As the saying goes, in real estate investments, you make your money when you buy, not when you sell. After all, the purchase price is the set point. From there, you can only realize so much in profit based on the likely future sales price. During that moment of buying an investment property, it’s crucial to have all your investment property calculations done before you even submit an offer.
These figures include a ballpark on ROI for rental properties, a clear idea of your expected profit on a flip after renovation and resale, and a detailed list of the expenses you’ll incur to process the property.
Many investors stop at calculating buyer closing costs, renovations, and holding costs. But they leave off a significant cost that incurred at the very end of offloading the property: seller closing costs. However, seller closing costs are too big—and too complex—to leave as an afterthought. Instead, calculate them from the start with as much detail as possible so you can strategize how to lower them and garner as much profit as possible at the end of the property’s lifecycle.
Why Calculate Seller Closing Costs For Every Property Investment?
There are two common styles of hands-on real estate investing: buy-and-hold (such as with rental properties or land you plan to develop) and flips (which are much faster). For flip-style investments, the reasons to account for selling costs become clear.
It’s very much a business strategy about calculations: you start with the finish-line price in mind, subtract the anticipated renovation costs, carve your percentage out of the remaining amount, and offer no more than that. If you don’t calculate your closing costs and add them to the renovation cost column, it’s coming out of your take—it’s as simple as that.
For buy-and-hold properties, it can be a little more opaque. Calculating your seller closing costs beforehand still offers several advantages over being in the dark:
- You can spend time as the property owner to find savings opportunities, such as locating the right title agency and service providers, learning enough about real estate to avoid needing a listing agent, and considering under which terms you would sell the property.
- You’ll have a better idea of your portfolio’s practical value. If you’ve kept up with your property’s likely sales price, subtract the remaining mortgages and the anticipated 6–10% closing cost. This gives you a clearer idea of what you’ll walk away with during retirement.
- It can help you set your long-term goals. If you generate [X amount] of return on a property that costs [Y amount] and will cost [Z amount] to sell and close, you can calculate how long you need to hold onto the property to cover the costs and turn a desirable profit. Knowing that number will inform you whether a property really fits your investment strategy and how you need to manage it long term.
- Figure the costs into your sales price. Once you decide to offload a property, don’t let a large expense jeopardize your profits. Have your closing costs in mind so you can account for them while pricing your property and making negotiations.
Calculating your seller closing costs early on gives you a much clearer financial picture.
Buyer Closing Costs Matter Too
Buyer closing costs are generally smaller than seller closing costs, as buyers don’t directly pay for the agents involved. However, it’s still important to calculate them, as they can be around 2-5% of the purchase price. You have to bring those funds to closing and can’t wrap them into the mortgage loan. The amount you spend on closing costs will be an immediate expense that can take away part of your renovation funds or backup repair funds.
4 Factors That Can Impact Investment Property Closing Costs
As a starting point, you can roughly estimate the closing costs on your next investment property. Expect to spend between 7% and 10%. Even with the buyer paying a lot of the closing fees, you’ll have closing costs of at least 7% under most circumstances. Use a comprehensive closing cost calculator to track the likely expenses for your properties.
Here are the line item factors that will quickly start to add up:
1. Real Estate Agent Commissions
This is the biggest part of your likely closing costs. In Texas, the standard practice is to give each agent a commission of 3% of the purchase price. With both listing and buyer’s agents, this alone costs 6% of the purchase price. For a $350,000 home, you’d be spending $21,000 in commissions.
Behind the scenes, there’s a little more detail. You might decide to only pay 5% for real estate commissions. Your listing agent might split that evenly (meaning 2.5% for each agent), keep their typical 3% and leave the other agent with 2%, or keep only 2% and give the other agent 3% as a friendly gesture. The commission percentage for the buyer’s agent is visible on the MLS listing. This shouldn’t impact the level of service or degree of prospective buyer interest you receive, but it’s worth knowing as you strategize.
2. Title Fees
Title companies do research whenever a property changes hands. Their job is to make sure the seller owns the property without any liens against it or other complications. There are two distinct charges here: the charge for the actual research and verification that the sale can proceed and title insurance—a policy that guarantees their work and ensures they handle any potential disputes they didn’t see before. Expect to spend a few thousand dollars here.
This is a relatively low-cost line item. A survey marks the boundaries of the property and reestablishes the details of the property. Having an up-to-date survey can help with clarifying easements, settling disputes with neighbors, and appraising the property in the future. Every house sale requires a survey. If you’ve made any changes to the property, such as adding a structure, or if the available survey is decades old, your title company may prefer you order a new one.
4. Additional Paperwork and Processing
There are other fees and processing costs, such as tax certifications, notary fees, escrow fees, and general document preparation costs. While each one is relatively small, taking some time to find lower cost alternatives could help meet or exceed the hourly pay rate you’ve set for yourself.
How to Reduce Your Closing Costs
Once you’ve calculated your anticipated seller closing costs, you can move forward on a property purchase with more confidence or let it go and search for a property that better aligns with your strategy. This forecasting is a powerful tool that can guide any investor to make better and more informed choices at the beginning and end of their ownership.
If you have the time, it’s just as advantageous to find ways to reduce those closing costs. Here are four quick tips.
1. Decide If You Really Need a Listing Agent
Real estate agent fees are by far the biggest line items in your seller closing costs. While you’ll likely pay 3% for the buyer’s agent, you can shave off the 3% for the listing agent by representing yourself. Tools like flat-fee MLS listing services make it easier to profitably sell a property without an agent so you can distribute information about your property to a broader range of prospective buyers.
2. Choose a Cost-Effective Title Company
Generally, the person paying the fees decides the title company, but there are different circumstances under which the seller might decide the title company no matter what. Because title companies can charge different rates for their services, you have an opportunity here. Research reputable but cost-effective options so you can lower the cost without sacrificing peace of mind.
3. Negotiate for the Buyer to Pay Title Fees
Alternatively, negotiate to add the title fees to the buyer’s closing costs. Either side can pay for the fees; it’s just a matter of coming to an agreement. In most seller-advantaged markets, the buyers will pay to sweeten their offer. In buyer’s markets, however, the costs will typically fall to the seller unless you negotiate otherwise.
4. Be Meticulous About Seller Concessions
Once you accept an offer, that price isn’t set in stone. There are a couple of weeks when your buyer can negotiate price drops, seller repairs, and seller concessions. Participating in negotiations is often crucial. Proper communication helps avoid things like the buyer backing out and forcing you to put your home back on the market. Also, watch out for small concessions and expenses adding up and eating into your profit margins.
Use an Investment Property Closing Costs Calculator to Forecast Expenses and Protect Your ROI
Calculating your seller closing costs removes uncertainty. As an investor, you benefit from having clear-cut projections regarding expenses, property ROIs, and other calculations that guide your decisions during both the selling and buying windows. At ListingSpark, we give investors a bird’s eye view of the entire market and help calculate the pros and cons of different selling strategies. Reach out today to see how you can strategically whittle down your closing costs with modern tools.
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