Real Estate Investors Terminology. This week we look at Selling Transaction Cost and how to determine this value.

Real Estate Investors Terminology. This week we look at Selling Transaction Cost and how to determine this value.


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A successful 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 all together 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….  Selling Transaction Cost

 

Selling transaction costs are generally larger than the buying transaction cost (See blog from last week to review buying transaction cost).  Selling transaction costs can be grouped into three primary areas including legal/taxes, realtor fees, and marketing fees. The realtor fees are normally the largest of the three but each one individually is significant.

The legal/tax fees consist of the escrow/attorney fees, title insurance, transfer and conveyance, and recording fees.   The escrow/attorney fees will cover the cost of making sure all the documents are correct and that the closing is done correctly.  In Peoria, the common practice is to use an escrow company to close on the property. In Bloomington-Normal, the common practice is to utilize attorneys to close on a property.

Title insurance will need to be provided to the buyer. In Illinois, this cost is generally attributed to the seller but needs to be specified in the contract. This can be negotiated as to which party pays. Title insurance is provided by the Title Company to provide insurance that the title is free of liens and encumbrances.  See last week’s blog for a further discussion on Title Insurance.

The transfer and conveyance fees are the fees charged by the state, county and city government agencies to record the transfer of ownership.  The transfer of ownership is recorded by the Peoria County Clerk. Peoria County charges a fee to transfer the title. The city of Peoria also charges a fee when transferring of ownership is recorded. Peoria county charges 50 cents per $1000 dollars based on the sale price. The City of Peoria charges 25 cents per $1000 based on sale price.  Transfer fees are calculated by the following formula. Sales price/1000 * (.5 + .25) = transfer fees.  The fee will be paid in the form of stamps purchased and attached to the paperwork.  

Realtor fees are always a topic of debate. These fees are typically 7% of the sale price.  They are negotiated prior to the agents and homeowner sign the contract to sell the property.  The reason this is always a topic of debate is the general public feels these fees are high. I firmly believe a good Real Estate agent is worth this fee. This will be a topic of discussion in a future blog.  A good Real Estate Agent makes sure everything runs smooth in establishing a fair price, advertising, price negotiations and finalization of the sale through closing. Real Estate Agents are a valuable asset to have to help guide you through the process.

The last category of fees are the marketing feesSome of these costs are covered by the Real Estate Agent. The agent will list the property in the MLS, advertise on various other websites and real estate publications. The agent also will hold open houses. However; other marketing fees will come up. The major cost will be the cost to stage the property if you decide to do it. Staging helps the potential buyer to visualize how they could utilize the property and gain a good feel for what it will look like once their furniture is in place.  Staging cost will run about $1000 – $3000.  A property that has been staged may sell faster and for a higher price.

In summary, the Selling Transaction Costs are significant and are directly related to the final sales price.  The selling cost of a $200,000 property will be about $1500 for legal/tax fees, $14000 for realtor fees, and $2000 for marketing fees. Total cost will be approximately $17,500.  This will vary for each property and each set of circumstances for that particular property but this gives you a rough idea of the cost.

Next week I will discuss the holding costs.

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