Comprehensive Guide to Multifamily Closing Costs: A Detailed Explanation with Examples

Closing costs in a multifamily real estate transaction are a comprehensive set of expenses incurred by both buyers and sellers during the final stages of the property sale. These costs can vary significantly based on factors such as location, property size, and specific terms negotiated between the parties involved. In this comprehensive guide, we will provide an in-depth explanation of multifamily closing costs, along with suitable examples to illustrate each component.

1. Loan Origination Fees:

• Explanation: Loan origination fees are charges imposed by lenders for processing and underwriting the loan.
• Example: If you secure a $3 million loan for a 20-unit apartment complex and the lender charges an origination fee of 1.5%, you would pay $45,000 as a loan origination fee.

2. Appraisal Fees:

• Explanation: An appraisal is conducted to determine the fair market value of the multifamily property.
• Example: An appraiser charges $5,000 to assess the value of your 30-unit multifamily building.

3. Title Search and Title Insurance:

• Explanation: The title search ensures there are no outstanding claims or liens on the property’s title. Title insurance protects the buyer and lender against future title disputes.
• Example: Title search and insurance costs might total $4,500 for a multifamily property purchase.

4. Attorney Fees:

• Explanation: Attorneys are often involved in reviewing contracts and ensuring legal compliance throughout the transaction.
• Example: Your attorney charges $3,500 for their services in the acquisition of an 18-unit apartment complex.

5. Recording Fees:

• Explanation: Recording fees are paid to the local government for officially recording the property sale.
• Example: Recording fees can vary but might amount to $800 for the sale of a multifamily property.

6. Property Inspection Fees:

• Explanation: Property inspections help identify any necessary repairs or potential issues with the building.
• Example: An inspection company charges $2,200 to assess the condition of a 12-unit multifamily property.

7. Escrow Fees:

• Explanation: Escrow companies handle the transfer of funds and documents between parties, ensuring a smooth closing process.
• Example: Escrow fees may total $1,800 for a multifamily property sale.

8. Property Taxes and Insurance:

• Explanation: Buyers often prepay property taxes and insurance for a portion of the year as part of closing costs.
• Example: Prepaying six months’ worth of property taxes and insurance might add up to $9,000.

9. Survey Costs:

• Explanation: Surveyors determine the property’s boundaries and check for encroachments or easements.
• Example: Survey costs could be $3,500 for a large multifamily property with extensive land.

10. Transfer Taxes:

• Explanation: Some localities impose transfer taxes on property sales, typically calculated as a percentage of the sale price.
• Example: If the transfer tax rate is 1.5% for a $5 million sale, the transfer tax cost would be $75,000.

11. Environmental and Due Diligence Costs:

• Explanation: These expenses cover environmental assessments and due diligence, which are crucial for evaluating the property’s condition and compliance with regulations.
• Example: Environmental assessments and due diligence costs might total $10,000 for a complex multifamily property.

12. Brokerage Commissions:

• Explanation: Brokerage commissions are typically paid by the seller and cover the fees for real estate agents involved in the transaction.
• Example: If the agreed-upon commission rate is 5% for a $4 million sale, the seller would pay $200,000 in commissions.

13. Miscellaneous Fees:

• Explanation: Miscellaneous fees can encompass a range of expenses, including courier fees, document preparation charges, and other miscellaneous costs.
• Example: Miscellaneous fees may add up to $1,200 for a multifamily property transaction.

14. Reserve Funds:

• Explanation: Lenders may require buyers to establish reserve funds to cover future property expenses, such as repairs and maintenance.
• Example: If your lender mandates a reserve fund of $50,000, this amount would need to be set aside.

15. Prorated Expenses:

• Explanation: Buyers and sellers often prorate property expenses such as property taxes, insurance, and rent payments based on the closing date.
• Example: If the property taxes for the year are $24,000, and you close the sale on July 1st, the buyer might owe $12,000 as their share of prorated property taxes.

Prospective Rental Income:

• Explanation: In some cases, buyers may need to reimburse sellers for prospective rental income that the property would have generated after closing but before tenant turnover.
• Example: If the property has an anticipated monthly rental income of $10,000, and the closing date is the 15th of the month, the buyer might owe the seller $5,000 for the remaining half-month of rental income.

It’s important to note that closing costs can vary widely based on location and specific circumstances. Buyers and sellers should carefully review their closing statements to understand all the costs associated with their multifamily property transaction. These costs can significantly impact the financial aspects of the deal, so thorough planning and negotiation are essential.