What Investors Need to Know About Closing Costs

Buying a house is hard. Buying a house as an investor to resell the property is even harder. There are so many hoops to jump through, so many t's to cross and i's to dot that it can feel impossible to keep everything in order. However, if things fall apart somewhere in the middle of the buying process and you skip a step, the property can end up costing you far more than it should have. 

The buying process has a lot of steps to follow which ultimately determine the closing cost. To get a cheap, hassle-free deal, you're going to want to know everything about home buying and how to avoid the hangups. The final closing cost is going to depend on getting these things right, so taking a few precautions along the way will save your hide later. 

1. The Escrow Account

If you're buying a property, there's going to be a lot of money flying around during closing. There are attorney fees, appraisal fees, processing fees, loan fees and tons of other hidden fees that are all part of the closing cost. The first thing you need to do is make sure all the money involved is safe. The best way to get this guarantee is to put all the funds in an escrow account.

The escrow is an impartial third-party that holds the money until the deal is settled and the contract is closed. The third-party ensures that both sides of this deal — both you and the seller — don't rip each other off, as all the money is with a trusted account. A secure transaction means a lot less stress, which is an enormous relief when buying and selling homes.

2. Property Inspections

Some of the most important parts of home buying are the inspections. They'll definitely add some money to the final closing costs, but they're absolutely necessary to find any trouble with the property before the deal closes. If there's something seriously wrong, you'll have time to get the seller to fix it, allocate funds to have it fixed yourself or back out of the deal completely.

The inspection can also help an investor quite a lot by increasing the sale price for the eventual resale. There are also a lot of inspections to cover, not including the initial property inspection. Some of the most important inspections include construction compliance, insurance loss, bankruptcy and commercial property among other aspects. The inspections will cover everything so you won't have to worry later.

3. Title Search & Insurance

The title search and title insurance are smaller details that drive up the final costs. Though they may seem unnecessary, they're crucial to finalizing your purchase. The point of the title search is to make sure no one else has a claim on the property, like family members or mortgage lenders. If there are any other claims, you need to settle them before the property changes hands. The title insurance makes sure the buyer has peace of mind even if there are defects in the contract, as they'll receive compensation. 

In short, this is an incredibly important step for your financial security. It's important to note, however, that there are two different options for title insurance depending on your situation. If you're mortgaging the property, you'll have to take a lender's policy. Otherwise, the much more recommended option is the homeowner's policy. Either way, the whole thing shouldn't cost more than one percent of the total purchase price.

4. The Good Faith Estimate

The closing costs should never come as a surprise. Your lender will send you a Good Faith Estimate, or GFE, within three days of getting in your application. The GFE isn't an exact science and will contain a summary of all the costs with a general estimate. If you've been doing your own math this whole time, then you can compare the two to get a picture of your situation. 

There are other tools provided by lenders, like those which allow you to put the closing cost in the mortgage amount, or a closing cost evaluator to compare different scenarios. The point is, you aren't alone. The whole process seems a lot more daunting than it really is. Once you have the GFE in hand, then it should be smooth sailing until the contract's closed.

The Final Price

Getting a final figure for your closing costs before the GFE may seem a little overambitious. But you can always roughly assume that the closing fees will be around 2% to 5% of the purchase price. With that in mind, you should be able to work out a financial plan which works in your favor.

 

 Holly Welles is the editor behind The Estate Update, where she shares real estate tips and ideas for home fixes.