True Cost

Posted on December 30, 2013 by

When you begin to learn about real estate investing you normally hear about the big picture of how to find and sell real estate. Obviously, this is important because without a piece of real estate to buy or sell there are no profits. However, let’s assume you have the acquisition and disposition of real estate down to a science. Now it’s time to pay more attention to the details because as the saying goes, “the devil is in the details.” I like to say, “Profit is in the details.” In this case I am referring to fully understanding the true cost of closing a property.

Beginning with the contract, it must specify and make it clear who is responsible for each and every penny at the closing table. When you send over a HUD to the buyer/seller there should be no misunderstanding of who should be paying what. After nearly a decade of investing in real estate, I continue to see investors and wholesalers run into this problem time and time again. A few costs that are usually debated over are the title services and settlement costs, document prep fee, courier fee, tax certificate fee, government recording fee, HOA transfer fee, title policy, and even though its only $2, the state guaranty fee.  Individually all these fees are relatively small compared to overall purchase price but together can add up to be a few thousand dollars. Now imagine if you close multiple deals per month, these small costs can really impact your bottom line. So how do you overcome having to pay these fees?

The simple answer is to have the other person whether they are the buyer/seller pay those fees. However, this is easier said than done because no one wants to have to incur all the costs. As a wholesaler the solution is easy because essentially they have very little to no skin in the game. They can agree to pay all closing costs for the seller and pass those costs onto the investor while still netting the same profit. If the investor does not want to incur all those costs the wholesaler can simply reduce his/her fee a bit and close as planned. However, if you are the buyer in this scenario and the wholesaler does not reduce his fee because the deal is just that good, what are your options? Well, you cannot contract the house, you can ask for a price reduction to make up for all the fees or you can negotiate what you are willing to pay for and what you will not pay for. If you are reasonable and a repeat buyer they will normally work with you. Keeping in mind that real estate moves quickly these days make sure that you make a decision before another investor makes the decision for you. At any moment another investor can come in and buy the property from under you because they do not mind paying all the fees. The good news is you do not need to pay fees. The bad news is you missed out on another investment property.

What if you are the investor buyer buying directly from a homeowner and want them to pay the majority of the cost. First, be clear about what all the closing costs will be. Many homeowners have a misconception that when you agree on a price, that will be the amount they will be netting. You must explain to them that they will not be walking away with the agreed on sales price but rather the sales price minus any closing costs, taxes, fees, liens (if applicable), etc. DO NOT surprise them at closing with all these additional costs. This may not only cost you this deal but also any future referrals. Also, if you do agree to pay the title policy, let the seller know that there are still other fees like the ones mentioned earlier that they are still responsible for paying. In addition, make them aware that they are still responsible for taxes up to the day of closing. If it is early in the year the tax debit will be small but if it is later in the year the debit will be much more. When you are the buyer you must also consider property taxes. If the property taxes are not yet due your closing costs are reduced by the credit you receive from the seller on the HUD. However, if taxes are due but have not yet been paid, you will receive a credit but will also be required to bring the difference the day of closing. This can drastically increase your overall closing cost.  Being upfront and clear about all this will make the transaction and the closing smoother.

Review your contracts to make sure they are clear about who pays what because the title company prepares the HUD according to the contracts. Putting all this in writing leaves out the he said she said situations. Additionally, always double check the HUD before presenting it to the buyer or seller in case there are corrections that need to be addressed. Now go close those deals!!

Michael VazquezMichael Vazquez has been offering properties to real estate investors significantly below market value since 2006 in both Texas and Georgia. Michael taken on projects starting with just 4 brick walls (literally) to managing his own rental portfolio. When it comes to investing in real estate he has done much more than many twice his age. Michael is always looking for more investors to work with.

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