Estimating Closing Costs in Pennsylvania

[Steve Uhlig]

Hello Investors,

I am looking at 1-4 unit deals in South East PA outside of Philly. My question is about estimating total settlement costs as the buyer. The settlement charges consist of 2 main categories: closing costs and prepaid/escrow items. The closing costs are all one-time fees and the pre-paid/escrow items are all representative of on-going expenses like insurance, taxes, and interest. When estimating my initial investment calculation for the purposes of estimating ROI, should I factor in just the closing costs into the equation or should I factor in closing costs plus all pre-paid/escrow items. The reason I ask is it seems as though I would be double counting on-going expenses (insurance, taxes, and interest) if I also incorporate them into the initial investment calculation as well as in the NOI calculation. In the real life examples I have, total closing costs equal about 3.2% of the $200,000 purchase price, but when I add in pre-paid/escrow items the total settlement charges equal about 6% of the total purchase price. Which number is correct to use as part of the initial cash investment calculation: just closing costs or total settlement charges?

Steve

[Chris K.]

@Steve Uhlig

It depends on how you set up your underwriting but I agree that you are double counting it if you do it the way you describe. The way I have it set up, the pre-paid/escrow items do not belong in my "closing costs" column. Now if you are doing a monthly profit and loss as part of your underwriting, you do want to account for that. But that shouldn't really affect your ultimate returns in any meaningful manner even if you use IRR method.

Long story short, I wouldn't worry about including the pre-paid/escrow items as long as you don't forget to bring the money to the closing. :) 

Disclaimer: While I’m an attorney licensed to practice in PA, I’m not your attorney. What I wrote above does not create an attorney/client relationship between us. I wrote the above for informational purposes. Do not rely on it for legal advice. Always consult with your attorney before you rely on the above information.