- prices are negotiable
- true costs vary based on payment methods
- sales transaction costs may not be clearly stated
Variable costs are direct costs associated with the purchase price, carrying charges incurred during ownership and costs incurred while evaluating a potential investment property.
Carrying charges are incurred after the sale while evaluation costs are incurred before the sale.
Direct Costs
The purchase price is NOT the real cost and is just part of it. The total costs are:
- Search and Evaluation Costs
- Effect of cash payment on the acquisition costs
- Financing costs
1. Effect On Cash Payment on the purchase price is when cash is usually the strongest inducement to a seller to negotiate terms and to lower the price which increases the values of the investment to the buyer.
2. Extended Payment Terms or Seller Financing may make the sales price higher due to the seller’s risks. The buyers interest rate maybe lower than prevailing market rates and the seller will usually hold a vendors lien. The buyer should specify in the agreement of sale that the seller is aware of the buyer’s intention to prevent subsequent misunderstandings.
Evaluation Costs is the cost for screening and analyzing the property through Investment Property Analysis. It takes time and may require a professional advisor to complete an accurate report. Investors may recover evaluation costs if they purchase the property. Some of these costs may include options, costs of feasibility reports, planning fees, environmental studies and appraisal.
- Option Costs is when the seller guarantees the property won’t be sold for a specific period of time and can be up to 10% of the purchase price.
- Feasibility Reports are a formal study that estimates the likely success of an investment. It usually includes the property evaluation, detailed marketing study, an analysis of any rental structures (occupancy rates, profit and loss statements and comparables).
Usually this is prepared by an appraiser or property manager and the costs are generally the same as an appraisal. Property management firs routinely project returns and base their fees on those projections.
- Planning Fees are professional fees incurred prior to settlement and are done by technical advisors.
- Environmental Studies evaluate the impact on air, water quality and the land itself.
- Appraisal costs are guidelines on setting the price and establish profitable limits for a mortgage loan.
Carrying Charges
These are ongoing charges associated with ownership such as property taxes, interest on financing, insurance and so on. These are usually broken down to monthly expenses and are shown on an Annual Property Operating Date form (APOD) or a Profit and Loss Statement.
Investment Components/Organization Costs
Organization costs occur after the investor has decided to purchase the property. This is mainly for legal and financial fees.
- Legal Costs
The focus now shifts from business concerns to legal concerns. Lawyers are useful while the sale is in place and before it is closed. They are often not part of the negotiation process to speed up the time. Lawyers can review legal documents to protect the investor’s interest and avoid delays in closing, examine title and assure proper transfer, and form an organization for business operations like an LLC.
- Accounting Costs
Accountants can examine and verify the accuracy of financial records for the property, prepare financial statements required by the lender, implement an accounting system for the new business venture and select a cost recovery method.
- Architectural and Engineering Costs
Engineering costs will verify codes and check insurance requirements while Architects will prepare drawings to obtain financing.
- Financing Charges
Most investors use borrowed money to leverage their activity. Closing costs cover brokerage fees, legal fees, insurance costs, title preparation, deed preparation, inspections, notary fees and recording fees as well as possible other charges.
Broker Assistance is more valuable as transactions are getting more complex in nature.
Prudential Fox & Roach is an independently owned and operated member of
Prudential Real Estate Affiliates, Inc., a Prudential Financial company.
Equal Housing Opportunity.
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