Here'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 acts as a guarantee that the buyer will own the property free and clear of any liens and encumbrances. It 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 look around for the best deal. Every insurance company in your state will follow the same specific numbers.
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 for $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. She was insisting that the property was hers, even though the deed was never recorded.
My apprentice’s title insurance company reached out to the attorney and said, " Michigan state law states that if a deed has been recorded, it supersedes any pocket deed that's not recorded." This means that our client is in fact the rightful owner." The title insurance protected my student, which protected his $75,000 profit.
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, 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 You can also 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.
In order to obtain a title insurance policy, the title company has 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 it is recorded at the recorder's office. There is a tax charged for recording the deed and it is 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. . The only way to save money on title insurance is if you bought a property as an investor and are reselling it a few years later. In thatcase, you can provide the previous title policy which basically becomes a credit or discount towards the new title insurance.
Quick Claim Deed
In my program, I teach my apprentices how to close deals without title insurance. We use 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 either the sales price 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, and put in the $30,000 worth of rehab. When he sells it for $175,000 it won't look like he made any real money on the deal. This is a powerful tool in the house flipping world because the buyer has no idea how much you paid.
The recording deed is typically a buyer expense since the title is being transferred to the buyer. However, it varies from state to state, and in Florida, it's "customary" for the seller to pay it.
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 is typically a buyer expense and will vary depending on your policy category. 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. I have a great relationship with my closing company, so they cut these fees way down. They make a lot of money when they get the title insurance policy that they sell. You can save money by making sure you have built a good relationship with the closing company. You can locate the best deal by contacting a few closing companies and asking for their closing schedule of fees.
There are many closing companies out there but expect to pay more when there are attorneys involved. If you can choose either a title company or attorney, go with the title company, because you'll save money. I have a video about saving money on property insurance by talking to several different insurance brokers to find the best deal.
Real Estate Commissions
Real estate commissions are primarily paid for by the seller. You don't have to pay 6% as the seller if you do a “Flat Fee Listing”. The 3% will go to the buyer’s agent but you would 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. Placing a property on the market exposes it to the entire potential buying pool, which can increase your earnings. When you have a lot of potential buyers looking you can even end up in a multiple offer situation. You net more by accepting that 3% fee than you would trying to cut out agents on the buyer's side.
Most successful real estate agents make their money by being listing agents. 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 are things like taxes that have been accruing throughout the year. Usually, you pay your property taxes at the end of the year, so, as a seller, you're going to be pro-rating those unpaid taxes.If you were to pay property taxes in November, and 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 are pro-rated because the buyer, pays for the oil or gas in the tanks as part of the purchase. That is unless, of course, you include in the contract that the seller is giving those to you for free.
If you're applying for a loan on a property, there are a lot of costs that can get very expensive. If you are applying for a loan. The lender will provide you with an outline of 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
You can determine your deal's closing costs by clicking here for access to my closing costs calculator. It's an Excel file, and you can edit and adjust it, after watching a video tutorial located at that link.