Typical Transaction Fees in Real Estate Investing

For a new real estate investor flipping property looks like a good idea. However, there are significant costs associated with it in any real estate transaction. They are referred to as transaction fees because they are activated once a real estate transaction starts taking place.

It’s essential to understand transaction fees as an investor because they are among the key determinants of your net returns. These costs have the potential to dig into your budget if you don’t account for them in advance.

Transaction fees vary depending on where and when the transaction is taking place. Because they diminish your returns as an investor you should select properties with minimum transaction fees.

Here are some common transaction fees to provide you with a clear understanding of the types of costs you can expect to incur.

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#1: Real estate agent fees

The majority of people who sell or buy a home make use of licensed real estate agents. As professionals in the sector, they understand their markets well. With their excellent negotiating skills they can make the entire buying and selling process easier by ensuring the buyer and the seller are on the same page. They are involved in arranging tours, scheduling paperwork, and arranging things like photography of the home.

In exchange for their expertise, real estate agents charge a fixed percentage of the transaction value from both parties. The commission is always negotiable, but it’s often 4% to 6% of the transaction value depending on the contract the buyer and seller have with the agents.

As to who pays the commission is a little tricky. The standard practice is that the seller incurs the fee. However, the seller mostly includes this fee in the transaction value. Therefore the buyer ends up paying this fee indirectly.

#2: Legal fees

Real estate transactions tend to be complicated. They involve extensive paperwork because the costs of real estate are extremely high. Therefore, legal representation is crucial in any real estate transaction.

Conveyancers and solicitors are invaluable in property negotiations and can help you through the paperwork. They arrange all transfers, payments, and any other factors of the funds for the real estate transaction.

The legal fee is incurred by both the buyer and the seller. Some conveyancers will charge a flat fee while others will charge according to the complexity of the transaction.

Learn –> How to Invest in Real Estate, Make More Money and Retire Early

#3: Statutory fees

Whenever real estate transactions take place, most governments usually add to the transaction costs by taking a portion of the sale proceeds. Some of the statutory costs include:

Stamp duty

It is a  charge that is applied to the sale of residential property by state governments. Stamp duty is levied on the transaction value. It is not a fixed cost it differs in each state and territory.

This often results in people undervaluing their transactions on paper reducing the amount of stamp duty payable.

#4: Title search and issuance

This cost is usually incurred by the buyer. A title search is a background check on the property’s title to ensure that there aren’t any unpaid claims on the property. It is usually between $75 and $100.

The buyer also incurs a recording fee of the new title. It generally costs approximately $15 per page.

#5: Financing fees

The most common ways homebuyers finance home purchases are with mortgages. This attracts some transaction charges to be paid to the lender. They include:

Processing fee.

It’s charged by most lenders to process the mortgage agreement.

This fee includes the cost of collecting your documents, running a credit check to determine your creditworthiness, and the loan disbursement procedure expenses. Its fee is usually substantial because it ranges between 0.15% to 0.25% of the property value.

Appraisal Fees.

The lender uses an appraisal fee to hire a licensed professional who will determine the property’s overall value in question. This expense an inspection of the property compared to similar properties in the local area, recent sales that may have happened to these similar properties, and a final appraisal using all the information gathered.

It is required for a rental property investor to pay an appraisal fee of $300 – $400 for a single-family home and $500 – $700 for a multi-family property on average.

Mortgage loan insurance premium

As a buyer If you acquire a loan where you pay less than 20% of the down payment, you will have to get a mortgage loan insurance whose rate ranges from 1.75% to 3.75%.

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#6: Marketing Fees

From the seller’s point of view, search costs include advertisement expenses. Sellers have a variety of platforms to promote their properties. This can include money paid to newspapers and magazines to advertise their property.

Alternatively, sellers can make use of online portals that allow sellers to advertise their properties for free. However, serious sellers use the premium paid services offered by the same websites. Hence, they will incur a cost attached with that too.

There are circumstances whereby the owner of the house wants to rent the property instead of selling it. In this scenario, the owner may incur costs associated with conducting a credit check of the potential tenants to determine their creditworthiness.

In the case of a buyer search costs involve the expenses incurred to conduct scheduled visits to various houses

Learn –> How to Invest in Real Estate, Make More Money and Retire Early

#7: Closing Fee

Not only does the title company charge you for running a title search but they also usually host the closing at their office on closing day. This incurs a charge on the closing statement, usually shared equally by the buyer and seller.

The fee can range from $550 to $1,000, which works out to $275 to $500 each for the buyer and seller when splitting the cost.

It’s purpose is to cover the administrative work done behind the scenes to get ready for closing day:

  • Document prep
  • Attorney review
  • Escrow account set up
  • Escrow agent time spent running the closing

Final thoughts

The costs of transacting in real estate are many and varied. This is what makes real estate investment a long-term game. Flipping houses like one can flip stocks is not possible because of the transaction costs’ complexity.

Knowing the transaction fees you are likely to incur and who pays them is important whether you’re the buyer or the seller. Not knowing how much your transaction costs will be can be a real issue, especially if you thought that you had properly budgeted for the cost of buying or selling a home.

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