Closing Costs - Am I paying too much?

2 Replies

Hey BP,

I'm new to real estate investing, and wanted to get some opinions on closing costs.

I have already bought and sold a primary residence, prior to really getting into doing it as an investment. Made a profit, but was primarily due to market appreciation.

The reason for my question is I feel like paid way too much for closing, both when buying and selling. I've seen a few other closing assumptions used and they were less than what I paid:

Buying - Purchase Price: $135,000. Closing costs: ~$7,000
Selling - Selling Price: $180,000. Closing costs: ~$14,000

Did I get ripped off? Is this a function of my real estate agent? Should I find ways to lower this or suck it up?

I have the final HUD somewhere that shows the detail. I'll see if I can dig it up for specifics.

Thoughts?

"Closing costs" is actually kind of a vague term that confuses a lot of people.

You'd have to review the final HUD to see what you actually paid. But what we typically refer to as "closing costs" actually consists of actual settlement costs on the transaction as well as "prepaids" (for the buyer) and commissions (for the seller).

As the buyer, in addition to paying the taxes and recording fees on your mortgage, processing fees to the title company or attorney, loan origination costs, lender's title insurance policy, etc. (what you'd typically think of as "closing costs"), you also usually pre-pay for your first year of homeowners insurance plus an extra 3-4 months worth of premiums to fund your escrow account with your lender. Your lender may also have you pre-pay all or a portion of your first year's property taxes. 

You "pre-pay" these, and your lender holds them in escrow and pays the bills for your Taxes and Insurance when they come due (the "T" and "I" in your PITI payment) in a few months. But they come out of your "closing costs" in the sense that they are taken out of your funds at closing.

Here is an estimate I recently drew up for a Buyer on a $220k purchase:

As the seller, you'd normally pay the taxes and recording fees on the deed, owner's title insurance policy, title search fees, seller concessions towards the buyer's closing costs, etc....as well as the realtor commissions (on your $180k sale, it's likely that $10k or so of your "closing costs" were actually for commission. 

Here is a breakdown of who typically pays for what in FL:

And no - your realtor actually has very little to do with your closing costs, other than estimating them and explaining them to you, and possibly negotiating how much of them the seller will pay for the buyer. 

Also note that the only one you can control to some degree (and it varies widely) is your insurance premium. Different coverages, deductibles, etc, can make a huge difference in your annual premium. It literally pays to have a good insurance agent, and to shop around.

Hope that helps!

(PS - This is not legal advice and practices may vary slightly from state to state. My examples are based on a typical transaction in Florida).

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