SS196: The Hidden Cost of Buying and Selling Real Estate

SS196: The Hidden Cost of Buying and Selling Real Estate

Buying and selling real estate involves several hidden costs that buyers and sellers should know. In this episode, Charles discusses these costs and how they can significantly impact the overall cost and return on investment.

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Talking Points:

  • Real estate transaction fees are not a topic that is commonly discussed, but it is something that any future property buyer or seller should be thoroughly knowledgeable about. This is actually one thing that drives me crazy when speaking to people who have sold properties and only make a point of discussing what they purchased the property for and what they sold the property for, something very common with homeowners who are trading up to a bigger house. They forget to mention (most likely, they never kept track of) the list of repairs and renovations they made and the transaction fees they incurred when they bought and sold the property.
  • I have wanted to make this episode for some time, and a recent CNBC article reminded me of this topic (I have linked to it in the show notes). In the past, if someone had asked me if they should buy or rent, I typically told them that they would pay roughly 10% of the property sale price in transaction fees. This is an oversimplification, but my thinking was that you would have about 5% in agent fees when you sell and another 5% in transaction fees incurred during the purchase and sale process, which is pretty accurate, plus, of course, all of the repairs and renovations. I want to clarify that I am not saying that buying a property or home is a bad idea, but buyers need to know the full scope of costs before purchasing.
  • The CNBC article stated that the typical cost to sell a house is nearly $55,000. They noted that, on average, 39%, or $21,000, is spent on real estate agent fees. Sellers spend $10,000 before listing on home repairs, $8,000 on closing costs, $7,200 on buyer concessions that will reduce the upfront purchase costs for the buyer, $3,200 on marketing and advertising costs, and $2,200 on stagging costs. Of course, you might not be subject to all of these costs when selling your home or rental property, but it shows the significant impact these expenses will have on your overall return on investment.
    • So, let’s now break down these costs in more detail. I will leave out moving and staging expenses since they will not pertain to rental property investors in most situations.
  • For Buyers:
    • Closing Costs
      • Loan Origination Fees: These are fees paid to the lender for processing the loan.
      • Appraisal Fees: The cost of hiring a property appraiser to determine the property’s market value. The lender usually requires an appraisal.
      • Inspection Fees: The fees paid to the property inspector and other contractors you have hired to inspect the property’s condition. It usually includes a general inspection, pest inspection, and any specialized inspections that the buyer desires. I would add an HVAC contractor here for a detailed heating and cooling system review since an inspector usually cannot provide this.
      • Escrow Service/Title Company/Attorney Fees: Depending on your state, you will owe fees to one or more of these companies for handling the title and escrow service.
      • Recording Fees: The fees paid to the local government office for recording the property purchase.
      • Prepaid Expenses: This includes property taxes, insurance, and possibly utility services like water and sewer. Your lender may require you to prepay interest as well.
      • I would estimate these closing costs to run about 2%-3% of the property’s purchase price. I would go with 3% to be safe.
    • Repairs and Maintenance
      • Immediate Repairs: If a seller declined to make repairs, or you are doing renovations and repairs immediately upon purchase, these must be factored in.
      • Regular Maintenance: This is the ongoing maintenance required to maintain the property’s condition.
    • Homeowners Association (HOA) Fees:
      • HOA Dues: If you purchase a property in an HOA, you might have to pay an application fee to the HOA and possibly an initiation fee to the community. They also might require a prepayment of a certain number of months of the HOA dues when purchasing.
    • For Sellers:
      • Real Estate Agent Commissions:
        • This is the big one. Usually, it is 5% to 6% of the sale price if the seller pays for both the buyer’s and seller’s agents.
      • Marketing
        • Photography and Marketing: Professional photos are essential when selling any property, especially single-family homes. Suppose you are selling the property through a broker. In that case, they will most likely cover the cost of photography and marketing materials, but always verify this before signing a listing agreement.
      • Repairs and Upgrades
        • Pre-listing Repairs: The cost of making repairs before listing the property. These repairs are commonly done when the property owner is aware that something is in poor condition and that this issue will most likely become a concern during showings or the inspection.
        • Upgrades: Making upgrades before selling the property in hopes of increasing the home’s value over the cost of the upgrade is something that should be done only after careful consideration. An interested buyer might not like how you remodeled the bathroom and would have rather paid a lower price and done it themselves.
      • Closing Costs
        • Transfer Taxes: Taxes paid to transfer the property from the seller to the buyer.
        • Escrow Service/Title Company/Attorney Fees: Depending on your state, you will owe fees to one or more of these companies for handling the title and escrow service.
        • Title Insurance: The seller usually pays for the title insurance, which protects against issues with the property’s title.
      • Income Tax
        • Taxes on Profits: If you have made a gain on the sale of the property, you may owe capital gains taxes. Your accountant should be one of the first people you speak to before listing your property.
      • Some Additional Considerations:
        • Time on Market and Holding Costs: If the property is not rented while you are selling it, holding costs are another factor you must also consider.
        • The Real Estate Market: The state of your local real estate market will seriously impact the ease of selling the property, your negotiation power, the time on the market, and your overall return on investment.

Transcript:

Charles:
Imagine you’re about to make the biggest purchase of your life – a new home. You’Ve saved for years and budgeted your finances, only to realize all the hidden fees involved when you buy or sell a property. It drives me a little crazy when people discuss purchasing a property, maybe it’s a home or a rental property, and they say some broad numbers about the down payment or the mortgage amount, hinting at what their cost will be to purchase, what the monthly payment will be, and what they will rent it for, leaving out so many costs and fees. So in this episode, I will dissect all the fees associated with buying and selling real estate.

New Speaker:
Welcome to Strategy Saturday; I’m Charles Carillo, and today we’re going to be discussing the hidden cost of buying and selling real estate. Real estate transaction fees are not a topic that is commonly discussed, but it is something that any future property buyer or seller should be thoroughly knowledgeable about.

Charles:
This is actually one thing that drives me crazy when speaking to people who have sold properties and only make a point of discussing what they purchased the property for and what they sold the property for. Something very common with homeowners who are trading up to a bigger house, they forget to mention, most likely they’ve never kept track of the list of expenses, renovations, repairs they made in the transaction, fees they incurred when they bought and sold the property. Now, I have wanted to make this episode for some time, and a recent CNBC article reminded me of the topic. I’ve linked to it in the show notes. In the past, if someone had asked me if they should buy a rent, I typically told them that they would pay roughly 10% of the property sale price in transaction fees. And this isn’t oversimplification, but my thinking was that you would have about 5% in agent fees when you sell, and another 5% in transaction fees incurred during the purchase and sale process, which is pretty accurate.

Charles:
Plus, of course, all of the repairs or renovations. And I want to clarify that. I’m not saying that buying a property or a home is a bad idea, but buyers need to know the full scope of cost before purchasing. So the CNBC article stated that the typical cost to sell a house is nearly $55,000, and they noted that on average, 39% or $21,000 is spent on real estate agent fees. Sellers spend $10,000 before listing on home repairs, $8,000 on closing costs, $7,200 on buyer concessions. That will reduce the upfront purchase costs for the buyers and $3,200 on marketing and advertising and 2200 on staging costs. Of course, you might not be subject to all these costs when selling your home or rental property, but it shows the significant impact these expenses will have on your overall return on investment. So let’s not break down these costs in more detail, and I’ll leave out moving and staging expenses since they are not really pertaining to rental property investors in most situations, which is mostly what we talk about.

Charles:
So starting off for buyers number one is closing costs. So you have loan origination fees, and these are fees paid to the lender for processing a loan. You have appraisal fees, the cost of hiring a property appraiser to determine the property’s market value, and the lender usually requires an appraisal and they will choose their own appraiser. Next is inspection fees. So the fees paid to the property inspector and other contractors you have hired to inspect the property’s condition. It usually includes a general inspection, pest inspection and a specialized inspections that the buyer desires. And I would add like an HVAC contractor here for a detailed heating and cooling system review. Since an inspector usually cannot provide this, they can just provide some, you know normal overview of what they see, but nothing really, because they’re not licensed, they don’t work with HVACs all the time.

Charles:
The next is like the escrow service title company attorney fees. Now, depending on your state, you will owe fees to one or more of these companies for handling the title and the escrow services. Next is recording fees. And these are fees that are paid to the local government office for recording the property purchase and then prepaid expenses. And this includes property taxes, insurance, and possibly utility services like water and sewer. And your lender may require you to prepay interest as well. Now, I would estimate these closing costs to run about 2% to 3% of the properties purchase price, but I would go with 3% to be safe. Now, if you’re using some sort of specialty mortgage, so a low down payment, a government program, not a conventional loan, you might wanna increase this a couple percent. Number two is repairs and maintenance. So immediate repairs.

Charles:
So if a seller declines to make repairs or you’re doing renovations or repairs immediately upon purchase these must be factored into the cost of you purchasing the property, regular maintenance, and thus is the ongoing maintenance required to maintain the property’s condition. If you are a renter before this was taken care of by your landlord or, or it should have been. Next is the homeowner’s association, the HOA fees. Now, if you’re inside of an HOA these HOA dues and if you purchase a property, you in this HOA, you might have to pay an application fee to the HOA and possibly initiation fee to the community. They also might require a prepayment of a certain number of months in the HOA dues when purchasing. Now for sellers, the big one, number one is the real estate agent commissions, and usually this is 5%, sometimes 6% of the sales price if the seller pays for both the buyers and the seller’s agents.

Charles:
Obviously there’s been a lot of change in the, in the recent past about this, but I don’t really see this changing too much because buyers would have to bring more money to the table and most buyers are a little bit strapped and they’d rather roll it in to the price of the property, rolling it into the mortgage. Number two is marketing. So photography and marketing professional photos are essentially when selling a property, especially single family homes suppose you’re selling the property through a broker, in that case, they will most likely cover the cost. The broker will most likely cover the cost of the photography and marketing material, but always verify this before signing a listing agreement. This is one of the things that really kills looking at a new property, any type of property, when the pitchers are bad and it’s so inexpensive today it’s, it’s something that should not even be thought about twice.

Charles:
Number three is repairs and upgrades. So pre-listing repairs. So the cost of making repairs as a seller before listing property, and these are repairs are commonly done when the property owner is aware that something is in poor condition that this issue will most likely become a concern during the showings or the inspection. So they’re taking care of it right now, which is the right way of doing it to make it is the process as fast as possible once they have a buyer. And there’s less issues with going to closing. Next is upgrade. So making upgrades before selling property in hopes of increasing the home’s value over the cost of the upgrade is something that should be done only after careful, careful consideration. An interested buyer might not like how you’ve remodeled the bathroom and would have rather paid a lower price and done it themselves.

Charles:
So this is one of the things you have to really know going in whether you’re gonna give a lower price on the property or whether you’re gonna start upgrading things because upgrading can be really done. It’s really person to person. So if someone, it might turn off some buyers ’cause they don’t wanna pay for it if it’s not their style or not how they would want it done. Number four is closing costs. So transfer taxes, taxes paid to transfer the property from the seller to the buyer. Escrow service title, company attorney fees. So the same thing really on the buyer side, but depending on your state, you’ll owe fees to one or more of these companies for handling the title on the escrow services. It’s not gonna be the same price, so if you bought and you sold usually it’s gonna be a little less expensive one way or the other depending on how much work the title company or the attorney has to do.

Charles:
Now, title insurance, the seller usually pays for the title insurance, which protects against issues with the property title, and this goes state to state, but in Florida where I am the seller usually pays for the title insurance, which protects, as I said, the issues the property’s title and remains that it can give a good title to the buyer. Next is income tax. Now, this is not a fee per se that has to do with transaction fees, but it’s taxes on profits. And if you’ve made a gain on the sale of your property, you may owe capital gains taxes. Your accountant should be one of the first people you speak to before listing your property. But they’re also gonna be a lifeline with you helping you through the process of maybe mitigating how you can save taxes as you’re going. Now there’s currently right now there is an exemption for if it’s your personal residence of $250,000 or $500,000.

Charles:
So those gains you’ve made, if there are less than that amount or that amount, you don’t pay taxes on that. And that’s if you’re single or married, that’s where the two 50 or 500 comes from. 500,000 comes from over that you start paying taxes on that. And this is where it’s important to talk to your account then and figure this out before doing any financial transaction, not just buyer or selling. And there’s ways of, as we said before, mitigating this where you can do, do 10 30 ones or something else, different, different episodes. I talk about this, but it’s important to whenever you’re even thinking about it, to bring in your tax professional and if they can kind of let you know what you’re really talking about, you don’t wanna find out when you have the property under contract to be sold that you’re gonna have this huge tax bill.

Charles:
And really you don’t have many options at that time. So some additional considerations is time on the market and holding costs. Another thing that people don’t talk about if the property is not rented while you are selling it, holding costs are another factor you must also consider. And it also plays into the buyer’s hand because you’re more likely to offer rebates or discounts if you’re paying every day for maintaining that property for keeping the lights on the ac going, everything running correctly during this time where the buyer might be just kind of dragging their feet. So it’s something that usually works in the buyer’s favor, but it’s, it’s one thing that the seller hasn’t take into consideration. Now, the real estate market, the state of your local real estate market will seriously impact the ease of selling the property, your negotiation power, the time on market, and your overall return on investment.

Charles:
So I hope you enjoyed, please remember to rate, review, subscribe, so comments and potential show [email protected]. If you’re interested in actively investing in real estate, please check out our courses and mentoring [email protected]. That is syndication superstars.com. Look forward to two more episodes next week. See you then.

Charles:
Have you always wanted to invest in real estate, but didn’t have the time, didn’t know where to find the deals, couldn’t get the funding and didn’t want tenants calling you. Since 2006, I’ve been buying income producing properties and great locations that provide us with consistent passive income. While we wait for appreciation in the future and take advantage of tax laws while we’re waiting and unlike your financial advisor, we invest alongside our investors in every property we purchase. Check out to investwithharborside.com. If you like the idea of investing real estate, if you like the idea of passive income partner with us at investwithharborside.com, that’s investwithharborside.com.

Announcer:
Nothing in this episode should be considered specific, personal or professional advice. Any investment opportunities mentioned on this podcast are limited to accredited investors. Any investments will only be made with proper disclosure, subscription documentation, and are subject to all applicable laws. Please consult an appropriate tax legal, real estate, financial or business professional for individualized advice. Opinions of guests are their own information is not guaranteed. All investment strategies have the potential for profit or loss. The host is operating on behalf of Syndication Superstar, LLC, exclusively.

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