who typically pays the closing costs in a property deal?
The buyer traditionally pays the closing costs on a home purchase, regarding if it’s a condo, house, townhouse or estate though the seller can contribute as well.
The average closing costs on homes up to $500,000 is around $13,475; while on a homes just under $1,000,000 is around $18,775. The estimated closing costs for a home worth $1,500,000, would be approximately $28,125.
To have the seller cover closing costs:
- Negotiate seller contributions as part of the purchase offer. Ask for a set dollar amount or percentage.
- If countering, request higher seller coverage to allow room for compromise.
- Consider accepting a higher purchase price in exchange for maximal seller closing cost coverage.
- For competitive offers, minimize contingencies and flex on timing to incentivize seller coverage.
- If mortgage rates have risen, request seller assists to ease refinancing appraisal risks.
- On fixer uppers or distressed sales, angle for contributions to balance renovation costs.
- For first-time homebuyers, emphasize extra savings toward move-in prep and repairs.
While not guaranteed, savvy negotiation applying leverage at the right times can often secure seller assistance with closing costs.
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Actual closing costs will vary based on your specific transaction, location, lender, and other factors. Estimates are not guarantees.
Work with your real estate and legal professionals to determine accurate estimates for your unique situation.
The closing cost estimates, figures and descriptions provided in this article are for illustrative purposes only.
Neither the author nor publication assumes any liability for use of the general estimates and advice provided herein without consultation from appropriate licensed professionals.
When buying a home in the United States, it’s important to understand the costs involved beyond just the purchase price. Closing costs often callsed [closing cost on a house] are a significant expense and part of the real estate transaction, that can catch many homebuyers off guard.
Closing costs referred in some cases a buyer closing costs are the fees associated with the purchase of a property within the transaction phase of the deal, including everything from appraisal and inspection fees to title insurance and attorney fees.
In this section, we will explain who pays closing costs, what is a real estate transaction, provide a breakdown of the different fees involved with the closing costs and offer insights into how you can reduce your closing costs.
If you’re preparing to buy a home, read on to learn everything you need to know about closing costs and how to approach this important aspect of the home-buying process.
What Fees are Involved under closing costs?
- Lender fees with their origination fee, application fee and funding fee.
- Title and Escrow fees with title, search, settlement, notary and recording fees. are included in the closing costs.
- In addition taxes and insurance as property tax, homeowner’s insurance and mortgage premium
- Third party service fees as appraisal, credit report and flood certification fees
- Government fees and transfer tax
are part of the closing fees and included in every real estate transaction deal.
Closing costs for home buyers can vary widely based on loan amount, lender, and property location but typically total 2-5% of the mortgage amount. The fees pay for services to legally transfer property ownership and originate the mortgage loan.
Overview of Closing Costs
Closing costs are the fees and expenses, beyond the home’s purchase price, that buyers and sellers pay to finalize a real estate transaction. Closing costs typically range from 2-5% of the total loan amount for buyers.
Closing costs can be divided into the following categories:
Lender Fees
These are fees charged by the lender to process, underwrite, and close the mortgage loan:
- Origination fee (0.5-1.5% of loan amount): Covers lender services to originate the mortgage
- Application fee ($0-500): For processing mortgage application
- Underwriting fee (0.1-0.5% of loan amount): To review and approve the loan
- Funding fee ($0-1000): Lender fee for wiring the mortgage funds
Title and Escrow Fees
These fees cover title searches, document preparation, notarization, recording, etc:
- Title search fee ($100-500): To research property records for any issues
- Title insurance fee (0.5-1% of loan amount): Insures against errors in title records
- Settlement or closing fee (0.5-1.5% of loan amount): Paid to escrow company for closing services
- Notary fees ($0-150): To notarize closing documents
- Recording fees ($50-150): To record documents like the deed with local government
Taxes and Insurance
Buyers must prepay property taxes, homeowner’s insurance premiums, and mortgage insurance:
- Property taxes (Varies): Prepay property taxes as part of escrow
- Homeowner’s insurance premium (Varies): Prepay first year’s insurance premium
- Mortgage insurance premium (0.5-1% of loan amount): If down payment is less than 20%
Third Party Services
Services ordered by lender to assess and process the mortgage:
- Appraisal fee ($300-500): For home appraisal report
- Credit report fee ($25-50): For credit reports from bureaus
- Flood certification fee ($5-20): To assess flood risk
Government Fees
Recording and transfer taxes charged by state/local government:
- Recording fees ($50-150): To record the deed and mortgage
- Transfer taxes (0.01-0.03% of purchase price): Tax on property transfer
Being aware of these costs can help buyers budget and prepare for a smooth closing process.
How to estimate closing costs
Here is an example of estimating closing costs on a home purchase:
For example, for a $300,000 home, with mortgage amount of $250,000 and a deposit of $50,000 the estimated closing costs could be calculated as:
- Origination fees – 1% of mortgage amount e.g $2,500
- Appraisal fee – $500
- Credit report fee – $75 per buyer
- Title insurance – 0.5% of sale price = $1,500
- Recording fees – $200
- Transfer taxes – 0.3% of sale price = $900
- Home inspection – $350 to 550
- Total estimate = $6,025
To arrive at the best estimate, research specific rates in your area and account for variables like loan amount, home price, and local taxes and fees.
Avoid guesstimating percentages alone. Compile detailed line items with real costs from past closings and local information. Overestimate to allow a buffer.
Typical closing costs on a condo vs. house vs. townhouse
Closing Costs for Condos vs. Houses vs. Townhouses
Closing costs can vary depending on whether you are buying a condo, house, or townhouse. Here is a comparison of typical closing costs for each:
Condo Closing Costs
- Title fees – $500-$1500
- Recording fees – $50-$150
- Transfer taxes – 0-2% of purchase price
- HOA transfer fee – $100-$500
- HOA capital contribution – 0-2 months HOA dues
- Attorney fees – $0-$1000
- Homeowners insurance – $200-$1000
Condos tend to have lower closing costs overall since they do not require a land survey and have lower title insurance fees. However, condos have additional HOA-related fees.
House Closing Costs
- Title fees – $1000-$2000
- Recording fees – $100-$500
- Transfer taxes – 0-4% of purchase price
- Attorney fees – $0-$1500
- Home inspection – $300-$500
- Land survey – $150-$600
- Homeowners insurance – $400-$1200
Houses often have higher title and transfer taxes. Attorney fees also tend to be higher for houses. A land survey and home inspection add to closing costs.
Townhouse Closing Costs
- Title fees – $750-$1500
- Recording fees – $75-$200
- Transfer taxes – 0-3% of purchase price
- HOA transfer fee – $100-$500
- Attorney fees – $300-$1000
- Home inspection – $300-$500
- Homeowners insurance – $300-$800
Townhouses have lower title fees than houses but higher than condos. They require an HOA transfer fee but often lower HOA capital contribution than condos.
Home inspections are still needed.
Condos tend to have the lowest closing costs due to lower title and transfer fees.
Houses have the highest closing costs overall.
Townhouses fall in the middle. But costs also depend on local taxes, title and attorney fees.
Key Differences
- Condos have lower title fees but HOA-related costs.
- Houses have higher title, transfer taxes, attorney fees, inspection costs.
- Townhouses are in between houses and condos for most closing costs.
What affects the closing costs?
There are some distinctions among these property types that might affect the closing costs:
Homeowners Association (HOA) Fees:
- Condominiums often have higher HOA fees compared to townhouses due to more shared amenities and common areas which are factored into the closing costs.
Insurance:
- Townhouse owners typically face higher insurance costs as they are responsible for insuring their entire structure and property. This cost can be part of the closing costs when purchasing a townhouse.
Maintenance and Common Expenses:
- Condo fees may cover a variety of common expenses which might be reflected in the closing costs. People often assume that buying a condominium is cheaper than a house, but the costs of condo fees versus house expenses need to be evaluated carefully to understand the closing costs better.
These factors, among others, contribute to the variation in closing costs among condos, houses, and townhouses.
It’s advisable to consult with a real estate professional to get a precise understanding of the closing costs you would incur for a specific property.
Strategies to reduce closing costs
While closing costs are a necessary part of the home-buying process, there are strategies you can use to help reduce them. Here are some tips to consider:
- Negotiate with lenders and service providers: Don’t be afraid to ask for a better rate or to have some fees waived. Remember that you have the power to shop around and negotiate with different lenders and service providers. Ask for a breakdown of their fees and compare them with other options.
- Explore discounts and credits: Some lenders or service providers offer discounts or credits for certain circumstances. For example, you may be able to get a discount on your title insurance if you use the same company the previous owner used. Ask about any potential savings opportunities.
- Understand what’s negotiable: Some closing costs, such as government fees and taxes, are not negotiable. However, other fees may be up for discussion. For example, you may be able to negotiate the origination fee or appraisal fee with your lender. Do your research and know which fees are negotiable.
- Consider a no-closing-cost mortgage: Some lenders offer no-closing-cost mortgages, which means they will cover some or all of the closing costs in exchange for a slightly higher interest rate. This option may be beneficial for those who don’t have the funds upfront to cover closing costs.
- Plan ahead: Start saving for closing costs early in the home-buying process. A good rule of thumb is to budget around 2-5% of the home’s purchase price for closing costs. By planning ahead and having a savings plan in place, you can help alleviate some of the financial burden of closing costs.
To mitigate and reduce the closing costs, implementing these strategies, can potentially help you reduce the amount you need to pay in closing costs and save money during the home-buying process.
What are closing costs?
Closing costs are the various fees and expenses associated with finalizing a real estate transaction.
These costs typically include fees for services such as appraisals, inspections, title searches, title insurance, loan origination, and legal fees. They may also include prepaid expenses like property taxes and homeowners insurance.
It is important to have a clear understanding of these costs to avoid any surprises during the closing process.
Are closing costs different in a city or village?
Closing costs vary, with city or village location being a factor.
In the context of real estate, geographical location significantly impacts closing costs. Urban areas like cities often have higher closing costs compared to rural areas or villages, due to higher property values and additional fees that may be imposed by local governments. This variance can be attributed to differing local regulations, tax rates, and the cost of services in urban versus rural settings.
Examine closing cost estimates in both city and village settings to understand the cost difference, as local regulations and market conditions dictate these expenses.
who pays closing costs on land contract
A land contract is a form of seller financing where the buyer makes payments to the seller over a period of time to purchase a property. In a land contract, the seller retains the title to the property until the buyer fulfills the contract terms, essentially acting as the lender. The buyer, on the other hand, takes possession of the property and is responsible for its maintenance and other associated costs, although the legal title remains with the seller.
Secure the title to the property, If the buyer completes all the payment terms as agreed in the contract. This arrangement allows individuals who might not qualify for traditional mortgage financing to purchase property.
Land contracts provide a more flexible financing option for buyers, while giving sellers the ability to earn income over the term of the contract through the buyer’s payments, which often include both principal and interest.
In land contracts, the responsibility for closing costs can be negotiated between the buyer and the seller.
Under land contracts, typically, sellers and buyers don’t have to pay for closing costs or origination fees, which can range between two and five percent of the total purchase price.
The buyer takes on other expenses such as property taxes, mortgage note interest, and insurance premiums, If a land contract is the chosen method of sale.
In a land contract sale in the United States, both the buyer and seller typically pay certain closing costs:
Buyer’s Closing Costs
- Attorney fees – The buyer pays their own attorney fees for reviewing the contract and representing them at closing. This can range from $150-$500 per hour.
- Title search and title insurance – The buyer pays for a title search to ensure there are no liens or other issues with the title. They also pay for owner’s title insurance to protect their interest. This costs around $500-$1500.
- Appraisal fees – If required by the lender, the buyer pays for an appraisal to determine the property’s value, typically $300-$500.
- Environmental inspection – The buyer may choose to pay for an environmental inspection of the land. This costs around $300-$500.
- Recording fees – The buyer pays recording fees to file the land contract with the county, generally around $50-$150.
- Down payment – The buyer makes an initial down payment, often 10-30% of the purchase price.
Seller’s Closing Costs
- Attorney fees – The seller pays their own attorney fees for reviewing the contract and representing them, similar to the buyer’s fees.
- Title fees – The seller pays fees to prepare and transfer the title, around $500-$1500.
- Real estate agent commissions – If agents are involved, the seller pays their commissions, typically 5-6% of the purchase price.
- Property taxes – The seller pays any owed property taxes up until the sale date.
- Deed preparation – The seller pays to have the deed drafted and executed, around $150.
The responsibility for closing costs in a land contract is subject to negotiation between the involved parties, and the structure of the deal.
Key Points
- Both buyer and seller pay certain closing costs in a land contract sale.
- Buyer pays costs related to financing, title, appraisals, inspections, recording fees, down payment.
- Seller pays transfer taxes, title fees, commissions, property taxes, deed preparation.
- Attorney fees are paid individually.
- Exact division of costs is negotiable.
who pays closing costs on new construction
To pay closing costs on new construction:
- The buyer typically pays costs related to financing, securing title, inspections, and recording fees. This includes:
- Loan fees like origination, application, and underwriting fees
- Appraisal and credit report fees
- Title search, title insurance, and escrow fees
- Attorney fees
- Recording charges
- Down payment
- The seller (builder) typically pays costs related to constructing and selling the home. This includes:
- Real estate commissions
- Title preparation and transfer taxes
- Any unpaid property taxes
- Deed preparation fees
- Some closing costs may be split between buyer and seller, such as:
- Survey fees
- Prorated property taxes
- HOA transfer fees
- The builder may offer incentives to cover all or part of the buyer’s closing costs if using their preferred lender.
- Closing costs typically range from 2-5% of the home’s purchase price.
- An estimate of closing costs is provided on the Loan Estimate form within 3 days of applying.
- The final closing costs appear on the Closing Disclosure form provided 3 days before closing.
- The buyer brings a cashier’s check or wires the closing costs to the title company at closing.
The buyer pays most financing and title-related closing costs, while the builder pays for construction and sale costs. But the division is negotiable, and builder incentives may reduce the buyer’s out-of-pocket expenses.
Can you negotiate who to pay the closing cost in buyer or seller market?
It’s possible to negotiate who pays closing costs in both buyer and seller markets, though leverage differs:
In a buyer’s market:
- Buyers have more sway to request seller concessions to cover all or part of closing costs because there is lower demand.
- Sellers may be more willing to contribute in order to entice buyers and close a sale.
- Buyers can negotiate closing costs along with repairs and other terms since sellers have less negotiating power.
In a seller’s market:
- Buyers have less influence but can still try negotiating for seller assists. Highlighting benefits may persuade sellers.
- Sellers have more power to refuse concessions, but some may compromise to rapidly close a sale.
- Buyers can offer concessions like waiving contingencies in exchange for seller paying closing costs.
- First-time homebuyer status or using preferred lenders may incentivize seller contribution.
The strength of negotiation position differs between markets, but win-win compromises can be found in both. Smart negotiating tactics increase the chance of securing seller assistance with costs.
Should you consider the closing cost when pricing a home for sale?
Considering closing costs in pricing strategy, not just commission splits, allows more informed sale pricing to achieve net goals. Both buyer and seller costs should shape listing decisions.
It’s recommended for sellers to consider closing costs when pricing a home for sale.
A few key reasons:
- If you price too low, you may not net your minimum target after closing costs are deducted. Planning ahead prevents this.
- Itemizing estimated closing costs helps develop a pricing strategy to comfortably achieve net proceeds goals.
- The higher the sale price, the larger your dollar contribution to both buyer and seller closing costs based on percentages.
- If you need proceeds to fund your next home, factoring in closing costs ensures you have enough leftover.
- When pricing competitively, you can build in room to offer buyer closing cost assistance as a negotiation concession.
- Disclosing expected closing costs in the listing helps align buyer expectations on total outlays.
- Awareness of closing costs helps you weigh pricing vs. time-on-market tradeoffs to net your target.
Should you consider the closing cost when pricing a home for sale?
Considering closing costs in pricing strategy, not just commission splits, allows more informed sale pricing to achieve net goals. Both buyer and seller costs should shape listing decisions.
It’s recommended for sellers to consider closing costs when pricing a home for sale.
A few key reasons:
- If you price too low, you may not net your minimum target after closing costs are deducted. Planning ahead prevents this.
- Itemizing estimated closing costs helps develop a pricing strategy to comfortably achieve net proceeds goals.
- The higher the sale price, the larger your dollar contribution to both buyer and seller closing costs based on percentages.
- If you need proceeds to fund your next home, factoring in closing costs ensures you have enough leftover.
- When pricing competitively, you can build in room to offer buyer closing cost assistance as a negotiation concession.
- Disclosing expected closing costs in the listing helps align buyer expectations on total outlays.
- Awareness of closing costs helps you weigh pricing vs. time-on-market tradeoffs to net your target.
Can you negotiate the closing costs on an overpriced home?
Justifying seller contributions due to an overpriced home being your only rationale for still buying it can help negotiate closing cost assistance. But be ready to compromise further or walk away.
You can negotiate closing costs when an home is overpriced, but have less leverage as the buyer:
- Request the seller pays a fixed dollar amount toward your closing costs in the offer, not a percentage. Start high, expecting counteroffers.
- Point out the home is overpriced per the appraisal, justifying the need for seller subsidies to complete the deal.
- Offer to increase the purchase price if the seller covers more of your closing costs to offset their concession.
- Promote waiving contingencies like inspections to incentivize the seller to cover costs.
- If they really need or want to sell quickly, emphasize you canclose fast if they assist with closing costs.
- Request closing credits for any repairs or upgrades needed that led to the high list price.
Should you mention and include closing cost in the sale agreement?
Yes, it is recommended to specify how closing costs will be covered in the real estate purchase agreement.
Reasons to detail closing costs in the contract:
- It locks in agreed upon seller contributions, preventing later disputes.
- The contract should reflect any negotiated closing credits for repairs required.
- Clarifying the split of recurring costs like HOA fees prevents confusion.
- It creates a paper trail if any deviations from standard practices are agreed upon.
- Discrepancies in closing cost estimates can be addressed before signing.
- It ensures a clear understanding, especially when parties don’t share a common first language.
- Contingencies like appraisal gaps influencing seller covers should be documented.
Specifying cost expectations upfront aligns both parties and avoids unpleasant surprises. Both sellers and buyers benefit from clearly defining closing cost responsibilities in writing.
For example, a home seller could specify in the purchase contract they will contribute $5,000 toward the buyer’s closing costs. This commits the seller to providing a closing credit.
To achieve the best outcome, the buyer should negotiate the highest dollar amount the seller will reasonably accept and specify that as a firm contribution amount rather than a percentage.
This locks in the maximum funds from the seller. Including the $5,000 closing cost credit in the initial contract prevents later disagreements and clearly sets expectations upfront for both parties on the transaction costs.
Defining seller closing cost contributions in the real estate sales agreement creates clarity for both buyers and sellers on the out-of-pocket expenses to expect at closing.
Specifying dollar amounts rather than percentages will maximize the seller assistance that buyers receive.
Clauses for Closing Cost Exceptions
You can include a clause in the purchase agreement specifying who will pay closing costs.
The clause should outline the specific reasons warranting seller assistance. Common exceptions would be buyer negotiation tactics, market conditions favoring buyers, or loan qualification needs. This clause legally obligates the seller.
Here are some sample clauses to outline exceptions to the traditional splitting of closing costs:
- Seller to pay up to $_______ toward buyer’s closing costs.
- Seller to pay the following buyer fees: origination, appraisal, credit report, title search, and recording fees.
- Buyer and seller to split title insurance premium and transfer taxes 50/50.
- If seller is providing closing cost credit, add: If buyer’s closing costs are less than amount provided, seller is not obligated to pay the difference.
- Seller to pay buyer’s first year of homeowner’s insurance premium in addition to other closing costs.
- Buyer to pay all lender-related fees. Seller to pay all title and deed recording fees.
- The seller agrees to credit the buyer $X toward closing costs due to home inspection findings requiring repairs.
- The seller agrees to pay 50% of buyer closing costs, not to exceed $Y, in exchange for waiving the appraisal contingency.
- Due to home price escalating to contract maximum, seller agrees to now pay $Z in buyer closing costs to facilitate sale.
- First-time homebuyer status entitles buyer to request seller payment of standard buyer closing fees.
- As part of seller’s VA loan compliance, they agree to credit buyer’s entire closing costs at closing.
- Due to home price being at the top of buyer’s preapproval, seller agrees to assist with closing costs to ensure loan ability.
The specific division of closing costs can be negotiated between the buyer and seller. It’s important to clearly outline who pays which fees in the purchase agreement to avoid confusion at closing.
Both parties should review final figures on the closing disclosure prior to closing.
When Closing Cost are Due
Closing costs are paid by the buyer and/or seller as part of the final steps when selling a house:
- Accepted Offer – Buyer and seller agree to terms including closing cost responsibilities.
- Inspections – Buyer completes inspections to identify issues.
- Mortgage Approved – Buyer secures financing if needed.
- Title Work – Attorney or title company handles title search and insurance.
- Down Payment – Buyer deposits down payment funds with escrow/title company.
- Final Walkthrough – Buyer inspects property before closing.
- Closing Costs Paid – Buyer and seller pay agreed upon closing fees and credits.
- Documents Signed – Legal documents like deed are signed transferring ownership.
- Keys Exchanged – Seller provides buyer with property keys upon closing.
Closing costs are paid in the final steps when buyer and seller funds exchange hands and ownership legally transfers. Both parties pay owed costs before completing the sale.
Disadvantages of seller paying closing costs
Disadvantages for the seller paying buyer closing costs include:
- Less net profit – Dollar amount contributed lowers the seller’s final proceeds from the sale.
- Tax implications – Seller-paid closing costs can be taxed if not structured properly.
- Reduced negotiation power – Offering credits weakens the seller’s bargaining position on other terms.
- Delays closing – Waiting on renegotiation of credits can stall the closing date.
- More out of pocket – Seller may have their own closing costs to pay on top of buyer credits.
- Sets precedent for future buyers – Next potential buyers may expect credits as well.
- Questionable return – Credits don’t necessarily guarantee the buyer will close or refer future business.
- Indicates overpricing – Buyers expect closing credits for an overpriced home needing reduction.
While credits can incentivize buyers, significant disadvantages like less profit, higher taxes, and reduced leverage lead many sellers to avoid paying buyer costs if possible.
Do closing costs include realtor fees
Closing costs usually refer to the fees and expenses paid at the closing of a real estate transaction separate from the purchase price of the property. These can include loan origination fees, appraisal fees, title searches, title insurance, surveys, taxes, deed recording fees, and credit report charges.
Realtor fees, also known as commission, are the payments made to the real estate agents for their services. They are typically a percentage of the sale price of the home and are paid by the seller, not the buyer. However, these fees can indirectly affect the buyer as they are built into the price of the home.
The commission is usually split between the buyer’s agent and the seller’s agent and is paid out of the seller’s proceeds at the time of closing. So while they are paid at closing, they are not usually considered part of the buyer’s closing costs.
However, all terms are subject to negotiation, and there may be situations where the buyer agrees to cover a portion of this fee, but this would be less common and clearly outlined in the purchase agreement.
What is Good Faith Estimate and its relation to closing costs?
The Good Faith Estimate (GFE) is a disclosure required by the Real Estate Settlement Procedures Act (RESPA) to provide an estimate of closing costs to mortgage borrowers. Here is how it relates to closing costs:
- The GFE must be provided to mortgage applicants by lenders within 3 business days of applying.
- It itemizes all expected closing costs associated with the loan, including origination fees, appraisal, title insurance, taxes, etc.
- The GFE provides a close estimate that the actual closing costs cannot legally exceed by more than 10% in most cases.
- If closing costs end up substantially higher, the borrower has grounds to contest the charges.
- The closing agent is also required to provide a revised GFE within 3 days if the costs change by more than 10% due to valid circumstances.
- The estimate gives borrowers the chance to assess and understand costs before committing to the transaction.
- Borrowers can use the GFE to compare closing costs between multiple lenders and negotiate them.
Real Estate Settlement Procedures Act (RESPA) is a federal law that provides protections for homebuyers around the real estate settlement process, which includes closing and paying closing costs.
- One aim of RESPA is to ensure that buyers receive disclosures about the nature and costs of the real estate settlement process from their lender and closing agent.
- It requires the closing agent to provide the buyer with a Good Faith Estimate (GFE) of closing costs within 3 days of applying for a mortgage.
- RESPA limits how much closing costs can increase from the GFE to closing and lets buyers negotiate changes exceeding legal tolerances.
- RESPA also created the standard HUD-1 settlement statement document that itemizes all closing costs paid by the buyer and seller.
- Violations of RESPA’s closing cost disclosure rules can lead to lawsuits and penalties against lenders and agents.
RESPA creates consumer protections around transparency and accuracy of closing costs disclosures provided to home buyers. It aims to eliminate surprises about the costs buyers will pay at settlement.
