Real Estate Investors Terminology. This week we look at Buying Transaction Cost and how to determine this value.
A successful in Real Estate Investor has a good understanding of the key terms that Real Estate Investors use, what they mean, and how the values for the terms are determined. Once these keys terms are understood, then the Real Estate Investor can begin to understand and be successful in the Real Estate Investing business.
As a reminder, over the next several blog posts I will be digging deeper into the key terminology, explaining the meaning of them, and how they are determined. The last post in this series will bring it altogether to look at the potential profit or loss of a Real Estate Investment.
The terms we will be discussing are After Repair Value (ARV), Initial Purchase Cost, Repair Costs, Financing costs, Transaction costs, Buying & Selling costs, Holding cost, and Profit/Loss. Each of these terms is important and can have a big impact on the ability of and Real Estate Investor to make a profit. The potential profit or loss in a Real Estate Investment can be calculated by this formula:
After Repair Value – repair cost – financing cost – transaction cost – buying and selling costs – holding cost – initial purchase price = potential profit/loss
Transaction Costs…. Buying Transaction Cost
Generally speaking, the transaction cost when buying a property consist of attorney fees and title insurance. Title insurance is paid to a Title Company to search the property records and public documents to make sure that there are no liens, encumbrances or defects to the Title of the property. The insurance provides protection to the buyer. Depending on the type of transaction and financing, the lender will also have a Title Insurance Lenders Policy.
A Title company will issue a title insurance policy after the search of the property records are complete, they are satisfied that due diligence has been done, and there are no issues with the Title of the property. If there are issues, the investor has to work with the seller to get these issues resolved. A good investor will not buy a property without a good Title to the property.
In a normal transaction, the seller will typically pay for the title insurance but when investing in properties and renovating them, the cost of title insurance may be paid by the buyer. This needs to be agreed upon prior to the purchase of the property.
Most likely, an attorney will be needed to review documents and provide advice on issues with the purchase of the property. Attorneys have a broad knowledge of the law and many will specialize or focus on certain areas of the law. Obviously, using an attorney that focuses on Real Estate is wise.
When calculating the cost of Title Insurance and Attorney fees for your buying transaction you can assume a cost of about $750 for title insurance and $750 for attorney fees. Both of these numbers are approximations and should be confirmed by talking with a title company in your area and a real estate attorney in your area. The amount of work that has to be done will impact these numbers as well.
Next week I will discuss the selling transaction costs.