If you’ve ever bought or sold a property, you know that closing costs can add up. For investors, those costs can have a big impact on overall returns, especially when margins are tight. The challenge is that closing costs aren’t the same everywhere. They vary by state, by county, and even by municipality.
Understanding what you’ll be paying – and why – can help you to plan ahead and avoid surprises on the settlement sheet. Let’s walk through the main categories of closing costs investors can expect to encounter when purchasing real estate.
1. Transfer Tax
Transfer tax is one of the biggest expenses you’ll see at closing. It’s charged by state and local governments whenever real estate changes hands. The tax is typically calculated as a percentage of the property’s purchase price.
In Pennsylvania, for example, the total transfer tax is generally 2% of the sale price. 1% goes to the state, and 1% goes to the municipality. While that’s consistent across most areas, there are exceptions. Reading City, for instance, applies a higher local rate of 2.5%. That’s a meaningful difference if you’re buying a larger property, so it’s important to confirm the local rate before you close.
Maryland is even more varied. The state applies a 0.5% transfer tax, but individual counties can also add their own. Hartford County’s rate isn’t necessarily the same as Baltimore County’s, and some counties assess both a county tax and a recordation fee. Understanding your specific location’s rules can save you thousands of dollars and prevent last-minute surprises.
2. Title Insurance
Title insurance is another significant cost, though it’s one of the most important protections you can have. It ensures that the property you’re buying has a clean ownership history and that no one else can claim rights to it.
Lenders require title insurance for financed purchases, but it’s a wise safeguard even if you’re paying cash. It protects you against potential legal disputes or title defects that could arise after the sale.
The cost varies slightly from state to state and lender to lender. In Pennsylvania, title insurance rates are set by the state and generally range between 0.5-1% of the purchase price. The percentage decreases as the price of the property increases. Maryland follows a similar pattern, although the exact rates can vary more with higher-value properties.
Title insurance may not feel exciting, but it’s one of those line items that can save you from enormous losses down the road.
3. Loan Fees
If you’re financing your purchase, lender fees are another part of the closing process. These can include a loan origination fee, appraisal costs, underwriting fees, and other charges that vary by lender.
The largest of these is typically the origination fee, which compensates the lender for processing and funding your loan. It usually falls between 0.5-1% of the total purchase price, although, as with most fees, the percentage tends to decrease as the property value rises.
Lenders may also pass along smaller administrative costs. Appraisal fees ensure that the property’s value supports the loan amount. Underwriting and document fees cover the lender’s internal review. While these fees can seem like a nuisance, they are part of the cost of leveraging financing in real estate.
4. Real Estate Commissions
Agent commissions are another important cost to understand. In many transactions, sellers pay commissions to both their listing agent and the buyer’s agent. The traditional rate hovers around 6%, usually split between both sides.
However, nothing about commissions is set in stone. Rates can be negotiated and often decrease as property values increase. For example, a high-value commercial property might sell with a lower percentage commission than a single-family rental property.
For buyers, representation costs can vary. In some cases, the seller covers the buyer’s agent fee, but not always. If you’re purchasing an investment property, clarify these details with your agent upfront so you know exactly who’s paying what at closing.
Commissions are not typically part of a buyer’s closing costs when paid by the seller, but they are a key part of the overall transaction and should be understood early in the process.
Other Costs and Adjustments
Beyond the major items, there are usually smaller prorations and adjustments due at closing. These can include property taxes, utilities, and rental income or deposits for income-producing properties.
If you’re buying mid-year, for example, you might reimburse the seller for property taxes they’ve already paid for the remainder of the year. If the property is tenant-occupied, rents and security deposits are adjusted so that ownership and income line up properly after closing.
While these amounts are typically smaller than the main closing costs, they’re important for balancing the financial details between buyer and seller.
Final Thoughts
Closing costs are one of those parts of a transaction that many investors underestimate. Transfer tax, title insurance, loan fees, and commissions can add up quickly. And because rates and requirements vary from one area to another, doing a little research upfront can make a big difference.
Being prepared means understanding what applies to your location, loan, and deal structure. That awareness helps you plan your purchase more accurately and keeps your finances on track.
Many investors we work with appreciate the clarity that comes from understanding each part of a real estate transaction before they buy. If you’re looking for guidance or opportunities on your next acquisition in Pennsylvania or Maryland, contact us to discuss your goals and how we can help you move forward with confidence.
