Crash Course on Closing Costs

closing costsHere’s your crash course on closing costs, whether you are the buyer or the seller in a real estate transaction. You’re about to discover just exactly what the various closing costs are, how you may be able to save money on some of them as well as how to individually calculate each one. Also, referenced in this training is a Free Closing Cost Calculator that you can use over and over again to quickly and easily calculate the closing costs for your particular situation. This video is jammed packed with helpful tips so that you can structure better deals, save more money and have a greater level of control over those pesky expenses that seem to pop at a closing. Here is your crash course on closing costs:

 

Title Insurance

 

Title insurance acts as a guarantee that the buyer will own the property free and clear of any liens and encumbrances. It also insures that no one can lay claim to the title of the property once the new buyer becomes the owner. Title insurance is handled at a state level, so there is no need to shop around for the best deal. Every insurance company in your state will follow the same specific numbers.

 

Example

 

I have an apprentice who followed my training, and picked up a great deal for $70,000. He’s planning on putting $30,000 worth of rehab into the property, which will bring his total cost to $100,000. The house is expected to appraise at $175,000 conservatively, which brings his potential earnings to $75,000.

A week after closing on this deal, my apprentice received a phone call from an attorney who was representing the mother of the previous seller. The attorney informed him that the seller had signed over a quick claim deed to her mother five years ago which means that the property was hers, even though the deed was never recorded. She was then insisting that she owned the property, and that he needed to give it back to her.

My apprentice’s title insurance company reached out to the attorney and said, ” Michigan state law provides that if a deed has been recorded, that supersedes any pocket deed that’s not recorded, so our client is in fact the rightful owner.” The title insurance protected my student, which protected his $75,000 in profit.

 

Cost

 

Title insurance is based on sales price and varies by each state. For Example, Florida charges $5.75 per thousand; so you multiply the sales price by .00575, which is a little more than half a percent. In Florida, the cost goes down to $5 per thousand if the sales price is $100,000 or more. This means that if the sales price on a property is $100,000, then the title insurance cost would be $500. Likewise a $200,000 sales price would yield a $1,000 title insurance bill.

You can Google to research what the exact number is in your state, and use the Excel spreadsheet on the Closing Costs Calculator to calculate it into your purchase costs. In Florida it is customary for the seller to pay the title insurance fee, but most other states require the buyer to pay for it, since it technically benefit the buyer.

 

Title Search
In order to obtain a title insurance policy, the title company will have to do a title search on the property to see what’s against the title. This is an extra fee of up to $200 that needs to be added to the Closing cost calculation.

 

Deed Recording Tax

 

The deed is what transfers the title, and when it is recorded at the recorder’s office, a tax is charged based on the sales price of the property. In my county, it’s $7 per thousand, or .007%. This tax is based solely on what the deed shows as the sales price and there is no way to get around it. The only way to save money on title insurance is if you bought a property as an investor and are reselling it a year or two later. If this is the case, you can provide the previous title policy and that basically becomes a credit or discount towards the new title insurance.

In my program, I teach my apprentices how to close deals without title insurance, by using a quick claim deed to transfer a title without having to pay the heavy-duty deed recording tax. If you are in the state of Tennessee, they have a consideration at the top of their deeds, that says whatever the sales price is or the value, whichever is greater. This means that a house-flipper can purchase a property for way below market value, but put the actual value on the consideration on the recording of the deed. They might have to pay more in recording taxes but the key is that on public record it will look like they paid more for the property then they actually did.

So, if my apprentice paid $70,000 for a property in Tennessee, that values at $130,000, he can pay the recording tax on that $130,000 put in the $30,000 worth of rehab and when he sells it for $175,000 it doesn’t look like he made any real money on the deal. This is a very powerful tool in the house flipping world because the buyer has no idea how much you paid and they think they are getting a great deal.

The recording deed will typically be a buyer expense because the buyer is the one that benefits from the recording of the deed, since they are the ones that the title is being transferred to. However, it varies from state to state, and in Florida, it’s “customary” for the seller to pay it.

 

Property Insurance

 

This closing cost is something that is going to depend on what you are using your property for.

 

  • Standard Policy: When you are moving in and the property will be owner-occupied
  • Landlord Policy: When a property is being purchased as a rental property.
  • Vacant Policy: If the property requires minor fix ups.
  • Builder’s Risk Policy: A property that will need major rehab.

 

Property insurance cost will vary depending on which of these policy categories you fall into and is typically a buyer expense. You can try to get the seller to pay for these expenses, but property insurance, is usually paid for by the buyer, because they’re the ones getting insurance on the property.

 

Closing Management Fees

 

Closing Management fees includes anything from document preparation fees, to attorney fees. Some states require an attorney to do the closing so there will be additional fees for their services. California requires a closing company. Title company, and escrow company, which can rack up the closing costs.I have a great relationship with my closing company, and they cut these fees way down, because they make a lot of money when they get the title insurance policy that they sell, so they get a piece of that number right there. You can save money by making sure you have built a good relationship with the closing company. You should also reach out to three or four different closing companies and ask for their closing schedule of fees, to find the best deal.

There are many closing companies out there but expect to pay more when there are attorneys involved. If you are in a state where you can choose either a title company or an attorney, go with the title company, because you’ll save money. I also have a great video about saving money on property insurance by making sure you talk to several different insurance brokers to find the best deal.

 

Real Estate Commissions

 

Real estate commissions are primarily paid for by the seller, but, you can save a lot of money here. You don’t have to pay 6% as the seller. If you do a “Flat Fee Listing” 3% goes to the buyer’s agent but instead of paying the other 3% you only have to pay a flat fee of a few hundred dollars. The only way to pull this off is if you know a thing or two about real estate, and selling houses. I have a great video on how to make sure you sell a house fast called “The Kiss of Death when Selling a House”.

Real estate commissions can be really expensive if you have to pay that 6%. Some people will even try to eliminate the other 3% buyer’s agent fee by attempting to find a buyer themselves. After over 15 years of testing this, I can say with an almost 100% level of certainty that in most cases, if you put a property on the market and expose it to the entire potential buying pool, you will make more money because you had so many potential buyers looking at it, and can even end up in a multiple offer situation, where interested parties will bid the price up. You net more by accepting that 3% fee then if you try to cut out agents on the buyer’s side to try to find your own deals.

Most successful real estate agents make their money by being listing agents, because once they get the listing and stick it on the MLS for a low price, it’s easy to sell. The toughest part is getting the listing, which is why paying $300 for a flat free agent to get the listing on the MLS is a smart route. Then the buyer’s agent shows the property, and collects their 3% commission.

 

Pro-Rations

 

Pro-Rations are things like taxes that have been accruing throughout the year. Usually, you pay your property taxes at the end of the year, and so, as a seller, you’re going to be pro-rating those taxes that you haven’t paid yet that are going to be paid. If you were to pay property taxes in November, and then someone buys the house in December there’s going to be the opposite pro-ration where the buyer ends up pro-rating back to you.

Another example of pro-ration would be any oil in a furnace or propane gas in a propane tank. These items may be pro-rated because you, as the buyer, are going to be paying for the oil or gas that might be in those tanks that you are basically getting as a part of the purchase, unless, of course, you include in the contract that the seller is giving those to you for free.

 

Loan Fees

 

If you’re getting a loan on a property, you have just introduced yourself to a whole slew of new costs that can get very expensive. If you are applying for a loan. The lender will provide you with an outline of these fees called a “Truth in Lending statement” You can try to save money on loan fees by shopping around for the best deal. Great credit, money in the bank, and a great relationship with the bank can help lower these fees, but there is no way to eliminate them. If you are a novice, and you have bad credit, loan fees can get very expensive.

 

Closing Costs Calculator

 

If you want to know what the closing costs are going to be on your deal, just click here to get access to my closing costs calculator, it’s an Excel file, and you can edit it and adjust it, and that actually takes you to a video to show you how to use it.

Comments

  1. RON TRUETT says:

    If you have a mortgage on a property and the bank wants to escrow taxes and insurance can’t you prepay them to get out of the escrows because you shouldn’t pay bills until they are due. Taxes paid in rear and insurance paid in advance but quarterly.

    • Phil Pustejovsky says:

      You typically either have to pay a higher interest rate or a larger down payment for the bank to allow you to opt out of your taxes and insurance being escrowed into the monthly loan payment. I ALWAYS opt out because I would rather keep my money throughout the year and then pay when the bill is due.

      • Per my question, can you supersede the bank in prepaying the bills either just before the closing or along the way making the escrow invalid .

  2. George Gandjoulov says:

    Complicated Phil, may be one learns that with experience?

  3. Thank you, sincerely, Ray …

  4. jeffrey doto says:

    Thanks for this video, alot to learn…all part of building a solid foundation !!!

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