When buying an investment property, a real estate investor will typically have to go through a thorough procedure. The procedure includes finding a real estate agent, handling the mortgage, performing investment property analysis and finding a property, and finally closing on the deal. Today, we are tackling the closing fees that both the seller and buyer are indebted to pay when closing on a deal. Who pays closing costs in a real estate transaction? Is the property buyer the one who pays closing costs? Or does the property seller also share some of these costs?
Before we answer the question of who pays closing costs, let’s define what these fees are.
What Are Closing Costs?
To complete real estate transactions, there are taxes and fees that both the property buyer and seller have to pay over and above the price of the investment property- these are called closing costs. Generally, closing costs are outlined by the lender in a “good faith estimate” within three days of a home loan application.
Closing Costs Breakdown
Below is a list of all closing costs incurred in real estate transactions:
- Appraisal Fee: A home appraisal will be performed to evaluate the true market value of an investment property. Usually, you have to get a home appraisal when you get a mortgage.
- Attorney Fee: When working with a lender, the lender might hire an attorney to look over all the documents to better facilitate the real estate transaction. Note that not all lenders use an attorney, and not all states even require one.
- Escrow Fee: An escrow fee or an earnest money deposit is required when a buyer accepts a home offer. This fee along with the down payment will be sent to an escrow company to hold in an escrow account until closing.
- Credit Report Fee: Some lenders will charge you a small fee of no more than $35 for pulling your credit report and scores.
- Discount Points: To lower your interest rate, you can pay some of the interest up-front using discount points. Each point is 1% of the loan amount and lowers your mortgage rate by 0.25%.
- Recording Fees: The recording fee is usually $15 per page for issuing and recording the deed.
- Transfer Fee: Some states require that a transfer fee is paid when a property is transferred from one owner to another.
- HOA Transfer Fee: Some homeowners associations charge a small fee for transferring the account to a new owner.
- Home Inspection Fee: When a property is mortgaged, a home inspection is required and the fee is charged to the borrower.
- Home Warranty Premiums: This is a fee paid to maintain the functionalities of the household systems or appliances for a set period of time.
- Title Insurance Premium: This insurance is required for both the buyer and the seller. Owners title insurance protects the lender in case any issue with the title arises. It also protects the borrower in the event that someone claims ownership.
- Title Search Fee: The title company will charge a fee for performing a title search to check the history of the deed.
- Underwriting Fee: Some mortgage companies charge a fee for organizing and preparing all of the loan documents.
- Lender’s Title Insurance: This is a payment of coverage to protect the lender from financial loss sustained from defects in a title to a property.
- Loan Origination Fee: The lender will charge a fee for processing and funding the loan. This fee ranges between 1%-2% of the purchase price.
- Pre-Paid Interest: When a real estate investor closes on an investment property, he/she is indebted to pay interest for the remaining days left in the month.
- Prorated Taxes: Prorated taxes are the share of the taxes that the seller pays at closing. These taxes are paid in arrears; the seller would give credit to the buyer for one-half of the taxes on the closing day.
- Real Estate Agent Commissions: If you are hiring a real estate agent to mediate the transaction process, then expect to pay a commission. The commission is often times based on the sale price of the property.
- Survey Fee: When buying a home, a survey will be performed to measure the property lines. This fee varies, but on average, it will cost around $300.
- Transfer Tax: This is a transaction fee imposed on the passing or transfer of the property title from one person to another.
- Recording of Transfer Fee: This is a fee paid when the deed is recorded in the county where the land is located.
Who Pays Closing Costs?
Now the debate concerns who pays closing costs. Actually, there are no predetermined costs that are entitled to each, the property seller and buyer. Closing costs, themselves, vary from one location to another, from mortgage lender to mortgage lender, and even from mortgage to mortgage. In fact, these costs can be determined by a number of factors. When a market is a seller’s market, for example, the real estate seller has an upper hand in negotiating and lifting off some of the closing costs incurred. So to fully understand the rules behind who pays closing costs, we must look at different factors impacting the real estate market. Bottom line is, both the buyer and the seller incur these costs, but the extent varies. Let’s explore these costs more.
The Typical Closing Fees for a Buyer
Closing fees for a buyer of an investment property are usually those related to the mortgage. The closing costs for a buyer include:
- Loan Origination Fees
- Recording Fees
- Underwriting Fees
- Mortgage Points (Discount Points on Interest Rates)
- Attorney Fees
- Credit Report Fees
- Home Inspection Fees
- Appraisal Fees
- Survey Fees
- Lender’s Title Insurance
- Title Search Fees
- Escrow Deposits
The Typical Closing Fees for a Seller
Below are the typical closing costs the seller will have to pay:
- Real Estate Agent Commissions (for both agents of the real estate seller and buyer)
- Title Insurance Premiums
- Transfer Taxes
- Recording of Transfer
- Prorated Taxes
- HOA Fees (if applicable)
- Home Warranty Premiums
Sure, the number of items that the buyer has to pay is larger, but the amount of fees that both the buyer and the seller end up paying are within the same range.
What Is a Seller Concession?
A seller concession is when a real estate seller agrees to pay some of the closing fees for the buyer. Good news for buyers! But why would a seller agree to pay more in closing fees? Well, when the market is a buyer’s market, the real estate buyer will have more leverage when asking for seller concession. This is because a buyer’s market tends to have a high inventory of investment properties and a low number of buyers. Thus, the real estate seller will be more likely to accept a lower return on investment in order to sell the property by accepting higher closing costs. As a real estate investor looking to buy a property, we recommend looking into a buyer’s market.
On the contrary, when the market is a seller’s market, the real estate buyer will have less leverage when asking for seller concession. A seller’s market is one where there is a low inventory of investment properties and a high number of buyers. Sellers will even charge higher for the property and demand lower closing fees.
If you are a real estate investor looking to buy a property today, we recommend that you study the real estate market within an area. Learn whether the market is a seller’s or buyer’s market and set your investment strategy accordingly. To find the best markets to invest in real estate and investment properties today, visit Mashvisor!
The answer to who typically pays closing costs is that it varies. However, closing fees can further be negotiated with the borrower and seller. Remember to assess the real estate market within your area and tailor your needs accordingly. If you are a beginner real estate investor looking to buy a property, we highly recommend looking into a buyer’s market as you can easily negotiate the closing fees and ask for seller concession. Make sure to study cogently the closing fees. You don’t want to incur unexpected or hidden costs which can be hefty and burdensome on the cash flows.