In my two previous posts on real estate transaction closing costs every buyer, seller and lender must prepare for, I discussed at length and extensively on those property purchase or sale transaction closing costs that are connected to or aligned with accessing mortgage loans facility from a lender or a financial institution such as a bank or mortgage company.
Also I walked you arm in arm through some of the most common and important processes, activities and events that can help all parties involved in real estate transaction process achieve a smooth, hitch free, fair and successful real estate transaction deal particularly when financing a property purchase via the conventional mortgage loan.
In addition to this, I also promised to share with you in this very post some of the property sale or purchase transaction taxes, insurance policy, homeowners and other government related real estate transaction closing costs all buyers, sellers and lenders must be conversant with and be prepared for to avoid unnecessary discord or squabble.
I must say here that many inept investors have in the past purchased properties which they later regretted buying, some due to lack of the essential skill-set and knowledge required to successfully deal with complex and complicated real estate investing transactions or they got overwhelmed with the unexpected and unbudgeted for property purchase closing costs which came to them as a huge surprise.
In furtherance of my commitment to help increase your knowledge and understanding of some of these property purchase closing costs in order to help guide you through the principle of a purpose driven real estate investing to prevent and help you avoid any sudden outburst of bad temper also for you not to feel indignant about what might eventually played out of a gruelling real estate transaction process and closing costs.
And without wasting any more time, let me hint you on how I intend to sail this ship on this post. I would love to kick start this post with some of the important property purchase closing costs and task every buyer and homeowners must be prepared for to ensure that their supposed property investment asset don’t turn into instant liability.
Hopefully if time permits, I will touch those property tax, insurance policy and other government related real estate transaction closing costs before calling it a day in this post because extending this topic another week will overstretch its content and it may loses its value and I would not want that to happen.
For those people who are still trying hard to catch up with us on this topic, I can understand if you are befuddled and are not able to come to terms with some of this real estate transaction processes and closing costs explained so far in this particular topic I suggest you spend more time on them and get yourself acquainted with them.
For you to avoid being tizzy especially when you feel uncomfortable to handle real estate transactions, I strongly advice that you seek professional opinion prior to making investment decisions and if you must act based on what you read on Ordiez Resources Inc website, we also advice you speak with your real estate advisors to guide you.
Most of what I will be sharing on this segment of the post are the most common closing costs and am sure many are aware of them and have good knowledge of them yet they don’t take them seriously in real estate transaction process but I would stress their importance in this post.
The first property purchase closing costs I would dive into is Appraisal Fee and to help us cover as much as time would permit us, I would avoid any form of pettifogging to enable us deal with facts and what is important to know only about these closing costs.
If you need help with determining the true worth of the property you intend to buy or sell for you to know, have an idea of the estimate or determine what amount is considered fair enough to pay for or sell the property.
Appraiser most times work with investors, homeowners, lenders and sellers of real estate properties to help them estimate the true value of their property at a fee known as appraisal fee prior investing or putting it for sale in the real estate market for the public to buy and if you ask me only a few perform this task before buying or selling a property mainly because of the additional cost effect to the seller or the buyer.
Interestingly the appraisal closing fee in some property sale transaction deals are negotiable but most times it is customarily paid for by the buyer in almost all known property acquisition methods particularly via the conventional mortgage loan.
Let us quickly look at Property Rehab and Repairs as another important and common closing costs in real estate transactions.
Often this stage in property sale transaction process is performed prior to putting up, presenting, marketing and advertising property for sale in the market in order to increase its asset value as well as present it in the best possible light to attract potential buyer.
I must say many homeowners and investors ignore this stage of property rehab and repairs with some unreasonable excuses and this best explicates why many properties are poorly presented for marketing and advertising and of course accounts for the rapid lost in value and condition of real estate properties today.
The onus is on the seller of the property to make repairs and rehab the property before putting it for sale in the market but at times when the seller is heavy and could not handle the rehab on his or her own or bring it up to the taste of the buyer or a potential buyer then this could be negotiated particularly if the buyer love the property.
I must emphasize that patently the seller regardless of whatever form of real estate sale transaction process is charged with the responsibility of making important and necessary rehab and repairs on the property be it in an all cash property purchase deal or the conventional mortgage loan property purchase transaction.
Also if you think or notice something about the property that could have been done better or there exist a maladroit repairs or rehab in some part of the property that you are not satisfied with, you can raise it, ask questions and probably negotiate with the seller on the issue or concerns during the purchase transaction process.
As I stated earlier many homeowners and sellers in this part of the world hardly carry out rehab or repairs on their properties intended for sale or rentals. They close their eyes to repairs even to some obvious, visible, required and the most important aspect of their property but still expect buyers to make repairs and still want to sell at the prevailing market price.
As a result many properties are sold and leased out to potential buyers or occupiers in this part of the world in a very tatty and ropy state and surprisingly the homeowners would still want to collect or receive payment for security deposit for the badly maintained property in the case of a rental property.
Let’s move on to what is popularly known as the Realty Commission, I wont waste any time on this because almost everyone I see on the street is either a real broker or agent and I believe many must have either receive or pay Realtors Commission for engaging a realtor or rendering the service to someone.
The realtor’s commission is usually paid for by the seller of the property who engages the services of a real estate professional such as an attorney, broker, agent etc in the sale transaction process especially if the buyer of such property is financing the purchase through a mortgagee even if its in an all cash transaction deal.
However, If the buyer also seeks professional opinion and advice from the real estate professionals on the intended purchase transaction process then he or she will be charged a fee for this service.
I don’t really want to commit myself to giving you an estimate of what the realtor’s fee or commission is like in a real estate transaction deal. I can say buyers engaging an attorney and a real estate agent must be prepared and ready to pay around 7.5% of the property purchase cost as legal fee and between 1% and 2.75% as real estate agent fee.
Similarly, sellers using an attorney and real estate agent for their real estate sale transaction process must also be ready and willing to pay 5% as legal fee and of course between 1% and 2.75% as agent fee as part of the closing costs in transactions running to thousands of million.
The next property purchase closing costs I want us to discuss is Inspection of Property. This is one of the most important important task in property sale transaction process and this is carrying out of inspection on the property to check and ascertain not only the structural condition of the building but also to know the operational state of the installed electrical, mechanical, heating, air conditioner and plumbing systems.
Conducting an inspection around and through the property allows and enable the buyer to make an investment informed decision in order to prevent splurge. Often time inspection of property is carried out on the request of the buyer buyer and hence the buyer is responsible for payment of all inspection fee regardless of the form of acquisition methods be it in an all cash down sale transaction or through the mortgage loan financing method.
It will be appropriate now to talk about those closing costs that are tax, insurance and other government related.I crave your indulgence to start with insurance and I will only discuss the two most important must have insurance policy because others are based on choice of the parties involved.
Let us look at the Owner’s Title Policy fee paid for by the seller as part of the closing costs in a real estate sale transaction deal. Owner’s title policy fee is charged as a one time fee that covers and protects the buyer of the property in the event of unexpected and unforeseen title issues, concerns and problems.
It is envisage that there may be issues the seller or homeowner failed to disclose in the transaction process, hidden liens problems, case of forgery and any other form of error or omission in deeds which may crop up as a result of carrying out the property’s due diligence when examining records.
For this reason it is very important for every buyer or homeowner to process and secure a title insurance, which will instinctively make them the rightful owner of the property it in the eyes of the public and the law.
The great news is that processing what is known as Owner’s Title Policy provides you with a legal backing, defense and assurance in case a lawsuit ensues in respect of the title ownership claim and this most times is issued in the amount of the property purchased and it might also interest you to know that it lasts for as long as the buyer has an interest in the property.
I want to harp on this again that the seller is responsible for the payment of owners title policy in both the conventional mortgage loan financing and in an all cash real estate sale transaction deal.
The second insurance related property purchase closing costs is the Lender’s Title Policy which customarily is paid for by the buyer of a property especially if the property purchase financing is via a mortgagee.
The essence of processing a Lender’s Title Insurance Loan Policy is to protect the interest of the Lender on the property against any unexpected, unforeseen, hidden and incubus title issues and problems that may surface during the course of the loan period issued to the buyer.
I must also warn and emphatically state here that the Lender’s Title Policy does not in anyway the interest of the buyer of the property in but instead it only encourages and allow the buyer to pay down on loan in order to gradually decrease the policy amount until it is paid off.
Let’s quickly look at Home Warranty, this is not as pronounced as other property purchase transaction closing costs we are familiar with in this region but we need to get ourselves attuned to this for development and growth sake as well as for future purposes.
Home Warranty provides the buyer with operational state of the covered or insured systems that are installed in the property intended for sale, this could be the electrical, heating, mechanical air conditioner systems and appliances.
In addition Home Warranty may also offer replacement and repair opportunities for covered equipments or systems that may be or become inoperable or damaged during the term agreed upon in the contract as a result of reasonable wears and tears that are considered appropriate. I decided to add this to it but it is rare you find yourself in this situation except in a lease deal.
Lastly on important insurance closing costs all parties to property purchase transaction particularly the buyer and lenders most show interest in is the Fire And Hazard Insurance.
Many real estate transactions here are usually done without this closing cost in mind but it is very necessary and important for the buyer to ensure that the property is insured against Fire and Hazard as well as protect it against any form of present or future threats to the investment especially if the buyer is financing the purchase with the help of a mortgagee.
This insurance cover protects the interest of both the buyer and the investor, the lender in particular for them to be rest assured that their investment is properly covered and protected against Fire and Hazard or any other known future government impound that may corrode the investment unexpectedly and untimely.
Hence if you are purchasing any property using a mortgage loan arrangement, you may be asked to pay for Fire and Hazard Insurance as part of the property purchase closing costs.
Let’s jump to some special tax related closing costs all parties to a real estate sale transaction deal be it the buyer, seller and the lender must exhibit confidence and be punctilious in their approach to enable them handle their transactions with remarkable aplomb regardless of who pays for what the knowledge of this is critical to the success of any real estate investment.
The first of this is what is known as the Tax Impound which sometimes referred to as an escrow account, usually this is used by the lender of a mortgage loan or a mortgagee as the case may be but the account is managed by a financial institution or a mortgage company.
This account is meant for the timely and periodic collection of the property tax payment and insurance from the buyer of the property or the borrower as the case may be and payments are made in this designated account with the financial institution on a monthly basis.
The onus is on the mortgagee or the lender to fully remit annually the tax impound as property tax payment to the government agencies responsible for property tax collection.
This process or method makes property tax payment a lot easy for the buyer or the borrower as the case may be compared to when they have to wait till the end of the year before paying for the property taxes which by then must have been accrued to a large amount and may be somewhat difficult for the borrower to pay the loom sum of money at the end of the year as property tax amount.
The tax impound as part of real estate sale transaction closing costs is customarily paid for by the buyer or the borrower particularly if the property purchase is financed through the conventional mortgage loan.
Let’s proceed to what is known as Tax Service Contract as part of a real estate sale transaction closing costs which if applied ensures the mortgagor, borrower or the buyer, who financed the purchase of his or her property via mortgage loan pays property tax on the purchased property transaction deal.
Most times or presumably at the close or completion of the property purchase transaction, the buyer is expected to pay a tax service fee to the lender or the financial institution that granted the loan to the buyer after which it is then remitted to the government property tax service agencies.
For effective management of this tax, the tax service agency or agencies are then charged with the responsibility of coordination, monitoring the accuracy and timely payment of property tax in real estate sale and purchase transactions during the term of the contract agreement between the lender and the borrower or the buyer of the property.
In addition to this, reputable tax service contract companies handling real estate tax service contract always inform the lender or mortgagee whenever the buyer pays property tax as well as send a statement to that effect to the lender at a fee if requested by the lender to erase, clear and ensure there is no or any act of impropriety in the process.
The buyer of the property or the borrower as part of the property purchase closing costs is customarily responsible for the payment of all cost associated with the tax service contract to the lender or the mortgagee.
However, If taxes are not paid on time the tax service contract agency is charged with the responsibility of sending a delinquency letter to the homeowner or the borrower as the case may be and if the time frame for tax payment elapsed and no payment is recorded then this instinctively becomes a lien on the property.
It is also worthy of note that property tax liens take precedence over mortgage loan in property purchase or real estate purchase transaction and this ensures and assures the lender that the property taxes are paid on a regular basis on the life span of the loan.
I would also love to take a peek at the Tax Credit and I don’t really want you to be marvelled by the incongruity of this in discusssing important real estate sale or purchase transaction closing costs but I think it is wise, sensible and necessary to have an idea of what this is even though it may not be accessible in this part of the world particularly in Nigeria.
The Tax Credit is a sum amount of deductibles allowable from the taxes owed by a tax payer to the government and this most times are as a result of some special types of credits granted by government or made available by to some individuals, groups and businesses based on their geographical location, societal class and industry particularly the real estate industry.
This is mainly seen in most developed countries of the world such as the United State, United Kingdom and several other civilized nations, it serves as a way of encouraging their citizens to invest or start a business in real estate regardless of the societal class by providing them with tax benefits, advantage, savings, deferral, deductibles and opportunities which cut across board without leaving class behind.
It might also interest you to know that tax credit in an organized set up is paid every forthnight or month depending on how you want or instructed them to remit on your claim form.
Lest I forget, the tax credit is paid for by the seller in both real estate cash transaction deals and the conventional mortgage loan financing.
The are several other property taxes that will further buttress my points here which I may not be able to discuss in this post because I have in the past and are also available in my new book titled Demystifying Real Estate Investing which by God’s grace should be out soon.
In my book, you would discover something interesting about the income tax, capital gain tax, stamp duty tax, value added tax, land use tax and rental income tax for homeowners of properties lease out to occupiers in exchange for monthly or yearly rent.
Before I call it a day, I still have about three more important information to share on real estate sale and purchase transaction closing costs all parties involved must be aware of particularly the buyer of the property.
The first on this is Document Preparation and Perfection which consist of multiple fees or charges at different stage of the title conveyance process which include registration fee, consent fee and stamp duty fee etc
After the right to ownership has been conveyed, the owner must get a valid survey for the property by applying for and competing the land information form certificate to enable you process the certificate of occupancy.
The owner now must return the application form with a cover letter and other required but relevant documents to the Land Use Allocation Committee Office for considerations, you can check out my blogs on how to successfully process C of O to legitimately make you the new owner of your newly purchased real property for details on this documents and much more.
The cover letter will clearly state all document attached to the application form addressed to the executive secretary of the Land Use Allocation Committee who is charged with the responsibility of publishing your claims on any National Newspapers for twenty one days for the public to object and if it survives this period the C of O would be processed.
This process is somewhat cumbersome and burdensome, you must ruminate about it prior setting out and make sure you are equipped with more than enough information about the process and the likely events that might played out in the process or be a glitch to successfully processing your C of O.
I want to expatiate on this a little bit for you to understand this concept and perhaps what I think is important to know as part of the property sale closing costs, the property taxes charged on sale in a real estate transaction is about 2% on capital gains for the government consent paid by the seller while a flat rate of about 3% of the accepted consideration of the property is paid by the new owner as registration fee coupled with about 8% of the value of the property as government consent and I thinking and hope this should suffice to delineate this facts on documents preparation and perfection of property purchase or sale closing costs.
I deliberately left out closing costs fees and charges on transfer of properties using transport in this because I already have an article on that in one of my blogs.
Also I wont dwell much on escrow service closing costs because I already have a post dedicated to importance of using escrow service companies in real estate transactions process and how anyone can effectively and productively take advantage of escrow services when purchasing real property.
The escrow service is rendered at a fee to successfully help with a hitch free and smooth real estate transaction process. It serves as a third party in the transaction process between the buyer and the seller who ensures the satisfaction of all parties involved.
Most times the buyer of the property who makes use of the escrow service pays for the escrow closing fee in all known property acquisition methods particularly via mortgage loan financing but if the property purchase is carried out using cash then the seller also pays for escrow service closing fee.
Another closing costs many may not be familiar with is the Recording Fee which many may argue that it has been conflated in the Document Preparation and Perfection and I really don’t have problem with this.
The agencies responsible for registering or recording of real estate purchase or sale transactions and processing of applicable documents charge a fee for this service which is usually known as the Recording Fee.
The payment for the recording fee and applicable documents is shared by both the seller of the property and the buyer and this exercise officially makes the transaction between the seller and the buyer a matter of public record which enables the general public and title insurer to search and access not only information and records on any property to determine the owner but also allow them to view the progression of the ownership of various properties.
And to my penultimate real estate purchase transaction closing costs many people especially the homeowner tends to ignore when they finally settle down in their new environment, neighbourhood and community their property is situated.
This is what many refers to as the Landlord Association Fee here but better known as Home Owner Association Fee usually paid by homeowners of a particular location, community as up keep of common areas and of course for maintenance and improvement of properties in the association.
In other words, If you purchase in a decent and well organized environment or community, you must be prepared to join the community’s Home Owner Association if one exist and expectedly must start contributing your monthly dues as member of the association and a proud property owner in the community in your first full month.
However all outstanding or previous dues owed on the property as Home Owner Association Fee must be paid for by the seller of the property at closing of the sale transaction process.
Finally, here is another little known property purchase closing costs every homeowners must be conversant with, the Assessment Fee is another fee levied on the homeowner in a civilized community or set up by the Home Owner Association to take care of important and necessary expenses not covered by the normal money monthly home owners association fee payment made for maintenance and improvement of properties under their jurisdiction.
Assessment fee is usually paid for taking care of public improvement projects such as streets, sewers, water, legal cost, indirect, special or consequential loss or damage claims etc levied against properties.
We have come to the end of these series on the most important real estate sale or purchase transaction closing costs every buyer, seller and lender must be aware of and must be prepared for and I would say bye bye now, please watch out for my next blog on real estate investing and investment property management.
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