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Are you aware of the different subset of fees that exist on the settlement statement? Are you able to accurately estimate your closing costs on your next purchase? If you are not confident in your answers to the above two questions, then this will be a helpful line-by-line walk through of the settlement statement from the buyer’s perspective.
At closing, the settlement statement will have both a debit and credit column for the buyer, and a separate debit and credit column for the seller. These columns are a simple accounting exercise to arrive at the net proceeds given to the seller, and the necessary cash to close the buyer must bring to the closing table. This article focuses strictly on the buyer side of the equation. The seller’s debits and credits would show up as two columns to the left of the “Description” column in each example.
FINANCIALS & PRORATIONS
The first portion of debits/credits will be the Financial section which entails the purchase price minus the original earnest money and loan(s).
In the above example the property is purchased for $460,000 and there was an initial earnest money deposit of $15,000. In theory, if this was a pure cash purchase and there were magically no fees, the buyer would owe $445,000 at closing ($460,000 - $15,000).
You’ll notice the loan amount of $508,500 is more than the purchase price of $460,000. This is because the loan amount includes rehab funds which are accounted for in the debit column under Construction Reserve for $112,200. So yes it is a $508,500 loan, but $112,200 is not given to the buyer on the day of closing. Rather this amount sits in an escrow account until drawn upon during the construction portion of the project. Therefore, the net loan at closing is $396,300 ($508,500 - $112,200) against the $460,000 purchase price before we account for prorations and fees.
The remaining Proration/Adjustment category is typically going to include credits to the buyer. This would be any upfront deposit you paid your lender (good faith deposit), county tax proration, rent proration for the existing tenants (if you close on the 15th of the month, half of the rent already received on the first of the month is credited to you at closing), and any seller credits granted during attorney review. There are no seller credits included in the above example, but they would appear in this section if any credits had been granted.
A quick note on tax proration; in Cook County taxes are paid in arrears. So these 2021 taxes are paid in March of 2022 and August of 2022. Since the seller owned the property up until the closing date of 12/10/2021, he owes almost the entirety of the 2021 taxes; just not 12/11/21 - 12/31/21. During attorney review your attorney will also negotiate if taxes are paid at 100%, 105%, 110%...etc as it is assumed taxes go up each year.
LOAN CHARGES
The next grouping consists of all the fees charged by your lender. If doing a cash purchase, there will be no debits or credits in this section. The itemized descriptions and amounts will vary greatly, but below is a good baseline of what can be expected when dealing with bridge financing. Traditional residential financing will likely be more attractive and carry less fees than this example.
In this example, the origination fee is 1.25 points ($6,356.25 is 1.25% of the $508,500 loan) which would be high on a traditional loan, but inline with typical bridge financing options.
The prepaid interest covers the time between the loan closing and your first payment. Yes, you may not have a payment for a while, but the loan is not free during that period and the lender will capture that interest in the form of prepaid interest.
The Tax Escrow line item is front loading money into the escrow account to pay the upcoming taxes. This is not necessarily a lender fee but a cost that would happen regardless which lender you chose. If you didn’t have a lender on the deal, you would still plan to set aside this amount to make good on your upcoming tax and homeowner insurance payments.
TITLE FEES
The next section is the laundry list of title fees. Typically the seller chooses the title company as they are the ones providing title insurance. The seller will be responsible for the actual title insurance and title search, while the majority of the other “auxiliary” title fees are passed on to the buyer as shown below.
The buyer’s lender will almost certainly always request lender title insurance which is the $525 line item. In all, this buyer is paying north of $3,000 in total title fees which can feel like a waste.
One negotiation tactic when coming to agreement on the original contract, is to tell the seller “yes we can accept this price and term, but we will choose the title company.” Your attorney is likely an agent of multiple title companies and he/she can look to shop around and provide you the most competitive. Additionally, you may have good experience with certain title companies closing on time and also providing you with ease of doing business during your draw process. The draw process after closing is a whole separate topic, but if you are utilizing bridge/short-term financing, it’s likely that you will use the same title company you closed at to also service your rehab draws.
In the grand scheme of things, this negotiation tactic is not a huge deal, but every dollar counts and most sellers won’t care who is taking the lead here (although their attorney will likely care as he is also an agent of multiple title companies and is now being left in the cold on his cut of title fees).
Government Recording and Transfer Charges
Next you have your government fees which can be a big hitter when the property is within Chicago’s city limits.
The $98 to record the deed is a standard Cook County fee and if you are recording a lien (as we are in this example), it is an additional $98. A cash purchase would only have one $98 charge.
The Chicago Transfer Tax is the one that hurts the ole checkbook. The overall Chicago transfer tax rate is $5.25 for every $500 of the purchase price. So in this example of a $460,000 purchase, the city is collecting $4,830 for blessing you with the right to transact within their municipality :). Of that $5.25 per $500, the buyer is responsible for $3.75 and the seller is responsible for $1.50. So in this example the buyer pays $3,450 and the seller pays $1,380 debited out of their column not shown above.
Because this is a set percentage rate, it is very easy to calculate on all your purchases moving forward. Take the purchase price, divide by $500, and then multiply by $3.75. That will be your transfer tax when purchasing within the city of Chicago.
Miscellaneous Fees
Lastly you have your miscellaneous fees. The majority of these fees are on the seller side as they are responsible for providing the survey, the water certification, and the zoning certification. On the buyer side, you’ll likely pay your attorney out of the closing proceeds and this is the only fee shown in the below example. Other items that may show up in this category would be the homeowners insurance premium if not paid out of pocket before closing or included in the escrow, and if you are within a certain amount of days from when a property tax bill is due, the title company or lender may choose to have you pay the upcoming statement out of your proceeds.
We can go into a lot more detail on each line item and also cover the seller side of the equation, but for now this is a good overview of what fees to expect when buying a property in Chicago. This should hopefully help guide you in underwriting future deals and feel free to reach out with any questions.
Tom Shallcros is a Chicago investor, licensed IL real estate broker with Second City Real Estate, and co-host of the Straight Up Chicago Investor Podcast - www.straightupchicagoinvestor.com