In this lesson, I’m going to take a few minutes to explain the 5 closing fees and cost categories that you should look out for in your deals.
Capital money for wholesaling is not required from you personally but both the buyer and the seller will be required to pay some fees.
If you are wholesaling, you are neither the seller nor the end buyer.
It will be completely unnecessary to overwhelm you with the minuscule details of a real estate closing statement.
That’s the job of a closing agent.
But you should have some idea of the different types of fees so I am going to break it down to fifth grade level for you.
If you are wholesaling, flipping or representing the interests of a buyer or seller as a real estate agent, you will appreciate this breakdown even though we focus on wholesaling.
Closing Cost is Why Real Estate is So Lucrative!
One of the many reasons why real estate is such a highly rewarding industry is the opportunity for so many types of professionals.
So the closing statement which discloses all the different fees is where everyone gets paid legally but not always ethically.
That’s why you should get familiar with the closing fees and how they come up with the total closing costs on both the buyer and seller side.
Depending on what state your subject property is located in, there are different types of closing statements.
I am more familiar with the HUD-1.
But I promise after understanding these 5 categories of closing fees, it wouldn’t really matter as you will know what to look out for and how to negotiate unnecessary fees.
What % of the Purchase Price is the Closing Cost?
If you are a real estate wholesaling professional, please note that these fees are already factored into your maximum allowable offer (MAO).
Some have claimed 2.5% – 3% of the purchase price to be the closing cost on the seller side and may be 1% on the buyer’s side, but it really doesn’t matter.
You can always offer to pay your seller’s closing cost because there is always room to re-negotiate if necessary.
By the way, I have created a free tool to help you calculate your MAO and you can find it at: www.DealEstimator.com
Also, I cover this in detail on the next lesson so be sure to look out for it.
Let’s go ahead and dive in through the 5 categories of fees in typical closing costs and understand what they are.
My name is OLA and I am the author of the books…
Smart Real Estate Wholesaling…
And Real Estate Money Secrets…
…which you can download for free at www.SmartRealEstateWholesaling.com
Closing Cost Fee Type #1 – Brokers’ Fees
This section of the closing cost and statement discloses commissions that are paid out to real estate agents, agencies and brokers.
In most states and circumstances, the seller is responsible for paying the agent.
But there are cases where things may have been negotiated differently.
Brokers and agents can make up to 6% in commissions but I’ve never had to pay more than 3%.
Although I may have chosen to be generous and pay more because a good agent can be an asset in your whole business and not just in one deal.
#2 – Loan Fees
If your transaction involves a lender such as mortgage banks or hard money lenders, certain fees will be incurred and disclosed on the closing statement.
You may see loan related fees such as:
- Origination Fees
- Appraisal Fees
- Credit report fees
- Flood certification
- and others…
Some of these fees can be negotiated to reduce or remove them. All it takes is to ask.
With wholesaling and flipping real estate that involves cash only, you may not encounter most of these fees.
Points usually means 1% of the loan amount involved. So 2 points based on $200,000 will incur a closing fee of $2,000.
Occasionally, mortgage insurance premiums may also go under this section but speaking of insurance…
#3 – Insurance & Taxes
There are 3 main types of insurance involved in real estate transactions.
The 1st and most popular that every transaction should have is the home owners insurance.
It covers all the danger associated with owning a property on the streets such as accidents, fire damages, disasters, environmental issues and more.
Secondly and as mentioned in the loan category, mortgage insurance premium would usually go under this category.
It’s an insurance that accompanies mortgage loans with low down payment because it has higher risk for the lender.
The 3rd and last type of insurance has to do with the title of the property which has its own category; I will cover that in a few seconds.
Lastly under this category, the transaction may also incur property taxes which is prorated between the buyer and seller based on the number of days of ownership in the year.
Closing Cost Fee Type #4 – Title Charges
Under this category of the closing cost we have all the charges associated with clean transfer of title to the buyer.
These properties are a major part of people’s lives and the one major real asset that carries the most weight of people’s net worth.
So it’s not unusual to have past debts and liens attached to the properties.
Because of this, some type of guarantee is necessary to be offered unto the buyer to protect them from being hunted by other people’s past debts.
That’s where the title insurance comes in.
In addition to title searches and fulfillment of any past issues, the title company will insure the title of the property for the buyer.
So it’s a pretty unique type of insurance in the sense that it protects against past events while the other types protect against future accidents and incidents.
Also under this category of the closing cost and fees, you may incur fees such as:
- Lender’s title insurance
- Courier fees
- Wire fees
- Documentation preparation
- Attorney fees
- Settlement fees
- Escrow fees
- Recoverable fees
- Title review
These closing fees can vary from state to state and in some cases vary even at a more local jurisdiction level.
Let your local title company worry about this.
#5 – Realty Transfer Fees
You know there was no way of getting away with this without taking care of Uncle Sam and his agents right?
Last but not least, you will incur realty transfer or transfer fees based on the local jurisdiction’s formula.
For example, the realty transfer fees in New Jersey at press time is imposed on the seller as such…
$2.00 – $5.80 for every $500 of consideration for everything below $1 million.
And $6.05 for every $500 for all purchase prices or consideration over $1 million effectively taxing the rich more.
That’s a weird formula right.
Conclusion & The Main Lesson
HAVE YOU SEEN THIS: More Video on our YouTube Channel
You, as a real estate wholesaling professional or any profession outside of the attorney, the title or closing agent don’t really have to bother yourself about these details.
What you’ve learned here is more than enough and the rest of your energy should be focused on finding deals.
So that the rest of the real estate industry can worship you for creating business.
As you can see everyone will get paid when you create the lead pipeline and subsequently create deals; it’s a marketing skill.
To learn more about this, go ahead and download my 2 books…
SMART REAL ESTATE WHOLESALING and REAL ESTATE MONEY SECRETS
for free at: www.SmartRealEstateWholesaling.com
For a quick start guide, go to www.11DaysChallenge.com to set up a lead pipeline in 11 days.