Closing Costs: What Are They and What Will You Owe When You Buy Land in Texas?

You’ve found the perfect piece of land in Texas, and you’ve agreed with the seller on a final price for the acres. Congratulations!?

But that sale price is not the end of the story. Now come closing costs — and it’s important to budget for these extra fees to avoid any unfortunate surprises.

What are closing costs??

You’ve likely heard of closing costs when it comes to home sales. But they’re part of the process for land sales in Texas too.?

Closing costs are the extra costs not included in the actual sale price. More specifically, they’re the fees you have to pay for the services related to securing a loan.?

The land loan process can have a lot of moving pieces — and there are corresponding dollar amounts for all those pieces. From document preparation and taxes to an attorney’s time, closing costs are all the line items associated with finalizing a loan agreement.?

Although closing costs are not officially included in a sale price, they do legally have to be disclosed and agreed upon before a deal officially goes through.?

Closing costs can include:?

• Loan origination / underwriting fees: Someone has to deal with all that loan paperwork. You’ll pay the administrative costs for the lender to process your application. Sometimes you’ll also pay an application fee.
• Appraisal fees: A crucial part of the loan process is having the land appraised to put a dollar amount on its value. You’ll need to pay for an appraiser’s time.
• Real estate commissions: The cut of the sale that the real estate agent makes. (This is often paid by the seller.)
• Taxes: You didn’t think you’d get away with a land purchase without paying taxes, did you? The good news is that in Texas, you won’t pay any transfer taxes on real estate sales. However, you might still need to pay federal capital gains tax.
• Record filing fees: These could also be listed as document preparation fees. Again — someone has to process all the paperwork. This is an important service, and it doesn’t come for free.?
• Title insurance: This crucial insurance protects you in the event there is a mistake on the title for the land you’re purchasing.?
• Miscellaneous fees: The above list is not exhaustive when it comes to closing costs. Depending on the individual lender and/or seller, there could be other fees associated with finalizing the loan.?

How much are closing costs in Texas??

Closing costs can, of course, vary based on a number of factors, including the specific characteristics of your parcel of land, the loan organization you borrow from, whether you hire a real estate attorney (and how much they charge), and more.

In general, closing costs will equal about 3 to 5 percent of the total loan amount. Again, this exact number can vary depending on your individual situation. But it’s safe to say the bigger the loan you’re taking out, the more in closing costs you will have to pay.

Are attorney fees included in closing costs??

Attorney fees are an important piece to consider for your final closing costs total.?

In Texas, you’re not required to hire a real estate attorney when you buy or sell property. Still, there are benefits to hiring one. If you do so, you could pay some attorney fees in your closing costs. These can include fees associated with title insurance, title exam, document preparation, taxes, and more.

Property specific closing costs?

Some closing costs will depend on particular characteristics of your piece of land. These property-specific closing costs can include:?

• Insurance: If your land is in a floodplain, for example, or is particularly prone to any kind of natural disaster, there will be costs to insure the land against those possibilities. These fees might also vary based on whether the land includes any kind of structures.?
• Appraisal / surveying fees: In addition to appraising the value of the land, sometimes you will also need to hire a surveyor to confirm borders of what you’re purchasing. These fees will likely depend on the size of the land parcel you’re purchasing as well as the appraiser / surveyor’s rates.?
• Percolation test: If the land you’re purchasing is undeveloped and you plan to build a house on your property, you’ll need to have the soil assessed to see if it’s suitable for a septic system.

Who pays closing costs??

It depends on which part of the closing costs we’re talking about. Both buyers and sellers are responsible for specific fees under the closing cost umbrella.?

For example, a seller might pay deed preparation and real estate commission fees, while the buyer might be responsible for appraisal and attorney fees.?

A HUD-1 settlement statement will outline who pays what, as well as total amounts for each line item.?

Are closing costs included in a mortgage??

No. You will pay closing costs in order to finalize your land purchase. The amount of your actual land loan (like a mortgage on a home) is the regular amount you’ll pay monthly in order to achieve equity and eventually own the land outright.

And the good news: once you pay closing costs, you’ll never have to pay them again!??

How do you lower closing costs??

You could ask the seller to contribute to closing costs as part of your final deal.?

There may also be rebates or incentives available for some borrowers when they purchase a property.?

How to estimate closing costs

You’ll receive a closing cost estimate a few days after submitting your loan application. It’s important to carefully review each item within that estimate to make sure it aligns with your budget (as well as any previous discussions you had with the seller, your attorneys, etc).?

Closing costs are often overlooked by potential buyers. And it’s no wonder: the process to find the perfect parcel of land, then secure a loan for that tract, may have been long or frustrating. Buyers are understandably excited to finish the deal.?

But it’s important not to forget about closing costs, and to factor these into your overall purchase budget.

Apply for a loan?

Closing costs aren’t the most fun checks you’ll ever write. But they are an important piece to the land purchase puzzle. And if you’re in the market for your own wide open space, closing costs are the final hurdle you’ll have to clear to close the deal.?

If you’re ready to begin the land loan process — whether for an ag-specific venture like a farm or ranch, or for a piece of rural real estate — reach out to our team today to get started.

This article was originally posted in the Texas Farm Credit Resource Center: https://texasfarmcredit.com/resources/texas-closing-costs/