Some buyers and sellers are unsure of what costs they’re responsible for in a real estate deal, so today we’ll get to the bottom of this common quandary.
When a buyer submits an offer on a home, one of the steps they must take is to fill out a purchase contract with the help of their agent. Within this contract, they will be able to stipulate what they plan to pay and when they would prefer to close, among other things.
Today, we’ll be focusing on one particularly crucial portion of this contract: the Allocation of Costs section.
This section (also known as Paragraph 7) in the California Residential Purchase Agreement is the portion of the real estate contract that indicates what the buyer is willing to pay and what expenses they would like the seller to cover.
There are four sub-paragraphs included in Paragraph 7—7A, 7B, 7C, and 7D.
Paragraph 7A covers inspections, reports, and certifications. Paragraph 7B covers government requirements and retrofits. Paragraph 7C covers title and escrow. And, finally, paragraph 7D covers all other costs.
Everything within this section of the contract is negotiable, but there has been a precedent established in regards to which party typically assumes each given expense. With that said, let’s review what is customary for each of these categories.
7A: Inspections, reports, and certifications. This section is totally blank when the buyer receives the contract, so they and their agent will need to fill it out based on what’s appropriate for their specific deal. In our area, natural hazard inspections are common, so this is one item most buyers should plan to include. Usually, buyers will ask the seller to pay for this inspection, which will identify any potential natural hazards that may threaten the home. The buyer may also ask the seller to pay for a pest inspection, which will identify any active infestations of wood-consuming organisms, such as termites. As for the general home inspection, buyers are generally expected to cover this expense on their own.
7B: Government requirements and retrofits. Items within this category include things like smoke or carbon monoxide detectors, which are now required in all homes. And in the state of California, seismic strapping is required on all hot water heaters. Most of the time, sellers are expected to cover the retrofitting of these items.
7C: Title and escrow. In Southern California, it is customary for buyers and sellers to split the escrow fees, or for each to at least pay their own. It is also typical for the seller to pay for the new owner’s title insurance. The buyer will pay for their own lender’s title insurance, however.
7D: Other expenses. This subparagraph usually includes expenses like the county transfer tax, which the seller usually pays for. Smoke inspections, which are required in Palm Springs, are also generally covered by the seller. Also, if the property happens to be within a Homeowners Association (or HOA), the seller is typically responsible for paying the HOA document preparation fee—the fee that allows the buyer to receive all relevant literature related to a given HOA’s covenants, codes, and restrictions. The HOA transfer fee is another item the seller is often expected to pay for. This section of the paragraph is also where the buyer would need to indicate if they expect the seller to pay for the first year of their home warranty.
If you have any other questions or would like more information about what this section entails, or about any other aspect of the real estate process, feel free to give me or my team a call or send us an email. We look forward to hearing from you soon.