As you consider selling your investment property, it is essential that you have a clear understanding of what your net proceeds will be at the close of escrow. We will outline typical costs sellers are responsible for, and other costs that are open for negotiation with the buyer. This guide breaks down each cost of sale individually, and allows you to estimate your net proceeds.
Actual Closing Cost for Sellers:
Mortgage Payoff:
The principal balance of your loan is not a cost of sale, however, other costs could be associated with your mortgage. These costs differ from bank-to-bank and loan-to-loan. Some of these costs include: pre-payment penalty, loan assumption fee and reconveyance fee. We suggest you call your lender for an accurate payoff amount.
Escrow Fee:
Escrow companies are used in California as an intermediary between the buyer and the seller. The escrow company is responsible for preparing documentation, collecting funds from the buyer, paying off the lender (along with the title company), pro-ration of rents, and distributing proceeds to either the buyer or seller after the close of escrow. Escrow fees can vary based on the sale price, however, estimated fees per side are $.75 to $1.00 per thousand plus a base of $250. So a sale price of $1,000,000 would be ($1,000,000/1000) x $1 + base of $250. Escrow fee per side would be $1250.00.
Agent Commissions:
In most transactions, the seller is responsible to pay a commission: this cost of sale is deducted from the seller's sale proceeds. Commissions are paid upon successful close of escrow. The fee is usually 5% and is split equally between the listing agent and the selling agent who procures the buyer. The commission is calculated off the sales price.
Title Insurance:
Title Insurance is mandatory to insure that the buyer is delivered clean title upon the close of escrow. The title company is responsible for paying off loans, liens, and other encumbrances. Sellers are responsible for the cost of the owners policy, while buyers are responsible for the cost of the lenders policy assuming the buyer takes debt on the property. An owners policy is roughly .001% to .002% of the purchase price.
1031 Exchange Intermediary:
The IRS allows you to tax defer your gains from the sale of an investment property by exchanging into another property of equal or greater value. The 1031 exchange must be "like kind" meaning you can exchange from an apartment building into a shopping center, industrial building, single tenant net lease, office building, raw land or a single family residence, as long as the upleg serves as an investment property. Your sale proceeds must be transferred from escrow to a third party intermediary to qualify for the 1031 exchange. The cost of this service is $500 to $750.
Security Deposits:
Security deposits held by the seller, for all occupied units, will be transferred to the buyer through escrow. This will appear on the final escrow closing statement as a debit for the seller and a credit for the buyer.
City and County Transfer Taxes:
It is customary that the seller pay both the City and County transfer taxes. LA County tranfer tax is .0011% and the City of Los Angeles transfer tax is .0045% of the purchase price. To calculate the amount of transfer taxes, multiply both of these numbers by the purchase price.
State Withholding Taxes:
Sellers who elect to do a 1031 exchange or have zero gain on sale, are not subject to this withholding tax. If you elect to not reinvest your proceeds, escrow will withhold 3 1/3% of the purchase price. This is a pre-payment toward your state income tax.
City of Los Angeles 9a Work
It is typically the responsibility of the seller to complete the work prior to the close of escrow and provide the buyer with a certificate of compliance. If the work has previously been completed, the some of the items below may not be necessary. The work includes: low-flow toilets, smoke & carbon monoxide detectors, gas shut off valves on every gas meter, water heater bracing & water conservation shower heads.
- Toilets- Currently there are rebates for free 1.1 GPF toilets, otherwise cost is $195 per toilet
- Smoke & Carbon Monoxide Detectors are $65 each
- Gas Shut-Off Valves for individually metered properties range from $200 to $300 per meter
- Gas Shut-Off Valves for master metered properties can range from $800 to $1500 per meter
- Water Heater Bracing is $100 to $200
- Shower Heads are $35 each
- Impact Glazing for sliding glass doors can range from $100 to $200 per door
Iconic Investments
16530 Ventura Blvd
Suite #409
Encino, CA 91436
T: 747-444-3303
E: info@iconicinv.com
W: www.iconicinv.com