I have a MIM Strat that I got for Christmas last year. Until about a month or two ago, I didn't play it particularly much. Now I play it at least once every two days.

My problem is that my fifth fret has this indentation under the G string. It's not particularly deep, but it contributes to fret buzz and makes bending on that fret on that string sound off. I heard somewhere that sanding the fret might help.

I'm just looking for the best way to do this without having to take it in to a shop. Please help.
I highly highly highly suggest that you DO NOT sand down the fret. Although it may turn out alright and eliminate your problem, there is a higher chance of you losing the playability of that fret across the board.

As to a way to fix this without taking it to a shop...
"It it best to keep your mouth shut and appear stupid, than to open your mouth and prove it."
Just take it to a shop and they'll most probably replace that fret. It'll save you alot of hassle and risk of screwing it up more.
When you take it to a shop just tell them the problem and they'll fix it the best way they see fit. Try it out as soon as you get it so if their is a problem you're right there to address it. Good luck.

Is there any way to prevent this kind of thing from happening in the future? Or is it just chance?
Well if you're using stainless steel strings they tend to be rougher on the frets. Also, when you're fretting you shouldn't press very hard. Just enough that you get a sound. It also saves your fingers! Also if your action is too low it causing rattling against the fret wearing it down. Last but not least, you don't have to strum very hard to get a rock sound going so you might be a little heavy handed. I have no idea what could be causing it to be honest, these are just some guesses. You should be fine after you take it to a tech though.
Well I have some fret buzz on a few of my strings that I haven't gotten around to fixing, so I guess that might have something to do with it.

I found a local shop that I think would repair it, and I'm probably gonna send them an email to ask about prices, but my guitar needs desperately to be set up. They charge about 55 bucks for a standard setup. Is this a decent price?
Quote by Guitarinetist
Or is that a rip-off.

Well I don't know where you live, but I usually go to a place called Long & McQuade because they are well known and if they screw up the process they are really good at replacing or repairing and dings they may have created during the process. A regular set up for me + new strings is around $35. If you have friends or teachers that play, ask them where they get their setup done. If not, then I'd go to a Guitar Center or something big like that.
First of all, word to the wise, (use the edit button). And second, call around and get estimates on what it will all cost you. That's the best way to do it I think. Hopefully you'll get this fixed and be back jamming in no time.
"It it best to keep your mouth shut and appear stupid, than to open your mouth and prove it."