Any real estate investor conducting a deal must be aware of any and all real estate closing costs that may apply to his/her purchase or sale.
These can include a wide variety of costs that many investors, beginner and experienced alike, can sometimes neglect or not notice, which might affect seriously the value or profitability of their deal.
Real Estate Closing Costs: What Are They?
Real estate closing costs are the costs that either a buyer, a seller, or both pay upon closing a home purchase deal. These can include a wide variety of costs such as your loan insurance, agent fees, or even record keeping fees.
Related: 11 Costs First Time Real Estate Investors Should Consider
It is important for any real estate investor looking to sell or purchase an investment property to keep all closing fees into consideration. Upon obtaining a loan, a real estate investor is advised to request an approximation of the closing fees that he/she will be required to pay to the lender upon closing the sale.
Real Estate Closing Costs: Selling a House
The biggest closing cost that a home seller would have to pay upon closing a sale on the property is the real estate agent’s commission. This commission typically ranges between 5% and 8% of the purchase price, which is a large sum that will be taken out of your sale profits.
Additionally, a home seller would also have to pay other expenses such as the new owner’s title insurance and the government transfer taxes. A title insurance, however, can be avoided if you’ve only owned the house for 3-5 years, as you will be able to request a reissue rate, which means that the buyer would have to pay for the lender’s title policy.
Related: The 6 Hidden Costs of Owning Rental Property
Lastly, a home purchase offer might include an offer to pay additional credit to the buyer upon closing the sale, which should also be taken into consideration when calculating your real estate closing costs.
Real Estate Closing Costs: Buying a House
A home buyer’s closing costs will depend on the individual sale and its conditions. As a buyer, you will have typically obtained a loan for the purchase of the property. Upon obtaining a loan, a number of closing costs should be added to your calculations, as lenders may require you to pay some or all of the following closing costs:
- The fee for acquiring a background credit report.
- Insurance escrow for homeowner’s insurance.
- Property tax escrow.
- Deed recording.
- Land survey.
- Notary fees.
- Prorations for your share of costs, such as utility bills and property taxes.
This list is by no means conclusive, and there are several other real estate closing costs and fees that may apply to your purchase.
Reminder: make sure to ask your lender for a closing costs report in order to have an estimate of the closing costs that will apply to you or that you might have to pay upon closing the deal.
Real Estate Closing Costs: Additional and Potential Costs
There are several other real estate closing costs that may or may not apply to your sale/purchase. As a real estate investor, you need to keep all possible closing costs in mind, and you should always allocate an amount of money to ensure that you will be able to pay all closing costs upon closing the deal.
Also, some of the closing costs that may arise upon closing a deal may be negotiated, reduced, or in some cases merged with other costs (such as a mortgage’s closing costs being merged into the mortgage, which may result in larger interest rates on the long run).
Some of these costs are:
Application Fee
This fee covers the lender’s costs for processing your application. Before you submit an application, it is advised to ask the lender how much the processing of the application is going to cost you. This fee may include the credit check for your credit score and/or an appraiser to estimate the value of the property.
Closing or Escrow Fee
This fee is paid to the title company or the attorney who has conducted the closing of the deal. An escrow is an independent party who oversees the closing of the home purchase, and some states require a real estate attorney to be present during the closing of any real estate deal.
Flood Determination
This fee is paid to a third party who determines whether or not the property is located in a flood zone. If the property is in fact located in a flood zone, then the buyer would need to pay a separate flood insurance fee.
Private Mortgage Insurance (PMI)
Private Mortgage Insurance is a fee that you may be required to pay if you’ve made a down payment on the loan that is less than 20% of the home’s purchase price. If the Private Mortgage Insurance applies to you, then you will typically need to pay the first month’s Private Mortgage Insurance payment upon closing the deal.
The list goes on and may include tens of other real estate closing costs, so make sure to consult a real estate expert or do a thorough research to be aware of all closing costs that may apply to your sale/purchase.
Related: Starting a Real Estate Business: What You Must Know
Bottom Line
Although we’d all like to enjoy the moment of closing a deal knowing that there aren’t any other costs that we need to worry about, the fact is that upon closing a deal you will have to worry about a number of closing costs that you might not have planned for or expected. This is why it is always advised to consult an expert or to do your research in order to determine any and all costs associated with any real estate deal that you conduct; whether it is a fee that you hadn’t expected upon obtaining a loan, or a fee that you’ve neglected and has come back to haunt you at your closing day, as a real estate investor you need to be prepared for any costs affecting or applying to your investment.
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