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