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Investor Insights Blog|Be Prepared When Buying/Selling Property by Understanding Your Closing Costs

Real Estate

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

real estate closing costs

The following was written by guest blogger James P. Schlimmer of IRA Title Pro, an Equity Trust affiliate.

James Schlimmer
James P. Schlimmer

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 or using IRA Title Pro’s Closing Cost Calculator for a report.

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. Check out the closing costs calculator now to see what costs you can expect on buying or selling a property.

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. This closing costs calculator should be very helpful in giving sellers and buyers a close estimate of what they should expect.

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.

3. Property-specific and third-party fees

  • Survey – Mortgage lenders often require the title company to remove any survey exceptions from their lender’s title insurance policy. For the title company to remove these exceptions, they need to review a survey. A property survey will determine if the land has any defects, encroachments, or easements that will prevent a buyer from making future changes. It will also confirm that the parcel size is accurate. Homeowners who want to make improvements such as adding a fence or pool should always get a survey to know where property lines are.
  • Home inspection – A home inspection is highly recommended if purchasing a property because it offers buyers an opportunity to discover potential future issues within the home before closing. In case any serious concerns arise, buyers can cancel their contract to purchase the property. A home inspector will assess different parts of the house like the plumbing, foundation, roof, electrical systems, HVAC, and chimney. A report of all the findings from the inspection then gets submitted for the buyer and attorney to review.

Don’t be surprised at closing: discover your anticipated costs today

Both buyers and sellers can expect to pay closing costs on their investment properties. Being proactive in understanding these fees is imperative and calculating these costs will ensure you’re prepared to complete your transaction without any surprises. Take the initiative and get an accurate estimate on what you’ll pay at closing by using IRA Title Pro’s Closing Costs Calculator.

 

About James P. Schlimmer

James P. Schlimmer is the CEO of Equity Real Estate Services and the President of IRA Title Pro. Renowned as a pioneer in the real estate industry, Schlimmer has been paving the way for innovation in a field that has been stagnant and overly complicated for far too long. For nearly a decade, Schlimmer has worked diligently, assisting buyers and sellers by revolutionizing the closing process with a more modern, seamless approach.

About IRA Title Pro

IRA Title Pro is a real estate closing company specializing in IRA-funded transactions, providing a quick and seamless process compared to traditional closing companies that may not have the experience needed for a streamlined IRA real estate closing.

 

IRA Title Pro is powered by Investors United Title, who is an affiliate of Equity Trust Company through common ownership. Neither company is an agent of one another. Equity Trust Company is a directed custodian and makes no recommendations or representations as to IRA Title Pro and any information communicated by Equity Trust Company is for educational purposes only and should not be construed as tax, legal, or investment advice. Clients are in no way obligated to purchase services from IRA Title Pro and are free to purchase such services from any title company as they deem appropriate. No customer may rely on any statement made by Equity Trust or any of its officers, directors, employees, or agents for any decisions regarding the use of the service offered by IRA Title Pro. Whenever making a decision related to your account, please consult with your tax, financial, or legal professional.


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