Be Prepared When Buying/Selling Property by Understanding Your Closing Costs

The following was written by guest blogger James P. Schlimmer of Equity Real Estate Services, an Equity Trust affiliate.

If you’re a buyer or seller of an investment property, you’re probably asking yourself, “What are closing costs and how much should I anticipate paying?” Closing costs are fees that are due at closing along with your down payment for services and other expenses to either secure your loan or finalize the sale of your property.

Factors that affect closing costs

The approximate closing costs for a buyer could fluctuate wildly based on how the buyer is going to pay for the investment property. If the buyer is paying cash, they should see minimal closing costs – especially if the purchase sales contract has the seller paying for the owner’s title insurance policy.

If the buyer is obtaining financing to acquire the property, they could see closing costs range from 2-6 percent of the investment property price; meaning if you purchase a home for $200,000, you can anticipate paying anywhere from $4,000 to $12,000 on top of your down payment to close.

A seller’s closing costs can also see quite the range, and this depends on whether or not the seller is working with a real estate broker. The typical broker commission is 6 percent of the purchase price, and that’s on top of the owner’s title insurance policy if that’s listed as a seller expense in the sales contract, as well as documentary stamp tax, deed transfer tax and any association dues tax payments that were not paid in advance but accrued during the time the seller owned the property.

Because closing costs can vary between each state, county, and municipality, it’s important to research the specific closing costs of your area to get precise numbers. This can mean talking to your local government or real estate broker for average fees.

Taking a deeper look into closing fees

The costs associated with closing on an investment property can be daunting, which is why it’s best to make sure you understand the expenses so you can be fully prepared to complete your transaction. Not only will closing costs vary based on purchase prices and services rendered, but they also differ from state to state. Some states require certain closing costs while others do not.

3 categories of closing costs for investors

While there are various fees and expenses to be paid at the closing of any investment property, these costs can be organized into three categories for easier understanding. A thorough examination of every tier and each process will help both buyers and sellers learn where their costs go.

1. Title/recording fees and transfer taxes

• Title search – An investigation into the details of the property title to ensure no one else has a claim to the property. This is typically performed by a title company or an attorney. They research every previous transfer and public records for any and all liens attached to this property.
• Title insurance – This insurance protects both the buyer and mortgage lender, if there is one, against any financial loss or title issues due to liens, disputes between prior owners over wills, clerical problems in courthouse documents, or fraudulent claims against the property or possible forged signatures. Costs fluctuates in each state and is usually based on the purchase price.
• Recording fees – These fees are charged by state and local agencies for registering a property’s transfer of ownership. There is a charge applied for every page of a deed, affidavit or mortgage recorded.
• Transfer/sales taxes – The city, county, or state’s tax on any change in ownership of real estate. Many states do not have a state income tax. One of the major ways these states generate revenue is through taxing real estate transactions. These transfer taxes are usually based on the purchase price of the sale or the loan amount. Every state, county, and municipality has its own calculations for transfer taxes.

2. Prepaid and escrow

• Prepaid days of interest – These charges are for any daily interest that accrues on your loan between the date you close on your mortgage loan and the period covered by your first monthly mortgage payment. This is why closing at the end of the month is best for home buyers.
• Prepaid taxes – The seller has to pay for taxes they owe while owning the house, and the buyers will have to pay for the taxes for the rest of the year after they close. Lenders require buyers to prepay for property taxes from the escrow account. This will vary based on what month of the year the home is purchased and sold.
• Initial escrow deposit – This deposit is made by the buyer as a sign of good faith when purchasing a home. The buyer’s escrow deposit is usually held by the listing or selling real estate brokerage, title company, or attorney and will be applied towards the buyer’s closing costs.