June 13, 2006
Out-of-Pocket Property Acquisition Costs
I haven’t ever given much thought to the “no money down” approach to real estate investing (perhaps because I’m fortunate enough to have a decent amount of savings), but I was pleasantly surprised by how little cash I will need to close tomorrow. After evaluating a number of different scenarios with my mortgage broker, we ended up structuring the financing for this property as a plain vanilla 30-year fixed rate mortgage with a 5% down payment. We looked at interest-only and adjustable rate mortgages, but as an investor planning to hold the property for only a short-period of time, the traditional fixed rate structure made the most sense because it had the lowest up-front costs. Even better, I was able to get a “seller’s concession” written into the contract where the purchase price is increased by approximately 3% and that increase is then applied toward my closing costs (which is just a convoluted way of borrowing for the out-of-pocket settlement costs). See a breakdown of the closing costs associated with this property below.
The end result (assuming the closing coordinator doesn’t call a fourth time to change the final figures) is that I will be paying out a total of approximately $16,500 to acquire this property after the closing costs not covered by the seller’s concession and the 5% down payment are tallied up. That comes out to only 6% of my $285,000 purchase price in cash spent to buy my first house, which is a pretty attractive figure in my opinion. That percentage goes up a little bit if you include the cost of the property inspection, homeowner’s insurance, and flood insurance, but it’s still less than 7% of the purchase price even with this all-inclusive view. This leaves me with a bit more cash in my pocket for the renovations and on-going expenses than I had originally budgeted for, so I’m feeling pretty good about the project so far. They key will be reselling this property on schedule to prevent the hefty carrying costs from eating all my profit away.
Comments(4)
Everything has been going smoothly and I’m happy with the financing plan that we have set up (5% down 30-year fixed rate mortgage with zero out-of-pocket closing costs thanks to a 3% seller’s concession), but I had an odd conversation with the mortgage guy yesterday when I noted that he had checked the “Owner Occupied” box on the application forms. I believe I had told him that I live in NYC and would be working on the property during the week, so I wanted to clarify that he heard me correctly – even though I suspected he was giving me a break by filling in the owner occupied box so I would qualify for a wider range of programs. His response was a chilling mini-lecture on how it certainly is an owner occupied property (rib-rib nudge-nudge) and how all my other documents will of course reflect that as well. He then repeated that message, prefacing the statement with: “Just to be ABSOLUTELY CLEAR…”
anywhere else. The tip is simple: make getting multiple bids from different banks and mortgage brokers easy by preparing all the necessary documentation electronically. This largely involves getting 
particularly impossible in the NYC area), so that leaves me in need of some serious cash. Fortunately, several years of soul-sucking work in finance have left me with a decent-sized savings account and I have always been a stickler about paying my bills on time, so hopefully lenders will be bending over backwards to give me a $300,000 - $450,000 mortgage on an ugly property in an up-and-coming neighborhood. Lots of recommendations on area mortgage brokers (most literature suggests they’re the way to go vs. getting a loan direct from a bank, right?) available 
