What Investors Must Know About Closing Costs in Property Deals

All real estate transactions have closing costs, including commercial real estate and investments. Through the closing process, there are many costs on top of your purchase price. Your closing costs will vary based on several factors. They are paid as the final step of your purchase. In general, the costs will be between 2% to 5% of the price of the property. Here we review the expected costs that you will pay, what closing costs are involved, and also whether the buyer or seller pays the closing costs.

Who Pays the Closing Costs?

When it comes to who will pay the closing costs, in most cases, the fees are shared. It boils down to who is more successful during the negotiation process. As a buyer, you can work with your real estate agent to ensure that both you and the seller pay as close to equal amounts as possible. Your agent will negotiate the deal that will work in your best interests, without chasing the seller away.

If it is a buyer’s market, you will more than likely have no issues negotiating a deal to split the closing costs with the seller. However, when it comes to a seller’s market, you lose your leverage during the negotiation process. With more interest in the property, the seller will be able to find other buyers as inventory is low.

What Closing Costs Should You Expect?

Although you are looking at paying between 2% to 5% of your purchase price, it is best to know what costs you will be looking at. Also, though some costs can be negotiated, some fees are always paid by the buyer.

Here is a list of the additional fees you can expect to see added onto your final costs:

Appraisal fee

An appraiser can ensure you either receive or pay the best price for a property. They will appraise the property based on the current market value. The fee for an appraisal will range from $300 to $600 for a single-family home. The fee will increase based on the square footage.

Mortgage application fee

Unless you are paying cash for your investment property, you will also have to pay a mortgage application fee. This fee is paid at the time of the application and is covered solely by the buyer.

Credit report fee

For a lender to find all the information that they need for your mortgage, they will have to do a tri-merge credit report. In some cases, your mortgage application fee will include this fee. If not, this will be an additional fee added to your costs. It provides the lender with your credit score and history.

Property taxes and insurance deposit

The owner is responsible for the closing costs related to property taxes and insurance. This is a one-time cost that will require at least 2 months of the mortgage insurance and property tax deposited at the time of closing.

Title search fee

A title search ensures that there are no questions as to the legitimacy of ownership at the time of purchase. The buyers in most cases cover this fee. This is also not something you wish to skip. Without it, others could have claims to the property.

Loan origination fee

This fee is 1% of the total borrowed amount.

Attorney fees

This fee is dependent on the state involved as some will require both parties in the transaction to have an attorney at the time of closing. They will ensure all is well and that there aren’t any legal challenges regarding the property.

Notary fee

A licensed notary public ensures all the necessary documents were signed. If the documents are signed at a title company or an escrow office, this will include notary services, and the fee can be waived.

Survey fee

The survey fee will depend on the initial contract. The survey will confirm the property lines and can range from about $800 to $1,000.

Courier fees

With all the documents going back and forth, there could be costs associated with couriers. Some of this sharing can be done electronically.

Hazard insurance premiums

This is paid for by the buyer. The insurance premium protects the lender from natural disasters.

These costs apply to all real estate transactions whether you are investing in it or buying it. In the case of a commercial investment property, you could also have additional costs such as property management fees. These fees will be ongoing.

It is in your best interest to work with an experienced investment real estate agent. They will ensure they negotiate on your behalf to minimize closing costs where they can. It is always a good idea to calculate the closing costs into the purchase price so that you have a more realistic final number.