Part 1: What is it? Why Do You Want One?
What is it?
The Good Faith Estimate of Seller Closing Costs is commonly referred to as the “Net Sheet,” as it is intended to show a real estate seller what he will “net” from the sale after the estimated closing costs are paid. In simple terms, this is the sheet which estimates your bottom line as a seller in a real estate transaction.
A seller should receive a net sheet at the time he lists the property in order to disclose the common expenses associated with the sale and should also receive a new one each time an offer or counter-offer is made where money changes hands. That is, a new net sheet wouldn’t be needed if a counter-offer only called for an inspection to be done at the buyer’s expense…money hasn’t changed here, only a term of the offer.
It is important to remember that a net sheet is an estimate and not a contract or guarantee. A seller’s signature is only acknowledging receipt of the Good Faith Estimate and is not committing anyone to those particular numbers.
Why Do You Want One?
Well, first of all, it’s the law. This law was passed to protect the public by preventing unscrupulous persons (agents, lenders, etc) from “padding” the sale with last-minute, undisclosed expenses.
Both the Seller and Buyer in a real estate transaction are entitiled to Good Faith Estimates of the closing expenses associated with their transaction. Of course, if the buyer is going to finance the purchase, the most accurate Good Faith Estimate would come from his lender. As to sellers, it helps them in their decision-making by providing a reasonable estimate of the bottom line to their transaction, whenever the terms of an offer change which might affect that bottom-line. For example, if the price changes, the commission and title insurance change with it, or if the buyer accepts a higher priced counter-offer but asks for the seller to provide a home warranty in return “the money changes” and so the seller needs a new Net Sheet to help in his decision making. This is to answer the seller’s question, “So, what does this change mean to my bottom line now?”
Again, it is important to remember that this is merely an estimate, not binding. However, the estimate needs to come reasonably close and include the key expense elements of the transaction. Most agents I know estimate high on expenses, with the rationale that they’d rather their sellers get a pleasant surprize at closing than an unpleasant one. If you don’t understand an expense or how the agent got his estimate, ASK!
Part 2: What’s On It?
A Net Sheet should relect all of the financial elements of an offer that would affect the seller’s bottom line. The most common in Baldwin County:
Commission: The sales commission – a percentage of the actual sales price based on the terms of the listing agreement.
Deed Preparation: The cost for an attorney to draw up the deed transferring title ($75 – $150).
Title Insurance: The cost (a percentage of the sales price) of the owner’s title policy, which the seller provides to the buyer as evidence of clear title. In turn, the buyer brings certified funds to the closing.
Termite Inspection: Contracts commonly stipulate that there will be a state-approved certificate of “no active termite infestation” completed by a licensed pest-control company provided at the time of closing and at the expense of the seller. Often required by many lenders. ($75 – $125)
Tax Prorata: The share of the current year’s taxes that the seller will be giving the buyer credit for. Property taxes are paid in arrears. As the seller has enjoyed the property for a portion of the tax year, but will not be the responsible party when the taxes come due, the seller gives the buyer a prorated credit based on the percentage of the tax year the seller owned the property. Based on where the sale falls during the tax year (October – September) and the previous year’s actual taxes.
Estoppel Letter: A fairly recent development that is charged by The Continental Group (TGG) for sales of properties in Phases 1, 2 and 3. It is an expense that TTG charges to report the seller’s outstanding balance of Homeowner Association fees and the current monthly Homeowner dues to the title company. ($200 – $335 depending on the timing of the request.)
Other items that may appear on the net sheet, based on the terms of the offer:
Homeowner Association Dues Prorata: If included, this is usually a credit for the portion of the month the new owner will enjoy the monthly association dues already paid at the beginning of the month if the sale is closed before the last day of the month.
Buyer Closing Costs: If a buyer has asked the seller to pay for some or all of his closing costs as part of the offer, those should appear on the net sheet.
Selling Bonus: If the seller has offered a selling bonus to the selling agent/broker as an incentive, this should be shown on the net sheet.
Home Warrantly: If the buyer has asked the seller to purchase a Home Warrantly, the expense should appear on the net sheet.
Prepaid Insurance Credit: This applies to Phases 1, 2 and 3 at the Plantation and at any condo where the Common Area Insurance is assessed separately from the monthly association dues. In that situation, a seller may have paid the insurance assessment for the upcoming year and wish to have that amount proprated at closing similar to the way taxes are prorated. This item must be specifically negotiated by the seller, however, because one-time association assessments are typically not prorated at sale. Since such assessments constitute a lien against the unit the moment the board declares them, the seller is typically responsible for paying those off in order to get clear title. If successfully negotiated, this items constitutes a credit back to the seller for the unused portion of the insurance assessment paid.
Decorating or painting allowances are not often seen in contracts, especially if the purchase is being financed. Lenders consider these allowances to be discounts from the contract sales price and deduct them from the amount they will lend. For example, if a unit has a contract price of $100,000 that includes a $10,000 decorating allowance, the lender will only lend against a $90,000 sales price. So instead of lending $75,000 (75% of $100,000), it will lend $67,500 (75% of $90,000). That means the buyer will have to come up with another $7,500 out of pocket, which whittles down the $10,000 decorating allowance pretty quickly.
Hopefull, this will take some of the mystery out of one of the most common and useful documents among the many that you will encounter in the sale of your real estate. If you ever have questions about current market conditions or about what it would take to list your property at the Plantation, we are at your disposal at Mandoki Realty.