Property sales are incredibly complex. Even for property investors who have years of experience buying, improving, and selling homes, there are a lot of different people involved in the behind-the-scenes work of property transactions, and they all must be paid.
Most of the fees for handling paperwork, getting the loan in order, and managing the details of transferring ownership are called closing costs. Investment property closing costs are due at the closing for both buyers and sellers. In Texas, closing costs are relatively higher than in most other states, though this does not account for property transfer taxes—which many states other than Texas charge.
New and experienced property investors can strengthen their business by understanding all the details behind closing costs on both sides of the transaction. Not only can you better anticipate all the fees that will be due before ownership can change hands, but you’ll also find opportunities to lower your costs of doing business. After all, buyers and sellers each pay hefty closing costs for every property transaction. Knowing which investment property closing costs you can reduce and which ones are non-negotiable lets you invest, forecast, and anticipate profits in more detail.
How Much Are Investment Property Closing Costs?
Investment property closing costs, like any residential property’s closing costs, are best estimated as a percentage of the property’s value. Many of the individual costs, such as agent commissions, are tied directly to the sales price, while other fees may be a percentage of the loan value. In general, expect to pay closing costs equal to 2–5% of the home’s price as a buyer and approximately 9% of the home’s price as a seller.
When Do You Know How Much You’ll Be Paying in Investment Property Closing Costs?
Buyers won’t receive a final breakdown of their closing costs until approximately three days before the deal closes. This is because many of the fees, especially those determined by the lender, won’t be finalized until the very end of the process. However, many lenders will provide loan estimates, which detail the types of fees and their general dollar value or percentage costs. Once you receive a final breakdown, you can arrange a wire or cashier’s check.
Likewise, sellers won’t have a specific closing cost breakdown until near the end of the transaction. However, because seller closing costs come out of the sales price, they don’t have to arrange a wire or check.
What Are the Investment Property Closing Costs for Buyers in Texas?
Buyers generally pay a smaller amount in closing costs than sellers, and they range from 1.5% to 6% based on the particulars of the deal. Closing costs include specific property fees, loan-related fees, and administrative fees. Texas buyers purchasing a home at the median price of $351,500 can anticipate between $5,272.50 and $21,090 in closing costs. However, for cash buyers, closing costs become significantly simpler—and lower.
Consider these individual line item fees that make up closing costs for investment buyers in Texas:
A significant portion of the closing costs buyers pay are mortgage and loan fees. While these fees may be relatively small, they are often non-negotiable and are unlikely to be covered by the seller.
- Loan Application Fee: This non-refundable fee is paid to the lender. Depending on the lender’s terms, the fee may be a deposit that is credited against other line items, or it might be a separate fee entirely. Expect to pay up to $500, depending on your lender.
- Loan Origination Fee: This ‘catch-all’ fee is approximately 0.5–1.5% of a mortgage (e.g., approximately $3,000 for a $300,000 mortgage loan), and it can increase if you pay down your interest rate with points. This includes underwriting, funding, administrative fees, and processing. Expect it to be the biggest individual line item on your closing cost breakdown.
- Credit Report Fee: Lenders need to know your credit before pre-approving or approving a loan. This costs up to approximately $80.
If you are putting together an all-cash offer, you don’t have to pay these fees.
Home appraisals are required by lenders in almost all scenarios. Lenders need to verify that the value of a property exceeds the value of the loan before they can approve it. Third-party appraisers review the property and the area to establish the fair market value. This will cost between $300 and $500. If you’re paying all in cash, you may not need an appraisal because you don’t need a loan. However, it can still be best practice to get one to minimize the risk of a poor investment.
If the property is in an HOA, there will be fees to close. Typically, there are three fees, and each one is negotiable.
It’s not uncommon for the buyer to ask the seller to cover the cost of furnishing the HOA bylaws, rules and regulations, and other important documents. This typically costs $200–$250 to order from the HOA.
This document outlines the accounting information the title company will need to balance and collect at closing. Like the documents package, the resale cert usually costs $200–$250.
Note: Often, the HOA will package these two together and call it a resale package that they charge $400–$500 for and will not let you parse them out or order separately.
This is a fee typically paid for by the buyer. In essence, it’s an administrative fee paid to the HOA to transfer ownership in their system. The transfer fee typically ranges from $150 to $250.
The title of a property is the legal establishment of its owner. Title companies investigate the current legal property owner and ensure the title is clear—or without dispute or liens—before closing. They provide services like a title search to uncover any potential liens, other claims to the property, and court judgments that can affect the transfer of ownership.
- Search Fee: For the actual search, companies charge up to $250 dollars.
- Insurance Fee: The search itself is often not enough. Buyers also purchase title insurance policies for approximately 0.75% of the property value. This protects both the buyer and lender in the event of future problems with the title.
Title fees may be handled by the buyer or seller. The choice often depends on the strength of the market. Historically—and in buyers’ markets—the seller often covers title work. However, the buyer may offer to cover the fees to make their offer more attractive. Doing so can be more appealing to sellers than offering a comparable increase in purchase price, as it means the seller doesn’t need to have that cash on hand.
Escrow Funds and Fees
Most lenders either require or offer a mortgage escrow account. Buyers pay lenders a portion of property tax and home insurance premiums every month, which are collected in the escrow account until sufficient funds have been collected and payment is due. The lender manages this service entirely on a buyer’s behalf.
- Mortgage (including home insurance premiums and a portion of property taxes): Expect to pay approximately the value of two monthly mortgages (including the mortgage principal and interest, a fraction of the estimated property taxes, and a fraction of your home insurance premium). This prepays money into your escrow account.
One of the last major fees for buyers is the recording fee. Your local municipal government will need to update its records, and this will cost around $150.
Fees Based on Loan Type
In today’s market, more and more buyers are purchasing homes with non conventional loans or unconventional loan terms. While these options make homes more accessible, they also lead to additional investment property closing costs. Anticipate these potential increases based on the loan terms you’re working with:
- Conventional Loan with PMI: If you pay less than 20% on a conventional home loan, you’ll need to pay private mortgage insurance (PMI). You can choose to pay PMI up front as a lump sum during close, or it can be added to your monthly mortgage payments. If you add it during closing and negotiate to have the seller pay a percentage of closing costs, this option may save you some money.
- VA Loan: VA loans require an upfront funding fee of between 1.25% and 2.15% of the mortgage.
- FHA Loan: Similarly, an FHA loan with a 3.5% down payment will incur a mortgage insurance premium (MIP). This cost is approximately 1.75% of the purchase price, and it is a lump sum during close. There will also be a smaller fraction added to your mortgage moving forward.
There are some fees that buyers might need to pay for specific deals on a case-by-case basis. Some lenders may charge courier fees to send documents, such as if a signatory lives out of state and cannot sign electronically. For complex deals, real estate attorneys may also need to draft paperwork. However, most real estate transactions will not incur these costs.
Conversely, there are some costs, which are not considered closing costs, that you’ll incur while purchasing a home. If you hire a home inspector, you’ll pay them independently for their services. You’ll also pay option and earnest money within three days of the contract being executed. Option and earnest money are credited back to you once the transaction closes.
What Are the Investment Property Closing Costs for Sellers in Texas?
Sellers pay higher investment property closing costs than buyers. Not only are you paying a higher percentage of total fees than the buyer, but the property itself may also have a higher value. For example, if you invested in a property and flipped it, the value may easily be 130–150% of the original value when you purchased it. With that in mind, it’s important to understand all the closing cost fees and know where you can lower them.
Agent Commission Fees
This is the single biggest portion of a seller’s closing costs, equaling 6% of the property’s sale price. Sellers must pay the commission fees for both the listing agent (who acts on behalf of the seller) and the buyer’s agent, with each one taking 3%. However, buyers and sellers aren’t legally required to have agents represent them.
Property investors who are comfortable representing themselves by marketing the property, reading through offers, and negotiating a final deal don’t need to hire a listing agent. This tactic will immediately remove approximately one-third of your total closing costs by lowering your agent commission fee obligations from 6% to 3%.
Remember: either the buyer or the seller may end up paying the title search and title insurance premium. This can equal approximately 1% of the home’s value. (Similarly, some of the HOA fees may be covered by the seller.)
Property taxes are paid to the local municipal authorities by January 31st following the end of a calendar year. The bill itself doesn’t become available until October, just four months before. As the property owner for at least part of the year, you are responsible for paying a prorated portion of the property taxes. In Texas, property taxes are approximately 2% of the home’s value. So, if you sell a $500,000 property at the end of June, anticipate paying $5,000, or half of the annual $10,000 obligation.
Your property taxes may be even higher if your investment property is not a primary residence and doesn’t have the protection of a homestead exemption.
As part of the negotiation process, you may make concessions to the buyer. For example, you might pay for a new HVAC system if the current one isn’t working, or you might partially or wholly purchase a new roof if the lender can’t approve the buyer’s loan with the current roof. These items are not included as technical closing costs. However, rather than making those repairs yourself or lowering the sales price, you might “pay” the buyer the agreed-upon funds as part of the closing costs.
The Bottom Line
Navigating the world of closing costs in Texas can seem daunting, but it doesn’t have to be! Whether you’re buying or selling a home, understanding the ins and outs of these costs and who’s responsible for paying them can save you time and potentially a good deal of money.
From title company to HOA fees, each transaction can have a variety of costs to consider. But don’t forget that many of these costs are negotiable and depend on various factors, such as whether you’re using a real estate agent or taking out a mortgage.Here at ListingSpark, we’ve walked through this process thousands of times, and we’re here to guide you every step of the way. Our innovative pricing model offers significant savings for sellers, and our expertise ensures a smooth and efficient transaction for both buyers and sellers. Reach out today for expert insights and services that help you feel more confident and prepared for your next real estate venture. Remember, knowledge is power, especially when it comes to navigating the real estate market. Happy buying or selling!
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