Closing costs generally are expenses of the sale that must be paid in addition to the purchase price (in the case of the buyer’s expenses) or be deducted from the proceeds of the sale (in the case of the seller’s expenses). Some closing costs result from legal requirements; others are a matter of local custom and practice. There is no statutory definition of closing costs and it is not defined in the DRL-approved offer to purchase forms. Contract provisions shifting the responsibility for the payment of closing costs or creating closing costs credits without defining “closing costs” may lead to disputes between the parties at closing.

Defining closing costs

An offer provides that the seller agrees to credit the buyer in an amount not to exceed $3,000 at closing for pre-paids and closing costs. The total cost of the appraisal, inspection, and lender’s title insurance policy is less than $2,000. The buyer wants to buy down her interest rate. Can the buyer legally have the seller pay points with the remaining credit? 

It is unclear whether the parties intended by the term “pre-paids and closing costs” to include buyer’s loan points. The buyer may be able to use the residual amount of the credit to pay for points to buy down the monthly interest rate on the buyer’s loan if points are authorized closing costs. The parties may need to confer with their attorneys if this cannot be resolved by negotiation.

The buyers want the offer to purchase to be drafted so that the sellers pay for all closing costs. Must the offer specifically state each closing cost item? 

The agent may wish to use language to the effect of “the seller will pay the costs of closing the transaction, excluding loan closing costs and including costs such as ______,” listing proper items from the closing statement. Another approach may be to list items that are not appropriate closing costs for the purposes of that offer.

Is it permissible to have the buyers’ closing costs included as a credit back to them? 

Check with the lender for the underwriting criteria. Including a credit for closing costs and/or other expenses may put the buyer in jeopardy of failing to qualify for the loan.

The seller would like to have the buyers pay all closing costs including all commissions and title work. Is this legal? 

The seller and buyer can agree in the offer that the buyer will pay all closing costs. The contract should spell out what costs are included and give a maximum or a lump sum amount.

Commission on closing costs

Is it legal to charge commission on closing costs in MLS transactions? For example, the selling price is $70,000, and the closing costs credit paid by the seller is $2,000, for a net price to the buyer of $68,000. Is commission based on $70,000 or $68,000? 

The commission will be based upon $70,000 unless the brokers have expressly agreed otherwise. Pursuant to the National Association of REALTORS^® Handbook On Multiple Listing Policy, offers of compensation must be based upon a percentage of the sale price or a dollar amount. If another arrangement were contemplated, an agreement would have to be entered into between the brokers (i.e. a standing policy letter or a compensation agreement for the individual transaction). Statement 7.23 - Information Specifying the Compensation on Each Listing Filed with a Multiple Listing Service of a Board of REALTORS^®, provides in relevant part:

In filing a property with the Multiple Listing Service of a Board of REALTORS^®, the participant makes a blanket unilateral offer of compensation to the other MLS participants and shall therefore specify on each listing filed with the Service the compensation being offered by the listing broker to the other MLS participants. This is necessary because the cooperating participant has a right to know what his compensation shall be prior to commencing his endeavor to sell. (Revised 11/96)

For more information about offers of compensation, please refer to Legal Update 96.12 and Legal Update 02.01.

A licensee’s friend is working with a buyer’s agent in a different market area. The buyer’s broker fee is three percent and the compensation offered in MLS is two percent. The buyer’s agent suggested that the offer state the seller will credit the buyer with $2,000 toward closing costs, and then the buyer could use that at closing to pay for the balance of the buyer’s broker fee. May this be done? 

The parties may negotiate for a provision requiring the seller to pay some of the buyer’s closing costs at closing. Although the buyer will be in breach of the buyer agency contract by not paying the fee, the failure to pay this fee will not prevent the transaction from closing, so it is unlikely that all real estate professionals would agree the buyer’s broker fee is a closing cost unless closing costs are specifically defined to include these fees.

Mortgage fraud and closing costs

A broker received information that original offers can be written to include seller credits to the buyer at closing for closing costs and pre-paids, but this may not be done in an amendment. Can an amendment be written that would change the purchase price for the seller to pay back the buyer at closing for pre-paids and closing costs with the remainder of the unused portion to remain with the seller? 

This may provide an opportunity for mortgage fraud. Mortgage fraud occurs any time a participant in a real estate transaction misrepresents facts with the intent to bilk another party of money it is not entitled to. Fraud may occur when there are two sets of offers drafted, one representing the “real deal” and the other- the fraudulent transaction. Fraud can also occur when the parties have inflated the sales price by using a “forgivable” second mortgage or phony work orders. Mortgage fraud can be committed by any of the participants in a real estate or mortgage transaction including sellers, buyers, real estate brokers and salespersons, mortgage brokers, mortgage bankers, appraisers, and loan originators.

The concern that may be present with an amendment, depending upon the specifics of the transaction, is that an unscrupulous lender or mortgage broker may “lose” and not forward the amendment when the transaction documents are sent to the secondary market. This may potentially distort the loan ratios and mislead lenders by falsely portraying the buyer’s equity.

Examples of how a REALTOR^® may properly respond to suspected mortgage fraud in their transactions are found in the November 2002 Legal Matters article. A variety of state and federal agencies are making efforts to fight mortgage fraud. Complaints must be filed so these agencies are given information about what transpires in the marketplace.

For complaints against licensed and certified real estate appraisers and real estate brokers and salespersons call the Department of Regulation and Licensing at 608-266-7482 or go to State Complaint Form.

For complaints against mortgage bankers, mortgage brokers and loan originators call the Department of Financial Institutions at 608-261-7578 or go to www.wdfi.org/fi/mortbank.

For complaints against any person engaged in mortgage fraud call the U.S. Department of Justice, U.S. Attorney’s Office and FBI (operating a mortgage Fraud Task Force out of Milwaukee) at 414-276-4684.

In addition, the “Mortgage Fraud” REALTOR^® Resource Page includes links to federal and Wisconsin resources and DR Hottips to help REALTORS^® navigate this frustrating area.

Practice Tips for REALTORS^® Prudent brokers who draft contract provisions referring to “closing costs” should also define “closing costs” in the offer. This definition may be inclusive or exclusive. An inclusive definition lists permissible closing costs; an exclusive definition includes all fees and costs paid at closing except for those listed. If an amount is given for a closing cost allowance or credit, specify clearly if the amount is a maximum (closing costs not to exceed a certain amount or closing cost up to a certain amount) and what will happen to the balance if actual costs do not reach the maximum credit or allowance. It is also wise to check with the lender in advance to make sure the provision will not violate the lender’s underwriting standards.