- This is important training on closing costs that is useful to both the purchaser and seller in a real estate deal. You will learn the different closing costs involved in real estate and how to save money on them. I have included a
- to help you calculate what each of these costs are.
Types of Closing Costs:
1. Title Insurance
The role of title insurance is to ensure that the buyer will purchase the property free of any liens or holds. It protects the buyer from claims on the property after the new buyer has become the owner. Title insurance is a state level closing cost so each insurance company in your state will have the same specific numbers.
I have an apprentice who found a great deal for $80,000. He expects to put approximately $20,000 worth of renovations into the property which brings his cost up to $100,000. The property is expected to sell for $180,000 conservatively, making his potential earnings $80,000.
A few days before closing this apprentice received a phone-call from an attorney representing the father of the previous seller. The attorney was claiming that the seller had signed over a speedy claim deed to her father three years ago. The attorney believed that this meant the the property belonged to the father even though the deed was never recorded.
My apprentice had his title insurance contact the attorney and let him know that Michigan state law states that a recorded deed supersedes any unrecorded deeds. The title insurance protected the apprentice and instated him as the rightful owner. $75,000 in profit.
Title insurance is based on sales cost and is different in every state. Florida chanrges $5.75 per thousand so you multiply the sales cost by .000575. and varies by each state. For Example, Florida charges $5.75 per thousand; so you duplicate the sales cost by .00575. This cost goes down to $5 per thousand if the sales cost is $100,000 or more. If the sales cost on a house is $100,000, then the title insurance cost is $500.
You can easily use Google to find out what the title insurance cost is in your state and who is required to pay it. In Florida the seller pays the title insurance fee, but most states require the buyer to pay for it.
- Title Search
A title search is used by the title company, to search for any liens or holds against the property. This is an additional $200 you will need to calculate into your closing cost estimate.
2. Deed Recording Tax
The deed is what transfers the title. It is done in a recording office where a tax is charged based on what the deed shows the house sold for. In my county it costs $7 per thousand or .0007%.
I teach my apprentices how to close deals without title insurance, by using a quick claim deed to transfer a title without paying the a large deed recording tax. The state of Tennessee has a consideration that allow you to put either the sales price or value on the deed, whichever is greater. This means a house-flipper can purchase a property for under market-value, but put the true value on the deed. This means paying a higher recording tax, but makes it appear as if they paid more for the property on the open record.
So if an apprentice purchased a property in Tennessee for $100,000 that was really worth $150,000, he can pay the recording tax on $150,000. If he put in $30,000 worth of renovations and list the property for $$190,000 without looking like he profited a great amount from the deal, even though he really did.
This is an effective tool in the house flipping world because the buyer thinks the value is the amount you paid and that they are getting an incredible deal.The recording deed is typically a buyer expense because the buyer is the ones that the title is being transferred to. The cost varies from state to state and some states even list it as a seller expense.
3. Property Insurance
This closing cost depends on what type of property purchase you are making.
- Standard Policy: When you are moving in and the property will be owner-possessed
- Landlord Policy: When a property is being purchased as an investment property.
- Vacant Policy: If the property is being purchased with vacancies and some renovations needed
- Builder’s Risk Policy: A property that will require major renovations.
Property insurance cost will fluctuate depending on the type of policy category you fall into. It is typically a buyer expense because they are the ones establishing property insurance on the home.
4. Closing Management Fees
Closing Management fees include document arrangement fees, attorney fees, and sometimes attorney or closing company fees. I have a great relationship with my closing company, and they help me keep these fees down because they profit when I obtain the title insurance policy that they sell. You can save money by developing a great relationship with your closing company. You can research the best closing companies in your area to find the best deal.
If you are in a state that allows you to choose a title company or an attorney, choose the title company, because you’ll save money. I also have an incredible blog about saving money on property insurance by researching insurance brokers to find the best deal.
5. Real Estate Commissions
These fees are essentially paid for by the seller, but you can save a lot of money in this department. You do not have to pay 6% as the seller. You can do a “Flat Fee Listing” where 3% goes to the buyer’s agent but instead of paying the other 3% you can pay a flat fee of a few hundred dollars. I have a great video on how to sell a house fast called “The Kiss of Death when Selling a House”.
Real estate commissions can be expensive if you have to pay 6%. Some individuals will even try to remove the 3% buyer’s agent fee by locating t a buyer themselves. I can say with an almost 100% level of certainty that exposing a property to the potential purchasing pool will often get you a large amount of potential buyers looking at your property. If you end up with a lot of interest you can even end up in a bid up of the purchase price by multiple offers You could net more by utilizing that that 3% buyer fee then you would if you attempt to locate your own deals.
Most successful real estate agents profit by being listing agents, because once they get the listing and stick it on the MLS , it’s easy to sell. The toughest part is getting the listing, which is the reason paying $300 for a flat free agent to get the listing on the MLS is a smart decision. At that point the buyer’s agent shows the property, and collects their 3% commission.
Pro-Rations are taxes that have been accumulating consistently. Usually, you pay your property taxes toward the end of the year, so these fees are pro-rationed based on when you purchased the property. If there is oil and gas in a heater or propane tank the seller might request it to be pro-rationed into the purchase price.
7. Credit Fees
If you are getting a loan on a property you will acquire lots of new costs and expenses. If you are applying for an advance the moneylender will provide you with an outline of these fees called a “Truth in Lending Statement” You can attempt to save cash on credit fees by shopping around for the best deal. Awesome credit, cash in the bank, and a great relationship with the bank can help bring down these fees, however there is no real way to dispose of them.
Closing Costs Calculator
To determine the closing costs on your deal, you can access my closing costs calculator. It’s an Excel document that can be altered and adjusted. There is also a video to show you how to use it.