Thursday, July 14, 2011

When Buying Property Don't Pay Closing Costs

Just when you thought you have enough money to buy an investment property you learn about the closing costs you have to pay at the closing date.

These costs can be substantial:

1) Title insurance for the lender and the owner can add up to almost $2,000;
2)  Transfer Taxes (yes -- local governments tax you for merely buying property) vary but can be 1-2% of the purchase price;
3)  There is a government recording charge of $100 to record the required documents at the registry of deeds;
4)  A House location survey of $275;
5)  Termite inspection of $35
6)  Loan origination fees and appraisal fees can total close to $840.

The average title, insurance, and lending charges at closing in Virginia is $3,000

Your transfer taxes and recording fees can add up to several thousand dollars more.

In addition, you need to prepay a number of things for the lender including a mortgage insurance premium if you are required to carry mortgage insurance, homeowner's insurance, property taxes, and homeowner's association or condo association fees if there are any.

The bottom line is that you have to bring a lot more cash than you are expecting to closing to pay all of these costs.  It can be a real barrier to buying a property.  So one way to minimize this expense is to have the seller pay as many of these closing costs as you can convince them to.  When you are negotiating the seller down from their listing price ask them to pay the price reduction out of closing costs instead of actually reducing the purchase price.  This is because you have to bring cash for the closing costs and a higher purchase price just means a slightly higher monthly payment on your mortgage.  You won't really notice the higher mortgage payment but you will definitely notice giving up thousands of dollars at closing.  So avoid it at all costs.

2 comments:

  1. In addition, unexpected closing costs can eat into any anticipated reserve fund. What are your thoughts regarding factoring the closing costs into the investment pro forma?

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  2. Charley - this is a great point. You definitely want to include those in the pro forma and a lot of people don't realize how much they can be. If you can shift as many of the closing costs to the seller the better. Otherwise you can get caught pretty short on cash just as you are getting started.

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