What costs do I have to deduct from what I am paid for a property?

Question

I am pursuing my goal to be a land investor, and so far I feel good about having bought a number of lots at a good price. There is still a lot I have to learn, so my question is going to be as basic as it gets.  I need to have a way to roughly calculate how much I might earn in a land transaction.  For the moment let's leave out what I paid for the land, because it will vary and in any event it is easy to subtract that amount at the end.  Say that I am selling the lot for $20,000  (the figure might vary, but we've got to use something). How many costs do I need to subtract from that, in addition to what I paid for the land, to get to my net profit?  How much do I pay the realtor?  Are there closing costs I need to factor in?  Anything else?   I would love for you to provide as much information as possible, as it is extremely useful to me.

Kevin Sobilo · Answer

@Sylvia Castellanos, a few items

1. Transfer tax on the purchase and also the sale. Much of PA is 2% transfer tax USUALLY but not always split evenly between buyer and seller and some places have higher transfer tax. So, you should expect to pay 1-2.25% for each transaction (purchase and the sale).

2. Property taxes while you hold the property.

3. If you are starting out and need an agent, you might expect to pay 6% OR MORE in commissions depending on the price point. You mention a $20k sale price and an agent can't really make a living selling at 6% of that. For lower sale prices you might see them have a flat fee minimum perhaps something like $2500 or $3k.

4. Title insurance. This isn't required if you are purchasing with cash, but if you don't have clear title, you'll have a LOT of trouble selling on the back end. Title insurance in PA is based on the purchase price.

5. Closing agent. When you purchase, whoever handles the closing will likely charge you a fee for doing that work. This can vary quite a bit, but I might expect $250-750 but could even be more in your area.

6. There are a number of small fee with purchases and sales such as deed prep, recording fees, etc but they are small and pretty incidental.

Kevin Sobilo · Answer

These things vary from state to state and perhaps even region to region.

In Pennsylvania, the BUYER almost always pays for the title insurance to protect themselves. That is part of the standard contract that realtors use, but a private party sale could of course be different.

However, the seller may guarantee the title themselves depending on the type of deed they provide (General Warranty, Special Warranty, or Quit Claim). In PA, Special Warranty is probably the most common which guarantees the title against issues that came into existence during the seller's ownership.

With regard to closing costs, in Pennsylvania the seller generally pays for deed prep and half of the transfer tax and the buyer pays for the rest.

Sylvia Castellanos · Answer

What a great reply!  This is exactly what I needed. Thanks so much!

One question. Is it the seller or the buyer that pays for the title insurance?  On our hypothetical $20k property, how much might the title insurance cost?

Sylvia Castellanos · Answer

Sorry, one more question.  Aren't the closing costs split between the seller and buyer?

Sylvia Castellanos · Answer

Thank you for pointing out the possible pitfall . I will definitely look into it.

Kevin Sobilo · Answer

This does not replace title insurance in any way.

This pertains to the type of deed you provide with a sale. A quitclaim deed makes no guarantees at all. A special warranty deed (most common ) guarantees any issues that came into existence during the seller's ownership and a general warranty deed guarantees any issue no matter when it happened.

Kevin Sobilo · Answer

Even if a property has clear title you probably cannot get title insurance on a property until you own the property a year because title companies won't trust the title searches because tax sales are so messy.

You have to have clear title to get title insurance, but with a tax sale, you also generally have to own the property a year as well because that gives some time for any unknown issues to come forward. MANY things can affect the title to a property. It is not always simple or straight forward.

There is a high probability that you will need a lawyers services to do a quiet title or pay estate taxes or whatever else. Why have a title company start the work when you likely will need to hire a specialist in the end. This is the kind of messy work where I would recommend having the lawyer do everything. Otherwise you may pay twice as the lawyer might even want their people to do the title search again.

Sylvia Castellanos · Answer

Greetings from Montgomery County, Alan!  It's great to meet people from the Delaware Valley on this forum.

Let me ask you this. How much do you expect the title company or attorney overseeing the closing to charge?

Alan Asriants · Answer

In PA transfer tax is 2% which is usually split 50/50 between Buyer and Seller. Usually seller pays commissions.

Its possible you might need to order a tax cert. Then you have other fees like settlement fees, notary, etc that might be like 200 bucks total.

Your most expensive expenses are your transfer tax and commissions.

In Phila that transfer tax is 4.28%

Sylvia Castellanos · Answer

Something else that caught my eye in one of the replies I received. "However, the seller may guarantee the title themselves depending on the type of deed they provide."  I can guarantee the title?  What form does this take?

What costs do I have to deduct from what I am paid for a property?

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