Concept

Closing Costs

What it is

Closing costs are the friction of the transaction. Not the purchase price, not the rehab. The fees that have to get paid for the deal to actually close: title company fees, title insurance, local and state transfer taxes, recording fees, lender origination fees and points, attorney fees in attorney-state closings, prorated property taxes, and prepaid insurance if a lender is involved.

The 70% rule is supposed to figure these in. That 30% after you subtract the rehab covers closing costs, interest costs, real estate fees, utilities, insurance, property taxes. Is it perfect? No. Somebody’s insurance is more than somebody else’s. Heck, you might be buying cash. That’s why the 70% rule is a ballpark, not a contract.

Why it matters

Beginners forget closing costs. They run the deal with purchase price, rehab, ARV — and call it good. Then they sit at closing and watch money disappear on the buy side and watch a lot more disappear on the sell side. These numbers aren’t surprises to anyone doing this seriously. They belong in the underwriting before you make the offer.

The equity gap formula bakes closing costs in: ARV minus rehab minus holding costs minus closing costs minus minimum profit. Every term in that equation represents money that leaves the deal before profit. Skip any of them and your 70% rule screen looks great while your actual margin is 15% lower than you thought.

Closing costs also move between sides at the negotiating table. A seller can offer to pay buyer’s closing costs to justify a higher contract price. A buyer can ask for a seller credit at closing to cover repairs found in inspection. Both are closing-cost shuffles. The total money is the same, but the contract price and loan amount change. Useful to know when you’re negotiating.

How it shows up

Hard money loans add their own closing costs — usually 2-4 points upfront plus origination, title, and doc fees. On a $100K hard money loan, that’s $2,000-$4,000 in points alone, paid at closing. Roll those in when underwriting a flip funded with short-term debt.

On the sell side, budget for real estate agent commissions (typically 5-6% of sale price), transfer tax, any buyer concessions, and prorated property taxes. On a $200K sale, that’s $12,000-$15,000 off the top before you see a dollar of profit. Escrow it from day one.

equity gap, holding costs, escrow, title search, hard money, 70 percent rule