by Owner’. And then we came up with a third option of what to expect when selling to an investor.
And the last and final video, which is this one, was a summary of those 3 videos and a comparison of the pros and cons and closing costs.
Before I go, I really want to personally thank you for watching this series. I hope that you found it helpful and that you discovered something new. Remember, the intention of this series is to give you a general idea of your options. When you decide to sell your home, here’s my advice for you: start with you asking yourself these questions:
- Why am I selling my home?
- When do I need it sold by?
- What is my motivation?
- What are my goals?
Once you have a clear idea of the answers to those questions, come back to this video series and rediscover what your options are, and then choose. Choose based on what you’re hoping to achieve.
Again, thank you so much for watching, and I hope that our paths will cross again soon.