They've long sent homebuyers into sticker shock on the way to settlement. They've been the bane of real estate agents for years.
Closing costs in Maryland rank among the nation's highest. The state, unlike most, levies high transfer taxes and asks for a year's worth of property taxes at settlement -- a lump sum that's out of reach to many potential buyers, especially first-timers. But Maryland's closing costs finally could be headed down.
With the shifting of the economic and political tides, the talk is turning more and more to ways to offer some relief. For one thing, with the state mired in a slow recovery, the business community at large has come to view affordable housing as less of a real estate issue than a matter of economic survival.
Gov.-elect Parris N. Glendening, House Speaker Casper R. Taylor Jr. and other legislators all have listed lowering costs as a priority.
And a coalition of business groups led by the Maryland Chamber of Commerce -- which includes real estate and mortgage trade groups -- has drafted a plan for the General Assembly.
Several studies of closing costs rank Maryland near the top. For example, a study by the Chamber of Commerce last year placed the state first in average deed recordation and transfer tax paid by buyer, based on median home value in the highest tax jurisdiction.
Maryland came in second in the percent charged, at 2.8 percent -- with the median in the United States about 0.2 percent.
The cost of closing on a $150,000 house in Baltimore County is nearly twice the cost of closing in Arlington, Va., according to an analysis by The Sun. And government-imposed fees were four times higher, $3,792 vs. $933. A more pronounced difference comes from a comparison of Arlington and Baltimore City, where property taxes are about twice those of the county. Closing costs were about the same in Baltimore County and in Hanover, Pa. (The comparison does not include down payments or points charged by the lender.)
Settlement costs consist of government fees -- such as property and transfer taxes -- and private fees charged by brokers, lenders and title companies. The private fees pay for such things as preparation of the deed, an attorney and a title search.
What most galls buyers and real estate agents is that the state requires advance payment of a year's worth of property taxes and, unlike some states, levies a half-percent transfer tax on all transactions. Counties levy an additional transfer tax, with 1.6 percent in Baltimore County the highest.
The state has required property taxes in advance since the late ** 1960s, when state officials revised the system to raise money to balance the budget. The state enacted the transfer tax in the 1970s to raise money for Program Open Space -- in which farmland is preserved and parkland acquired.
In 1987, the legislature gave most buyers a $150 credit by exempting the first $30,000 of a home's purchase price from the state transfer tax.
It remains unclear what measures will be taken in the next several years, but among those under consideration and included in the chamber's plan are:
* Requiring counties to offer homebuyers the option of paying property taxes semi-annually rather than annually, cutting in half taxes owed at settlement, now one of the biggest expenses.
Homebuyers now pay a year's taxes at settlement, a portion of which reimburses the seller for pre-paid taxes and a portion of which the lender holds in escrow until taxes are due. A typical buyer of a $150,000 home in Baltimore County could save about $1,000.
* Exempting first-time buyers -- which would include anyone who hasn't owned a home in Maryland within three years -- from the state's transfer tax.
Usually, the buyer and seller split the cost of the transfer tax, equal to one-half percent of the purchase price. All buyers already get a $150 credit toward their portion. So, under that proposal, first-time buyers could save $225 on a $150,000 home.
* Increasing the buyers' credit toward their portion of the transfer tax.
* Switching to a system in which property taxes are paid at the end of the year rather than in advance. In the long run, this could allow buyers to put up as little as a month's worth of property taxes compared to a year's worth, saving close to $2,000. All but Maryland and two other states collect taxes in arrears.
Past experience
Attempts to reduce closing costs have been made in the past. In the late 1980s, a plan for statewide, mandatory, semiannual property tax payments failed in the face of opposition from Baltimore City, Baltimore County and the Maryland Association of Counties, or MACO -- which were worried about the loss from collecting property taxes more slowly.
In a compromise two years ago, the General Assembly passed legislation allowing, but not requiring, counties to offer semiannual payment plans. The law also allowed counties to charge a fee to homeowners to offset the later payments. Only Baltimore City and Harford County have taken advantage of the law.
And plenty of opposition remains.
The Maryland Bankers Association has opposed a semiannual tax plan in the past, though the group hasn't taken a position on the chamber's proposal.
"It would create additional administrative costs to banks," said John Bowers, president of the group, which is part of the chamber coalition. "What you do once, you have to do twice. When you do hundreds of thousands of home loans, it definitely ads up and increases costs that would be borne by someone."
Baltimore Councilwoman Rochelle "Rikki" Spector, president of MACO, said that group will oppose any efforts to make the semiannual payments mandatory.
"We categorically are not supporting legislation that would diminish the revenues that come back to local governments," she said. "And when they want to do away with transfer or recordation tax, those monies generated come back [to the counties] in open space land and agricultural land."
Still, real estate agents and others are encouraged by the renewed and wider attention.
Former Del. Michael Gisrael -- now a lobbyist for the state Chamber of Commerce and a senior vice president of Fountainhead Title Group Corp. -- sponsored the bill to give buyers a $150 credit toward transfer taxes and another, unsuccessful one to mandate semiannual property taxes. Back FTC in his Annapolis days -- he lost re-election in 1990 -- the issue drew little notice, he said.
This year is different, he says.
"This is clearly going to be a major initiative," he said. "I can't ever remember a time when we've had so much leadership support. The one thing that's different this year is all of a sudden now it's a priority. There's a realization across the board in the business community that this is a major economic development issue."
In fact, every business leader seems to have his own story of how the state's closing costs are hurting the economy.
Champe C. McCulloch, president of the Maryland chamber, tells how Baltimore lost out in 1991, when United Parcel Service sought to relocate its Greenwich, Conn., headquarters.
UPS rejected the city and instead chose Atlanta -- where it now employs more than 1,800 -- after considering factors such as the cost of housing and concluding that the costs of transferring some 700 management and administrative employees to Maryland would be too high.
Tom Quattlebaum, executive director of the Anne Arundel Association of Realtors, talks of a homebuyer whose company ** had transferred him from the Midwest to Washington. The man (( recently called Mr. Quattlebaum to check on something his real estate agent had told him.
The buyer was house hunting in Maryland and Virginia. His Maryland agent gave him an estimate of settlement costs that just didn't look right -- especially the column showing he would owe a year's worth of property taxes.
"He said, 'That can't be right,' " said Mr. Quattlebaum, who assured him it was. "He said, 'That's unbelievable. You made up my mind. I'm buying in Virginia.' "
"The housing market in this area has not been great in the last few years, and it's harder and harder for people who are trying to get their first house to get into a house," he said.
"There are lot of people renting apartments paying $1,200 in rent who could buy a house and have a lower house payment, but they can't come up with the cash to get into the house."