Borrower’s frequently ask me “How much are the closing costs going to be?”. This article will serve to examine the typical closing costs. A description of each of the common costs and some estimates of these costs will be given. Here is a list of the usual closing costs along with who pays them:
Appraisal Fee-The lender will virtually always require a property appraisal. One potential exception occurs when there has been a property appraisal performed within the last six months. In this case the lender may accept an existing appraisal if the appraiser is suitable to the lender. The appraisal is the lender’s only way to be assured that the property used as collateral is worth what the buyer/seller says it is. Real estate values change with market conditions and the economy in general. This is the reason lenders require a recent or new appraisal. The cost of an appraisal depends on the lender’s requirements. If the lender accepts the work by a State Certified General Appraiser the cost for a small commercial property appraisal can be $1500-$2500. If the lender wants a more detailed appraisal by an appraiser certified as a Member of the Appraisal Institute (MAI), the cost can easily run $4000 or more. The appraisal fee will typically have to be paid directly to the appraiser prior to closing.
Closing Attorney’s Fees-These closing costs will typically be a lender’s attorney and a buyer’s attorney involved in the closing. While their fees are technically charged for by the hour, there is a fairly reliable way to estimate what the sum of these fees will be. The lender attorney fee will usually be around 0.25% of the loan amount. The borrower’s attorney fee will typically be around 0.75% of the loan amount. A good rule of thumb will be that the two fees will run about 1.0% of the loan amount. The attorney fees are typically paid at the closing table.
Environment Study-It will be the lender’s decision as to whether an Environment Study will be required. Soil contamination with toxic chemicals are a lender’s biggest concern. If a major problem were discovered after the purchase closes it could be disastrous for both the buyer and the lender. If a lender is concerned about this possibility, or if he simply is not sure, he may require a Phase I Study. The Phase I Study involves a review of records, a site inspection, and interviews with owners, occupants, neighbors and local government officials. Is the Phase I Study indicates a possibility of problems then soil samples and further examination of the property for contamination will be necessary. The closing costs attributed to a Phase I Study are usually around $1800-$2000. The cost of a Phase II Study would depend entirely upon the amount of work required. This cost will have to be paid prior to closing.
Property Inspection Expenses-These expense will vary greatly with the property type and size. Costs of $0.05-$0.30 per square foot are not uncommon. The advantages to the buyer of having the property inspected are obvious. If an expensive defect were discovered prior to closing the buyer could renegotiate the price or require the seller correct the problem.
Title Policy Endorsements-These are endorsements that the lender may require as additions to the Title Insurance Policy. A typical endorsement might be an environmental hazard endorsement. Title Policy Endorsements typically cost $25.00-$75.00.
Hazard Insurance-A paid up hazard insurance policy will always be required on the property prior to closing. The lender wants to be assured that his collateral will be insured in case of fire or other hazards. Because closing costs associated with hazard insurance vary with property type, value, and location it is recommended that an estimate be obtained for your particular property.
Financing Fees-These closing costs are associated with the lender/broker. The origination fee can vary from 1.0%-3.0% depending on the loan size and complexity. The lender will typically charge for recording the documents at the courthouse. These closing costs are relatively small as the courthouse will usually charge a small fee per page for filing.