Estimated Closing Costs: How Mandatory Are They, Really?

“Before an agreement of sale is executed, the brokers involved in the transaction shall provide each party with a written estimate of reasonably foreseeable expenses associated with the sale that the party may be expected to pay….” (SREC regulations, § 334(a)) 

In legal document interpretation, “shall is an imperative command, usually indicating that certain actions are mandatory, and not permissive.” So yes, estimated closing costs are really mandatory and not optional in any way. 

If you have any doubt, the last two meetings of the State Real Estate Commission should put those doubts to rest. In two separate cases involving different brokers/agents, investigations found transaction files that were missing various required documents (like seller disclosure forms or the Consumer Notice), and in which the agent did not prepare estimated closing costs. Both involved actions against the agent, broker and brokerage, with fines and costs over $7,000 in each case — as well as the broker re-taking the 30-hour broker law course.  

To be clear, neither of these fines were solely for failing to supply the estimated closing costs. I believe that these cases (and most others we’ve seen that have cited this issue) start off with something more substantive and then uncover the paperwork issues during the investigation. But remember that state investigators don’t need to limit themselves just to complaints that have been filed. If they see additional violations during an investigation, they’ll almost certainly get added on and increase any penalties that might be sought. 

So, let’s hit a couple of common Legal Hotline questions about the details of estimated closing costs. 

Q: When do you have to give estimated costs? Can an agent just do an estimate when a property is listed or when they have a good idea of a buyer’s price range? 

A: Estimated costs must be provided “before an agreement of sale is executed.” This implies that costs would be provided for each potential transaction (i.e., each time a buyer submits an offer, and each time a seller is ready to accept one) and not just one time when the client has no transaction details to look at. That’s consistent with the goal of this rule, which is to be sure that the clients have current information on their financial obligations. Potential purchase prices go up and down, buyers ask for different types of concessions, taxes change over time, etc., so a single estimated cost sheet without a specific transaction probably won’t be close to accurate. This is certainly backed up by the Commission looking for a set of costs in each transaction file. 

Q: Can I use estimated costs developed by others, like builders, lenders, title companies or an MLS app? 

A: Um … it depends. 

Nothing requires that the licensee be the one who actually puts pen to paper (finger to keyboard?), but the regulations say that “the estimates of costs … shall be as accurate as may be reasonably expected of a person having knowledge of, and experience in, real estate sales.”  

If you were to prepare your own estimated costs, you’d probably look through a pre-printed form with lots of lines for possible costs, then start pulling relevant information out of the various transactional documents, mix it with a bit of your knowledge of the transaction (like, say, what your own brokerage fee is and whether the listing broker or seller is contributing to the buyer broker fee), to come up with a solid estimate. If you want to use an estimate that’s initially prepared by some other person or entity, you’d need to apply the same level of scrutiny that you would if you were drawing up your own estimate. 

For example, the traditional Pennsylvania transaction (and the default in the PAR Agreement of Sale) has the buyer and seller splitting the real estate transfer tax. An automated estimate from another source might make that initial assumption, but if you know that this particular buyer is offering to pay a higher share, you’d need to be sure that gets reflected in the estimate. Similarly, there may be some built-in assumptions about things like fees (how much and paid by whom), prorations (entering a convenient estimated closing date without knowing what the parties are negotiating) and municipal fees and taxes (especially if the provider isn’t intimately familiar with local practice). If you’re comfortable that the numbers are solid — as they came or after you amended them — then there’s no legal reason you can’t use an estimate prepared by another entity. That said…  

Q: Can my broker have rules like requiring that I prepare estimated costs for new clients at the beginning of the transaction, or that I must prepare my own estimates in a certain way or on a certain form? 

A: Sure. There could be solid business reasons why brokers implement certain risk reduction policies, and they’ll generally have the right to do so. Brokers who want to avoid empty transaction files (and the fines that come with them) may find it helpful to require the use of certain policies, forms or tech platforms to help increase the odds that agents get things right AND that the broker can keep an eye on things before the transaction closes to be sure it’s done correctly.