Understanding the Cost of Closing as a Real Estate Investor (Item per Item)

Hey, gang, this is Mike with My Real Estate DOJO and today’s session is about understanding the closing cost for two reasons. 1. You are going to be able to understand all the costs involved in closing a deal, so you can tell if it’s profitable or not. 2. Is very important as well, for you to be able to explain to your motivated seller all the costs you need to pay to do the closing. At the same time the closing or the costs of selling a home divides into two parts.

As an investor, part 1 is when you talk to a motivated seller you’re going to have a closing cost. Then if you are a fix and flipper, if you are an owner financing or you are some type of investor, buying quickly and selling quickly, then you’ve got incur two closing costs. A lot of the times my students do not understand that when they buy a property they’ve got to pay closing costs or there is potential to pay closing costs, because you’re dealing with a motivated seller.

When you turn around to fix the property, you’ve got to pay another round of closing costs. What I want to talk to you today about is the second part of closing. Once you buy the property you rehab and you fix it. When you want to turn around and sell the property, what are all the costs involved in it, because when I was starting out I didn’t realize all the costs involved. I actually want to go ahead and spell out A-Z what all the costs are.

Let’s go ahead, dive in and get started, gang. Now one of the things for the closing costs is basically going to be the realtor commission. That’s just given. In the state of Texas or anywhere in the United States, the average realtor commission is anywhere from 5-7%, I would say right around 6%. So if you have $100 000, right off the bat you are going to spend $6000 just in realtor costs. That’s something you have to understand when you are buying from closing number 1, because now we are talking about closing number 2.

Whenever you are talking to a motivated seller, you have really understand all your closing costs at closing number 2, so you can explain to the seller, before you close on closing number 1. One of the biggest costs is the realtor commission, like I said it’s going to be an average of 5-7%. Now this is not something that I just pulled out of the hat, this is something that actually if you go through Texas realtor commission, which is tracked, you can see what the average is or throughout the nation what the average is. The realtor organization, association actually monitors that, so you can go out there and look at those stats.

Another thing that most investors don’t think about is that when a home is listed with a realtor, the average realtor is going to negotiate 2,3 or even 4% of the asking price. Again you go to the realtor organization websites and you pull these stats out. See that throughout America, what does the average realtor negotiates. You will see that its roughly between 2-5% right around there. What that means is, if you have $100 000 home you can expect that the realtor is going to negotiate down $3000 and their offer is going to be $97 000 instead of $100 000. Now talking of the $3000 dollar discount you’ve got to also consider the realtor commission, the 6%. Here’s another thing you have to understand as closing costs. Closing cost is broken down to two parts – you have part number 1, which is the title policy. You know in Texas title policy is controlled by a governmental agency and it is standardized. So if you have a house worth 100, everybody is going to pay the same price for that title policy.

Bob is not going to pay a lower price and July is going to pay a higher price, because of their ability to negotiate. That’s fixed. Again, closing costs are divided up into two sections. Number 1 is the title policy. That is a big chunk of the costs which is about 50%. The other 50% is what I call the junk fees. What do I mean by the junk fees. Now you have things as notaries, deliveries, because somebody has to deliver the papers, filing fees, you have the title company charging you a bunch of junk fees, prep fees, this fee and that fee. That’s when the other half comes into closing costs. Closing costs is I will say, when I do the numbers, I always do it at 3%. It could be a little less or it could be more, but you’re in a good safer position to say 3%. It’s kind of like there’s a risk driving, but if you can buckle up, you have a lesser chance of getting fucked up. The 3% is buckling up and you are taking all the precausions not to get into a fucked up situation, excuse my language.

Let’s recap again: realtor commission, you’ve got the realtor discount fees and now you got your closing costs, which is roughly about 3%. Now as an investor when you buy a property you are going to get it three ways: you are going to get it through hard money lending, actually pay yourself cash or you are going to get some kind of loan, like private money or a standardized loan, like a bank. Either way, even if you pay cash, you’ve got to consider your holding costs. What do I mean by holding costs? When the property is vacant, you’re going to have to pay for the principle, the interest, taxes, insurance, all the utilities. You can’t do any showings if you don’t water or light. I mean you can, but the probability of you getting your asking price is going to decrease significantly. Holding cost plays a big part. The crazy thing about closing cost is that it's a variable cost, not a fixed cost. What do I mean by variable is the longer you have the property, the more it is going to cost you.

One thing I really want you guys to understand is when you have a vacant home, now I am not a lawyer or an insurance agent, but as a professional landlord this is my understanding of doing my due diligence significantly and talking to professionals, is that you can’t have your normal insurance. For example, if you have your normal insurance that you have for land lording, you have the house vacant and you are rehabbing it, you’ve got to have that extra insurance. If the property has been vacant for a couple of months, because you’ve fixed it up and now you are trying to sell it, you can’t get you’re average insurance, commercial insurance policy like a landlord policy or a fire policy, what you need to do is get the vacancy insurance.

These little babies cost a lot more than normal insurance. The other fucked up thing about it is that this insurance you pay upfront and they are not going to prorate your money whenever the deal closes.  For example, if you get a year-long policy and you only use three months, they are not going to refund the other X-months back to you. You are going to pay as many months, if you happen not to use all of it, guess what, the insurance company gets to keep all that money.

These are some important factors that some rookies don’t consider. A simple thing is, for example, lawn services. If you have a property, you’ve got to cut the grass every week -$25 times 4 is $100, you’ve got a couple of months and if you get a pool in the back – you’ve got to consider all these things whenever you are putting an offer in at closing number 1. Remember, we are talking about closing number 2, you already bought it from another seller, you fixed it up and now you are going to put it up for sale, but these are the costs you are going to run into, guys. Let’s recap, you’ve got realtor commission at 7%, realtor-buyer discount between 2-5%, closing costs 3%, holding costs – unknown, you’ve got closing costs such as principle reduction, interest, tax, insurance, utilities (water, electricity) and yard keep etc.

Now another thing that you need to consider is that you are going to have marketing costs. Even though its going to be put on the MLS and you can wait around and wait for the realtor to bring you a buyer, the best thing to do as an investor is to go out there and hustle and bustle and bring your owner, so you don’t have to pay that other 3% realtor commission. The way you do that is, you put your own sign up there in the front, you print your own flyers and put it out there and you go distribute your flyers to X,Y and Z.

You go ahead and put your own listings on online classifiers like Craig’s listing Yellow Pages. You do pay to be submitting on these website directories and things of that nature. You can take those actions to decrease paying 7% realtor commission.  If you can find your own buyer, you don’t have to pay a whole 6-7% commission especially if you do what I do and you don’t lock yourself up with the realtor to find you a buyer, because you did all the work. Now something else you might want to think about is when you have a vacant property not only do you have insurance for vacancy issues, which is more expensive, but more importantly  you’ve got to put some money aside for theft. If  theft happens, you’ve got pay a deductible it could $500-1000 or 1% or just depends on what you negotiate.

Realistically, you don’t want to sink all your money in the property and you are dead broke when something happens and you don’t have the money to pay the deductible. Guess what, that happens guys and that’s why I am doing this video-to help you understand all your costs. Another thing that a lot of people don’t consider is that you rehab the property, you did a really good job, you did an A+ job, now you find a buyer, you go on the contract, the inspector guy comes at the door. These inspectors are always finding problems even if you have brand-spanking-new home. The reason is that what they get payed for – to find problems.

So what does that have to do with your closing costs- lets say the inspector finds 9 things that need to be done, even if they are minor things, you have to do those for two reasons- whatever the inspector inspects its an important part of the home and you need to get that fixed or lender or bank is not going to lend money on the property. Since the buyer doesn’t have cash or investors like yourself, they are going to go to a bank and be reliant on the mercy of the bank. Its whatever the bank says they have to do. If the bank says, “Hey, out of the 9 things this inspector finds, you’ve got to do 1,2,3 100% or we are not going to give the buyer this loan” and guess what guys, you’ve got to get those 3 things or you are not going to get any other retail buyers out there –zero, because they are all going to go through the same hiccup or problem.

If they don’t have funds, those three major components of the home are the ones banks are going to require you to fix up. That’s some shit that you can’t mess around with, because if that flag goes up, you really got to fix that flag. That’s one part of the inspection cost. The other part is, let’s say the other 9 items, 3 you have to do, but there are 6 other minor things, like a little scratch, light bulb missing, a cabinet door doesn't open – just minor things that will cost $1000-2000, who knows. You’re going to have theft, you’re going to have inspection cost, which are going to be like major stuff that needs to be done and minor stuff that needs to be done. Another thing that you want to think about is if I sell a home or I do owner financing I like to wrap it with the home warranty.

For $500-700, depending on what company you go to, you can offer your home a warranty and that’s a great thing, because a lot of retail buyers eat that up like a monster, so that’s a good thing, but its going to add a little closing cost. Another thing to think about is, for example, termites. If you have termites, especially if you are in the south like we are in Texas, that can add some costs from the inspection to the treatment etc. Now you can understand the majority of all the costs that go into closing.

Now that you understand the majority of the costs that go into closing in closing number 2, now that allows you to open your eyes and really understand whenever you go talk to a motivated seller how to position yourself, how to make an offer and how to justify your numbers, especially to a logical consumer with all these costs you have to pay. Not only you have to pay closing number 2, you might have to pay closing number 1 if you are buying from a seller and you are offering to pay for their closing. In a sense you have to make sure your offer is good enough that you get the deal, so you are able to pay for closing number 1, maybe you don’t have to, which is great, but you definitely have to pay for closing number 2, once you buy the property if you are one of these investors that is going to fix it up and you are going to have that second cost.

Since I am already on this topic let’s talk a little about closing number 1. If you’re dealing with motivated sellers, which is what I teach and I am not talking about going to the auction or things of that nature, I am talking about fishing for the motivated sellers and that's what I specialize in guys that's my life-belt is dealing with motivated sellers. If you are going to buy a property from a motivated sellers, you’re going to have many of the same closing costs as you are in closing number 2. For me, I eliminate a lot of these costs, because I am a seasoned investor and I don’t recommend you do that if that’s your first deal and you’ve never done that. As you mature and you get better, you might want to be able to do some of this stuff yourself.

For example, one way that I eliminate the realtor commission is that i actually have my own realtor company. If you don’t have a realtor company, another suggestion is that you can use a flat fee MLS. What is a flat fee MLS. A flat fee MLS is a powerful tool, especially for investors to use, to get all the marketing, all the extra fees of a realtor, all the extra cons of a realtor without paying all the realtor commissions. In my company Plug-in Realty, if you want to get a company and use a flat fee MLS in the state of Texas we can definitely help you out.

For $495 you’re able to eliminate all the relator commissions, so for a flat fee of less that 500 bucks you are able to put your property in the MLS, which synthesizes with hundreds and millions other websites from big websites like Google, Yahoo to other realtor business and realtor websites etc. Not only you are going to be able to monetize on the marketing, but you are getting the actual guidance of a professional realtor and more importantly you get the actual paperwork, like the contract, auctions etc of a realtor and the great thing is that you don’t have to pay all the realtor commissions. Now if you use a flat fee MLS, there is a good probability that you can find your own buyer and then will have to pay zero commission, just that $495. If you guys are interested in the flat fee MLS, let me know and I’ll be happy to have my broker help you out. One of the ways that I save money is using the flat fee MLS, if I didn’t have my own real estate company, but since I do, I just go get my real estate company do it and it saves me money. But you guys should use the flat fee MLS. Another thing I do is the closing costs, another way that I decrease my closing cost is I know how to do the searches on the county clerks office, I know how to read title searches.

I can do all this stuff myself, but I’ve actually found people and that’s what they do-they do title searches for a couple hundred bucks I have somebody do a title search for me instead of going through a fancy company or a title company, I’ll just go to my attorney’s office instead of paying all these $3000-4000 for a closing, I can get a closing down for $1500 and even if I really wanted to go lower, I could have done it for $750. I have to do a lot of the footwork myself, but again, I am a seasoned investor, I know how to deal with the HOA, I know how to go to the county clerks office, I know how to do my own searches, I know how to do a lot of my prep works, I know how to decrease my costs. I don’t recommend that for everybody, but when you first start out, go the safest route, do a couple of deals and then learn to stretch a little further before you know you are touching your toes guys, its not big deal. That’s was two ways that I decrease my costs whenever I am buying from a motivated seller from closing number 1.

Another thing I do is I don’t buy title policy. I don’t recommend that for you guys, but for me I don’t buy title policy on it, because if the seller just bought it 3-4 years ago, it's a cookie-cutter property and i look at the title chain and i pay somebody to pull it up and it's a clean title. Why should i buy a title policy if they just bought a title policy a couple months or years ago. As a professional, I am not going to spend $1500 to buy the title policy. I don’t recommend that for you, but for me it works good. Have I gotten burnt? No I haven’t.

Can I get burnt-absolutely, that’s why I don’t recommend it for you guys. Once you learn how to fight, you can get into the ring with bigger opponents and have a higher risk of getting knocked out, but at the same time you have a higher risk of profit. That’s how life is guys. Some other ways that i cut costs is I ‘ve got a handyman, good contractors, ones that when the inspector comes up I need the roof or the plumbing, I have people in place that can actually do it for a good price. In a nutshell, when i do the closing number 1 I am in total control, I can spend as little money as I want.

When I do the closing number 2, which is the traditional way, I really don’t have that much control, because I have to do the dance, like everybody else does, like normal people. To do that, you’ve got to pay a lot more money and that’s why I am doing this video for you guys, so you understand both the closing costs, so you are able to give an offer to a motivated seller and create a win for you and create a win for them. Since you have this knowledge now, you could actually help the seller understand all that they would have to pay for and basically helps you negotiate.

Now, gang, don’t just watch me and watch 10 other guys. Watch me and go take massive action. Once you encounter a hiccup come back to my YouTube channel, ask me a specific question and I’ll be happy to help out. This is America, the grass is so green, go out there and hustle and bustle, don’t take a ‘no’ for an answer.

This is Mike with My Real Estate DOJO and I’ll talk to you later. Don’t for get guys, if you like these videos, please share, please comment and please share. If you really think I am providing value, please support me and buy some of my digital products. I have a variety of stuff from digital contracts, phone scripts, flyers, ways to protect your deals etc.

Gang, this is Mike, go out there and hustle and bustle, thanks for listening, have a great day!

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