We are doing our taxes right now. You may notice it’s August rather than April. Our reason for filling an extension is twofold. One, we get our accountant focused on just us instead of having to share her brain with everyone else. Two – and this is just rumor – I’ve heard you’re less likely to get audited by the IRS if you file an extension.
I don’t know if that’s true, but have you ever been driving along, doing the speed limit and happen upon a patrol car on the side of the road? Suddenly, even though you’re doing nothing wrong, you start feeling very uncomfortable. I understand that feeling pales in comparison to having an IRS agent standing in your office. That’s something I’d very much like to avoid.
But if reason No. 2 holds no water, then having my accountant’s full attention is reason enough to file the extension.
As we were working things through, my bookkeeper, Jackie Jones, said, “I just can’t get over how much closing costs are when you sell a house. Every time you send me a closing statement, my jaw drops.”
Jackie is not the only one who feels that way. Many home sellers and new investors get a shock while sitting at the closing table when they see just how much it costs to sell a house.
To make sure that doesn’t happen to you, I’d like to go over closing costs with you and teach you how to calculate them before you buy. This is important because if you’re going to be a seller of houses, you have to build closing costs into your purchase offers. Let me give you an example based on numbers from a house with a fixed-up value of $120,000.
As you’re looking at the closing statement, also called a closing disclosure, you’ll notice the section titled, “due from seller at closing.” At the very top of this section, you’ll see the total of everything that will be subtracted from the sales price. This includes lien holder payoffs, property taxes due, realtor commissions, and your contribution to the buyer for closing costs.
Line two under this section is titled, “closing cost paid at closing.” This is a little misleading. The closing costs here can mostly be attributed to the 6 percent realtor commission you agreed to when you listed the house with your agent. This section may also include any property taxes you need to pay. We’re going to overlook taxes and focus on commissions in this example, though. On the 120K house, commissions equal $7,200.
This will be your biggest cost.
Next, on line 8, you’ll see a section titled “seller credit.” This isn’t a credit to you. It’s the amount of money you are crediting to your buyer so they can purchase your house. And lately, this cost has gone up. For the last few years, you could always safely bet on the buyer asking for about 3 percent of the sales price for closing costs. Now buyers are asking for somewhere between 4 and 6 percent. Let’s use 5 percent on our $120K house. That comes out to $6,000 your buyer is going to ask for in closing costs.
This means it will cost you a total of between 10 and 12 percent of the sales price to sell your house. In dollars, the $120K house costs $13,200 to sell. You should round it up to $14,000 to cover the prorated taxes.
Now you see that closings cost a lot, but don’t get hung up on that number. It’s just the cost of doing business. Remember, you make your money when you buy. That means you need to account for a 12 percent reduction of your after-repair value while you’re formulating your purchase offer. Failure to do so, may make your jaw drop.
Joe and Ashley English buy houses and mobile homes in Northwest Georgia. For more information or to ask a question, go to www.cashflowwithjoe.com or call Joe at 678-986-6813.