Who pays the fees in a real estate transaction?
Big fees are involved with buying and selling a commercial real estate property. They add up quickly when you consider commissions, inspections, title and points.
Buyers and sellers have their own fees they are responsible for, others are negotiable. Some fees are paid by a party as a matter of convention, which can vary by your location. As an example for our discussion, our fees pertain to the purchase of a small office building in Napa at $1M with 30% down and a loan of 70%.
A few of the fees that can be found are escrow and title, due diligence and inspections, professional consultants and loan fees.
Escrow and title fees are fairly standard and in most cases are calculated based on purchase price and loan amount. If a loan is involved there will be two title policies: CLTA protects the interest of the borrow and ALTA the lender. By the time you add all the ancillary fees escrow and title fees would be over $5,000. The majority of these fees are paid by the buyer. Oftentimes the seller may pay the escrow portion of this fee or split with the buyer.
Due diligence and inspections are an important part of any purchase. Depending on the type of property, you may want to consider the following inspections and reports: structural engineering, major building systems (plumbing, electrical, HVAC), fire suppression, roof, environmental (phase 1), asbestos contamination, parking lot asphalt, energy efficiency and compliance, health & safety issues, building code compliance, ADA compliance.
Additionally, you may want to hire professionals to review the zoning, potential for development, potential areas of litigation, review of all past contracts including leases, tax issues as well as an investment analysis.
You could easily pay tens of thousands of dollars for these type of inspections depending on the complexity of the property. In our scenario the office building was built 15 years ago and is straightforward, therefore a major building system, roof and ADA compliance inspection were the only inspections warranted at a total cost of $5,000. In most cases these fees are all paid by the buyer.
Lastly, if a loan is secured as part of the purchase, the lender will have its own set of fees. In addition to loan points, there is an appraisal, processing fees, documentation fees, flood certification and several ancillary fees. The total of these fees in our scenario could top $15,000 and are usually all paid by the buyer.
The buyer paid fees for our $1M office building came to a total of $25,000. So, what does the seller pay? The seller pays the commission to the broker, which in our scenario is $60,000. Additionally, the seller pays the county transfer tax, which in Napa is $1.10 per $1,000 of the transaction amount. That would be $1,100. Then there are usually several ancillary fees from escrow, but overall the seller would pay about $62,500 in fees in our scenario.