When the house deal falls through
The price of bowing out of a home purchase can be high.
NEW YORK (CNNMoney.com) - Everyone knows buying a home is expensive these days. But not buying a house can run into a few bucks as well.
A lot of niggling little expenses and fees that home buyers encounter on the path to closing still must be paid even if the deal falls through. And those expenses can add up to shockingly high amounts.
"How high depends on where the buyers and sellers are in the negotiating process," says Bob Moulton, a mortgage broker with Americana Mortgage Group on Long Island. "Many of the expenses can't be transferred to another purchase."
When buyers bid on homes, the offers they make come with the understanding that contingencies written into the contracts will be satisfied. A house must pass an inspection, for example, or a buyer's financing package must come through. If those don't happen, the deal dies.
Between the time the offer is accepted, however, and the point when the deal falls apart, many actions may have taken place and they have to be paid for.
Fees you don't get back
Inspection fees: One of the prime reasons home sales break down is that inspections turn up unforeseen problems. The foundation might be badly cracked or the roof needs replacement. Usually, a seller will try to accommodate a buyer in order to get the house sold, but sometimes the problems can't be negotiated away.
The inspector's fee, though, which can run anywhere from about $250 for a small job to $1,000 or more for a big one, doesn't go away either and it's strictly the responsibility of the buyer.
Title search: All lenders require that a property's ownership is not in dispute and that it be free and clear of encumbrances. That means someone has to examine legal documents and records to make sure no one else can claim to own it and that there are no mortgage or mechanic's liens on it.
Generally speaking, title searches are undertaken by title insurers and they often absorb the search cost if a home purchase is canceled, according to Jim Maher, executive vice president of the American Land Title Association. There can, however, be cancellation fees that the buyer has to pay. Whether these fees apply and how high they can run varies from state to state.
Survey: In some cases buyers, or their lenders, may want the land surveyed before closing, according to Curt Sumner, executive director of the American Congress on Surveying and Mapping, the industry's trade association. Surveys can find encroachments on the property or other problems that buyers may want to know about before they take possession.
"The property survey is often ordered by somebody else in the chain, the buyer's attorney, the lender, but it's the buyer who gets the bill," says Sumner.
If any discrepancies that arise cannot be corrected or the deal falls apart for other reasons, the surveyor must still be paid. That can amount to somewhere in the neighborhood of $500 to $1,500, or more for really big jobs.
Attorney fees: Many real estate attorneys work on a flat rate and sometimes those fees can be applied to another home purchase, provided it is made within a designated time period, say a year. Other attorneys charge an hourly rate, which means any labor spent on a deal that fails still has to be paid for by the buyer. That can easily run into the hundreds of dollars and if there is any hassle about terminating the contract, the fees can quickly hit four-figure territory.
Appraisal fee: Many lenders insist an independent property appraisal be done before they approve the final loan, according to Moulton. It may be to protect the lender but it's the buyer who pays for it, perhaps $300 or so.
Financing costs: Application fees can usually be applied to another purchase but the delay can, in the current rising rate environment, cost buyers dearly, in added interest on their mortgages.
Moulton says, "Buyers locked into a low rate can buy an extension. It costs about a half percent of the amount of the loan for an extra 30 days."
That translates into $1,000 for a $200,000 mortgage, an expensive solution. And, that means the buyer has to find another property quickly, before the extension runs out or get stuck with a more expensive loan. Since the first week of January, 2006, the average interest on a 30-year, fixed-rate mortgage has risen from 6.21 to 6.60 percent, according to Freddie Mac. That difference would add about $51 a month to a mortgage payment, a total of more than $18,000 over the loan's lifetime.
Document preparation fees: Mortgage lenders and title companies charge these to put together all the papers they need to go forward with the loan. They may not add up to too much but, on top of all the other expenses, well, who needs it?
Add it all up and the expense of canceling a home purchase can easily add up to several thousand dollars - and it's not even tax-deductible.
There's no real solution to the costs associated with backing out of a deal. Making an offer on a home sends a big piece of machinery into motion and puts many different people to work. They have to be paid.
But buyers should calculate whether the costs of fixing whatever is wrong with the property (if it is fixable) adds up to a lot more money than it costs to back out of the deal - before they make the decision to walk away.