Financing, Closing Fees and Taxes in Real Estate Purchase

This article will answer frequently asked questions related to payment of real estate purchase. It will cover modes of financing and the closing fees (taxes/fees).

What are the payment modes for the purchase of a property?

  • Spot Cash - outright full payment straight from the pocket
  • Bank Financing - combination of own money plus bank financing
  • In-house Financing - buyer pays downpayment and promises to pay the balance by installment basis (I discourage buyers to get In-house Financing)

What is Bank Financing?

Bank Financing happens when the buyer is short of cash and borrows money from financial institutions to raise the fund needed to pay the property in full.

The term "bank" here does not necessarily mean a private bank like BPI, PNB, Banco de Oro, and MetroBank. The term "bank" refers to the financial institutions in general. It could also be a government financial institution such as SSS, Pag-Ibig, GSIS, etc. The buyer can loan from combination of various financial institutions.

Sample Computation:

Actual Value of Property: P1,000,000
Less: 30% Borrower's Equity: 300,000
Loanable Amount 70%: P700,000
Multiply by: 0.0116637*

Monthly Ammortization: P8,164.59 per month.

*Let's say Bank Loan interest is 9.25% and the loan term is 12 years -- therefore the Ammortization Factor (based on the table) is .0116637. There are many websites that provide an automated Mortgage Calculator, such as the REBAP website.

What are the consequences of Bank Financing?

In Bank Financing, the seller of the property is paid in full, an absolute deed of sale will be issued in favor of the buyer, and the title will be transfered to the name of the buyer.

The buyer "loaned" some amount from the bank to pay the whole price. As a result, the new property title, which is already in the name of the buyer, will be used as collateral of the loan.

The effect of bank financing is what we call Mortgage, wherein the property title will be held in the custody of the bank because it is being used as collateral of the loan. I have an informative blog entitled Understanding Mortgage you might want to read.

If the buyer cannot continue to fulfill his obligation to pay the loan, the bank will bring the title into a judicial proceeding called Foreclosure. When the court favors the claim of the bank in a foreclosure proceeding, the property becomes a Foreclosed Property which the bank can sell to anyone.

Why do I discourage buyers to get In-house Financing?

This option is available to most Real Etate Developers. Most buyers who have poor credit ratings with banks are forced to get into in-house financing.

  • The interest of in-house financing is too high - "sucker"
  • Buyer gets Contract-to-Sell instead of Deed of Sale
  • Etc., etc., etc., etc...

Another "flirty" term that is 99.99 percent similar to in-house financing is that something that you probably have already heard --- Rent-to Own. The only difference is that in Rent-to-Own, a Long-term Lease Contract is signed instead of Contract-to-Sell, and the lessee's Right of First Refusal is explained to him by the developer.

What are the taxes and fees that go with a real estate transaction?

For the Account of the Seller

  • Capital Gains Tax - 6% of the Selling Price (SP) or Zonal Value (ZV) or Fair Market Value (FMV) whichever is higher.
  • Business Tax - if applicable in a particular local government unit

For the Account of the Buyer

  • Documentary Stamp Tax - 1.5% of SP or ZV whichever is higher
  • Transfer Tax - rate depends on location of property (ranging from 0.25% to 0.75% of the SP or ZV, whichever is higher)
  • Registration Fee - graduated rate bases on SP (example: P5,646 for SP of P1 Million)

Special Taxes and Fees

Government may impose other taxes and fees that are not covered by the above schedule, such as but not limited to:

  • Value Added Tax
  • Real Estate Tax Arrears and Penalties

Who should pay the Special Taxes and Fees?

Most special taxes and fees are only determined AFTER the signing of deed of sale contract, and during the documentation and registration process. In short, these are "surprise" expenses that is always disputed by buyers and sellers. Most of the time, if not all of the time, the buyer ends up paying any surprise expenses. I have even heard buyers ending up paying the unpaid homeowner's association dues, utility bills, and tax arrears of the previous owner (seller). Some buyers are even charged extra fees to remove the existing tenants.

Why? Why do buyers shoulder all these, it it not unfair? My answer is simple, because most of the time, buyers come into the purchase transaction without representation. Unrepresented buyers become vulnerable, naturally "weak" on the negotiation table, he is likened into a respondent that goes to court without a lawyer. That is why it is important that buyers get the service of an Exclusive Buyer Agent (EBA). The EBA clears the road ahead for a smooth transaction for the buyer.

Who pays the Real Estate Agents or Brokers?

This question always pops out everywhere I go. My answer is there, inside my blog article Exclusive Buyer Agent (EBA).

If there is anything else important that I forgot to include in this article, please email me.

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