Title Insurance & Closing Costs: Tips for Real Estate Investors
Editor's Note: This post was originally published in August, 2022 and has been completely revamped and updated for accuracy and comprehensiveness.
You know that thrilling moment when you're about to close on an investment property? Whether you're a newbie or a seasoned pro, it's one of the most exciting parts of the journey. But let's be real, the closing process can be a bit of a drag, right?
Well, fear not! Modern tech has come to the rescue, making the whole process way more efficient and less of a headache. Companies like Spruce*, for instance, are revolutionizing digital title and closings, offering local expertise on a national scale—and making it faster to close on your dream investment property.
But hey, we know closing can still be a bit of a paperwork party, not to mention those pesky fees that can add up real quick. That's why it's super important to be prepared and budget for those costs so you don't get any nasty surprises.
So, are you ready to dive into the world of title insurance and closing costs? Let's break it down and get you prepared for your next property adventure!
So, do you have to buy title insurance?
When it comes to closing costs, title insurance costs typically tag along for the ride. You've got two types of title insurance policies to consider: lender's title insurance and owner's title insurance. The lender's policy protects the lender issuing the mortgage or other financing. In contrast, the owner's policy safeguards you, the savvy real estate investor, against any unexpected claims or title defects that could surface after purchasing the property.
Lender's title insurance? Yup, that's pretty much non-negotiable. If a mortgage or loan is involved, you'll need to secure a lender's title insurance policy, as the lender wants to ensure they'll recoup their investment.
Now, about owner's title insurance—it's optional, but let's be real, it's a wise investment. Title insurance can shield you from potential problems that only reveal themselves after closing on the property. We're talking annoying liens, distant relatives of former owners claiming a legal interest in the property, encumbrances, and other unwelcome surprises that could cost you a pretty penny or even threaten your ownership of the property.
An owner's title insurance policy typically ranges from a few hundred dollars to a couple thousand as a one-time premium. The protection lasts for as long as you own the property. As for who covers the cost of the owner's title insurance policy, that depends on local and state customs (which can even vary within a state) and the current investment property market. Sometimes the seller might pick up the tab, but don't bank on it being a guarantee.
What's in the closing costs mix for real estate investors?
When you're snagging an investment property, there's more to the party than just you and the seller. You've got real estate agents, lenders, attorneys, inspectors, title insurance companies, and more all working together to make the deal as smooth as possible. Closing costs typically account for about 2-5% of the property's value, so for a $500,000 property, you could be looking at $10,000-$25,000 in closing costs.
Here's a quick rundown of what you'll usually find in closing costs for real estate investors:
- Attorney fees: Real estate attorneys ensure all the documents are legal and accurate and will guide you through the closing process.
- Property appraisal and survey: This assesses the property's fair market value, which can impact your property taxes and investment potential.
- Property inspection: As an investor, you might require a contingency to only move forward with a purchase if the inspection comes back clear of major problems or damage.
- Loan origination and escrow fees: This covers processing and underwriting the investment loan.
- Lenders' service fees
- Credit report fees
- Title search: This investigates property records to ensure the seller has the full legal rights to sell the property.
- Title insurance policies: Lenders usually require a lender's policy, and it's often a good idea for investors to have an owner's title insurance policy as well.
- Taxes: Sellers often pay certain taxes, like prorated property taxes and possibly transfer tax.
As an investor, you'll typically cover most of these closing costs, but sometimes you can ask the seller to pitch in (either as a percentage or a set dollar amount). Keep in mind, though, that they're already responsible for a bunch of costs on their end, like agent commissions, prorated property taxes, HOA fees, and other expenses. Whether they'll agree to help with closing costs might depend on factors like who has more leverage in the current investment property market.
Escrow fees are often split evenly between the investor and seller, but this might also be up for negotiation. Some companies offer flat fees that could save money for both parties. For example, Spruce charges an all-inclusive flat settlement fee that includes notary fees, wire transfers, overnight couriers, eClosing software, and more. This fee usually starts at $400 per side.
How to potentially shave off some closing costs
Most closing costs and fees might be set in stone, but that doesn't mean there's no wiggle room to trim down your upfront expenses. Check out these tips to help lower your initial outlay.
- Shop around: Lenders like Kiavi can hook you up with quotes for things like interest rates, closing costs, and service fees. Comparing options can help you find the best deal.
- Choose your providers: If you come across inspectors or companies offering title searches at lower rates than the provider listed on your loan agreement, consider switching to a more cost-effective option. For example, tech-savvy companies might offer savings in both time and money, along with other perks.
- Haggling with the seller: While your local investment property market might influence this if you've got some leverage, you could try asking the seller to knock a bit off the property's sale price or cover a portion of the closing costs.
Remember, Kiavi teams up with Spruce to give real estate investors the power to tap into a custom online technology platform that harnesses modern tech and data science for quick, efficient, and reliable financing.
Wrapping it up: closing smarter on your investment properties
So, you've gone through the rollercoaster of emotions that come with purchasing an investment property, and now it's time to tie up all those loose ends. We've covered the must-haves and nice-to-haves of title insurance, the nitty-gritty of closing costs, and even some savvy tips to shave off some of those extra expenses.
Remember, modern technology has swooped in like a superhero to make the closing process faster and more efficient. Companies like Spruce* are leading the charge in digital title and closings, offering national coverage with local expertise. It's all about getting you to the finish line faster and with fewer headaches.
But don't forget that preparation is key. Budget for those closing costs and know what to expect when it comes to title insurance. With all this info under your belt, you'll be ready to navigate the world of investment property closings like a pro.
Now, armed with this knowledge, go forth and conquer the real estate investment world! May your closings be smooth, your title insurance rock-solid, and your investment properties ever prosperous. Happy investing!
*Kiavi collaborates with Spruce by allowing real estate investors to leverage a custom online technology platform that uses modern technology and data science to access financing quickly, efficiently, and reliably.