How to Estimate the Costs of a Property Sale or Purchase – HomeUnion

How to Estimate the Costs of a Property Sale or Purchase

Closing costs are generally 5% of the sale price if you’re the buyer and 10% if you’re the seller. You’ll want to keep closing costs in mind since you’ll be encountering a lot of closings if you’re trying to scale your investment portfolio or making use of any real estate investment strategies other than buying and holding. Let’s breakdown where your money will be going so you know how to budget appropriately. 

Lender’s fees

Your lender may, for example, charge an origination fee to close your loan. It could be one or more percent of the loan amount. Each percent is called s point. So, a loan of $400,00 with a point to originate would mean $4,000 tacked onto the closing cost. Some loans fold the fee into the interest rate instead of charging it outright. You may also be charged a small processing fee at closing of $100 or less.  

Property Taxes and Utilities

Usually, if you’re financing your property with a mortgage, then you’ll have to pay some or all of the first year’s property taxes. This amount will be put into escrow by the mortgage lender and paid later. In some states and municipalities, the water bill is contiguous with the property, so the title agent or attorney will close it and pay it before it can be transferred to the new owner. You will, of course, have to cover that expense. 

Real Estate Agent Commissions

Generally, commissions are around 5 to 6% of the closing sale price. Commissions may vary based on the region and on how in-demand realtors are in the market. The seller usually pays their commissions to their agent, who splits the commission with the buyer’s agent. 

There are ways to get around paying a real estate agent commission. Online real estate markets usually charge just 1%. And in a hot enough market or with the right network, a seller might not even need a real estate agent, although a seller may still have to pay the buyer’s agent 2 to 3% if they helped close the deal.

Recordation and Transfer Taxes

Recordation and transfer taxes are fees paid to your state, county, and/or town to document transactions. These fees can be estimated online using free calculators provided by title companies or by calling a title company. You can also look up the transfer tax rates and do the math yourself. Usually, the tax is a set amount or percentage that applies to particular thresholds. 

In California, for example, one pays the same rate in all counties, which is currently $1.10 for $1,000 or $0.55 per $500. That means if your home sells for $500,000, you pay $550 in taxes. In some states, the taxes are charged to both a buyer and a seller, while in others, a single charge is split between both parties. In some cases, exemptions or reductions are available to first-time homebuyers. 

According to the IRS, property transfer taxes can be deducted from your overall capital gain but not from your income tax return. If you're the seller and it falls on you to pay the transfer taxes, then remember that you may be paying your transfer taxes and your capital gains taxes at different times of the year. That's because the federal government receives capital gains taxes while the state gets transfer taxes. 

Title Fees

A title search entails a title agency or attorney scouring local land records to make sure all liens, mortgages, or other claims to the property are resolved before the closing. Title fees cover the cost of the title agent’s or attorney’s title search, the recording of the documents once they’re signed, and all associated needs. 

Depending on the market, the title search could cost between a few hundred dollars to over $1,000. Whether it’s the buyer or seller who chooses the title company varies from state to state. 

Title Insurance

Title insurance protects both buyers and lenders from any damages caused by title defects that weren’t caught by the title lien search conducted before the transfer of ownership. While uncommon, sometimes a title defect does slip through the cracks. 

The cost of title insurance depends on the state, property value, and loan amount but is usually around $1,000 for buyers. Some states have fixed premiums while others do not. The professional conducting your title search can likely recommend insurance policies to you. 

Lenders tend to stipulate that property buyers must pay for their own title insurance. This cost would be included in the closing disclosure. A lender’s policy tends to be less since the cost of insurance goes down the more of the mortgage is paid off.

Other Fees

  • Appraisal fee: This covers the cost of having an appraiser determine the property’s value.
  • Application fee: This fee covers the cost of applying for the loan. It typically covers the credit check or appraisal. This fee is sometimes negotiable, so you should ask what it entails.
  • Attorney Fee: This covers the cost of having an attorney look over the closing documents, although this isn’t always necessary. 
  • Courier Fee: This covers the cost of transporting your loan documents.
  • Discount Fees: While not always available, a discount fee is when you make some payments upfront to have a lower interest rate. 
  • Home Inspection: An inspection determines the condition of your potential investment and what repairs, if any, are necessary. You can use the results to bargain down the price. 
  • Pest Inspection Fee: In some states and for government loans, a pest inspection is required because of how costly termites and dry rot can be. Even if not required, a pest inspection is a good idea. 
  • Private Mortgage Insurance (PMI): For loans where the down payment is under 20%, PMI may be required. You’ll make the first month’s PMI payment at closing if it’s needed.

Closing Disclosure, Good Faith Estimates, & Truth-in-Lending Disclosures

There are some documents you should expect from your lender. 

  • Closing Disclosure: This is a five-page document you'll get at least three days before your closing. It contains final information about your loan. 
    • Loan terms 
    • Projected monthly payments 
    • Closing costs
  • Good Faith Estimate(GFE): A GFE provides you with information about the loan so that you can make an informed decision. You’ll get it within three business days of the lender getting your application and any relevant information. You can be charged for a credit report fee and nothing else before getting your GFE, at which point you must grant your lender permission to continue with the loan.
  • Truth-in-Lending Act (TILA) Disclosure: This also provides you with loan cost information so you can adequately shop for loans. You won't always get a GFE or Loan Estimate, but you should expect a TILA disclosure. 

Are Mortgage Closing Costs Tax Deductible?

Only home mortgage interest and some real estate taxes are deductible. When the time comes to itemize your deduction, deduct whatever is eligible. Some closing costs are instead to your home’s “cost basis”, which is your home’s original purchase price, so they may offset some taxes down the line. 

Can Closing Costs Be Included in a Mortgage? 

Yes, you can often add the cost of your closing to your mortgage, which is good news considering that closing costs may be a barrier to entry. Rolling your closing costs into your mortgage is also useful if you plan to sell your home sooner rather than later or intend to refinance. This is particularly useful if you’re practicing the buy, rehab, rent, refinance, repeat (BRRR) method. Alternatively, rolling your closing costs into your mortgage is known as a no-closing-cost mortgage. 

Other Considerations

When purchasing your investment property, remember that you’ll be paying more than interest, taxes, and a closing. 

Bottom Line

The costs of closing should not be the undoing of your investment strategies.  Some or all lender fees, for example, may be negotiable. Your research should inform how you budget since the average amounts may not be how much you end up paying. Not every buyer pays 5%, and not every seller pays 10%. As an investor, it’s your responsibility to conduct due diligence so you can improve your return on investment. That includes weighing the pros and cons of a no-closing-fee-mortgage.

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