The Cost of Closing a Sale (And Why it Matters)
When you know what you’re doing, investing in real estate can often be a profitable venture. By the same token, inexperience can and does lead to disaster. Usually, the most frequent mistakes by novice investors involve unforeseen costs and failure to factor them into their calculations, and closing costs, which can run you as a seller tens of thousands of dollars, are a common example. We’ve already discussed the fundamental aspects of making a sale and the important considerations that require careful thought on the part of you, the investor, when it comes time to sell your property, but the cost of actually closing the sale is just as important because it’s not only the last step in the process, but a potentially expensive one as well.
Mortgage:
If you purchased your property by obtaining a mortgage like most investors, you’ll need to terminate that contract at the time of sale. Obviously, you’ll need to pay off the remainder before doing so (which, again, is an obvious cost you need to account for). Terminating a mortgage before the first interest term typically carries a fee for breaking the contract, and it usually depends on the outstanding balance and how many months are left. Usually, though, you can expect the fee to be about half of a percent of the outstanding balance. We’ll talk about this in greater detail in a later post, but this is one example of why good credit, a favorable mortgage, and a large down payment all work in your favor as an investor in the long run when buying a property with the intent to sell it: the lower the outstanding balance, the less you’ll have to pay to terminate the contract at the time of sale.
Realtor Commissions:
Realtor commissions are a necessary evil and probably the greatest expense behind closing a sale. As the seller of a property, paying the agent commissions is your responsibility, including that of the buyer’s agent. Just how much it cuts into your bottom line is largely dependent on the realtor and what state you live in, so you’ll want to do your homework beforehand. This includes being knowledgeable about the normal rates in your area and property vetting agents before working with them. Remember, they’re after the largest commission they can possibly get without raising the property value to the point that it won’t sell, so sticking to your guns as far as pricing and knowing the market yourself is important as well. Generally, for a property under $500,000 a commission of 4% is typical, and for higher-priced properties as a rule you can expect to pay 7% on the first $100,000 and 3% of the balance.
Credit Lines:
As a final note, most real estate investors have a line of credit attached to their properties to build up their equity in them. When you sell, you’ll need to close this credit line and, like terminating a mortgage contract, there is usually a fee involved. This is well worth the expense, though, because building up equity in your properties while you have them ultimately improves your credit and in the long run saves interest costs on mortgages for future properties. When you sell your property that has a line of credit attached to it, you’ll need to pay off the balance and the fee is usually quite small, generally about half of a percent of the balance. Again, this is a worthwhile practice for the career real estate investor.
Factoring in these costs will help you determine the best price for your property when selling it, and making a habit of some of the practices we’ve outlined has far-reaching benefits for your future investments by saving costs over the long run and increasing your profits which as we all know is the name of the game!
– Get It Right Solutions