Hello all, 

This is my first question posed on B.P.! My question is simple. I am set to close on a property this month (a triplex). The purchase price is $48,000 with 25% down ($12,000). So my loan will be $36,000. However, I was shocked to see the $5,971 in closing costs/fees! Watching Brandon Turner's videos, and according to the B.P. Calculator, I should estimate about 1.5% in closing costs...but my closing costs and fees are significantly higher (double digits). What am I missing or not understanding here? I am attaching a picture of what the loan company wants me to sign (which I haven't yet). Do these amounts look normal? Would you sign for this loan or just pay cash if that was an option? Thank you!

It looks about right to me.  There are certain costs on the lender's part that come with any loan whether it's for $36k or $360k along with the prepaids for homeowners insurance and taxes.  There is a cost to gather and prep all the closing documents so the lower the loan value the more exaggerated they look compared to the loan, however, the costs on the lender's part remain no matter what the loan amount.  

On a side note, it's hard to find lenders who will provide such a small loan and the ones that do generally will require points be paid up front and a higher interest rate to help recoup their costs.  With such a small loan value it really is pretty worthless for the lender to spend the time and resources to create this loan for such a small payoff when there are plenty of other people trying to get bigger loans that will ultimately make the lender more money.  So all in all, I wouldn't fret about these closing costs. 

@Robert Nelson Fueston
That seems a bit steep. I would shop around different insurance and title companies to try and bring some of the fees down. As far as calculating 1.5% for close, I always calculate 5% just to be conservative. Where I am in south Florida the percentages change by 2-3% depending on the county we are buying in. I closed on a place in October 2020 with $17,000 in closing costs on a $323,000 loan.  Call around to different agents in the area and ask them what a normal closing percentage is, this can help you get a better understanding of what's normal for your area.  All that said Congrats on the Triplex! What area are you in that it's only 48,000?! That's like a pipe dream for us living down here LOL

Looks petty in line.

As said earlier, there are fixed costs whether the loan is $50k or $500k.

Thank you all for your replies! I do feel a little shocked...but suggesting 5% on the BP calculator rather than 1.5% should help avoid a problematic situation (incorrect Cash on Cash return). (Maybe scale down from 5% to 1.5% as the the purchase price increases?) I'm pretty new to this world...just been doing my education on B.P., talking to other investors, and reading!

@Jay Meola , the property is in Galion, Ohio...I grew up next door in Mansfield, Ohio. The Midwest seems to have good cash flow properties available...but I don't plan on much or any appreciation. So, that is the trade off! The property I am buying isn't pretty but it is already fully rented. 

@Robert Nelson Fueston

Ahh the midwest. That makes sense. If cash flow is what you're looking for then it sounds like you're in the perfect market! You said its a little rundown, does that mean you're going to rehab it?

@Jay Meola , no rehabbing...just doing the neglected maintenance. :) It really isn't worth rehabbing in my opinion. There is room for another efficiency to be built in it too and TONS of room that could be rented out for additional storage. But, not worth the cost of building the efficiency...I am looking into the storage rental part though...right now, the next door business is already using this extra space as storage as they are friends with the owners...might continue this for a small fee/month for them. 

Loan origination fess are like 5% which seems trifle high on a loan.

OTOH - Did you get a GFE from the broker/lender so you know before closing?

@Robert Nelson Fueston You really can't use percentages to accurately estimate anything (i.e. closing costs, repairs, CapEx, etc) when you're dealing with these extremely inexpensive properties. Take repairs/CapEx for example. If you need to replace a 40-gallon water heater, or a 3-ton AC unit, it's likely going to cost you the same whether the house is a $40k house or a $200k house. It's not like some contractor is going to come along and say "Well my normal price is $5k for this AC unit, but since you only paid $40k for the house I'll only charge you $2k."

Same thing with these loan costs.  Most of them are just fixed costs regardless of the loan amount (except points, which are obviously a percentage of the total loan amount).  This is why they can seem so high relative to the total loan amount on these micro loan amounts (and one of the reasons many lenders won't even bother doing them). 

With that being said, I took a look at some of the individual charges, and some of them do seem a little high (i.e. processing fee, underwriting fee, etc).  However, not totally out of line.  Ultimately though, you may be limited in terms of not having a lot of options to shop a loan like this around.  You don't mention what market you're in, but I know where I'm at I wouldn't even be able to find ONE lender to do a loan this small much less MANY to shop around closing costs with.  So perhaps just consider yourself lucky that you did find one willing to even fund the deal because I've personally read countless posts on here from other users who weren't able to find lenders to do that.  And now just do what you need to do to close the deal. 

Good luck.

@Steve Morris , I did not...I was originally going to pay cash for it...but then an opportunity came along needing the cash I was going to use (for a down payment on another property)...so I turned to a loan (and the banker mentioned that they rarely give out loans for that small amount - so I thought I was lucky they were willing to do it). I am learning so much! Thank you B.P. community for being awesome!!!

Thanks for your input @Kyle J. Good point...saving a % of the rent for repairs would vary wildly depending on what the rent actually is. 

@Robert Nelson Fueston   loans cost, that's for sure.  For a side by side analysis of loan costs, need to separate the pre-paid items you would experience with any purchase or any loan. 

I wish loan costs were talked about more on here.  Countless cash vs loan return analysis I've seen not factoring in costs or time or indigestion.  Like they are free and the money is available tomorrow.  

And BRRRR? LOL No mention of seasoning requirements or loan costs in that. 6 months and $6k needs to be in that acronym.

These costs seem in line with the market on average. 

The interesting thing I sometimes see in REI is that a lower-priced property doesn't mean costs overall will be lower. A broker lender once told me that is way easier from a loan processing perspective to buy a $50MM dollar project than a $5MM deal. 

This still blows my mind, but it is the reality we live in!

why are you doing escrow on this loan? that's almost $2k right there. title fees seem reasonable. lender fees are not great. at all. can they not waive the appraisal fee? see if they can use fnma's calculator thingy for a waiver. i'd definitely drop this lender and shop around some more. Ideally, you'd be looking at $2500 all-in for this, maybe a few hundred more. 

@Robert Nelson Fueston which state or city did you purchase the property?

@Victor S. I didn't know escrow was negotiable...I'm reading online now about that...and about the other stuff you mentioned...

@John Paul the property is in Galion, Ohio...I grew up next door in Mansfield, Ohio.

You would be better off paying for this with a hard money loan, HELOC or even a credit card cash advance. If you are familiar with area and the building do you really need an appraisal and a reinspection fee (whatever the heck that is)? Without the underwriting fees, points, etc, titles fees and escrow you could save 3-4K. That's pretty significate on a 50K deal.

@Craig Janet , thank you. I could use some HELOC money to pay for this triplex and not go the mortgage route...just wasn't sure if I should. I hope others will chime in with their opinions regarding this option. :)

There is no set percentage that tells you magically the cost of a loan. The cost is subject to: Your middle FICO, property type, condition, and use, loan to value...  Ask the lender if he/she can bump the interest rate up and offer a no points or .5% points loan.

Originally posted by @Kyle J. :

@Robert Nelson Fueston You really can't use percentages to accurately estimate anything (i.e. closing costs, repairs, CapEx, etc) when you're dealing with these extremely inexpensive properties. Take repairs/CapEx for example. If you need to replace a 40-gallon water heater, or a 3-ton AC unit, it's likely going to cost you the same whether the house is a $40k house or a $200k house. It's not like some contractor is going to come along and say "Well my normal price is $5k for this AC unit, but since you only paid $40k for the house I'll only charge you $2k."

Same thing with these loan costs.  Most of them are just fixed costs regardless of the loan amount (except points, which are obviously a percentage of the total loan amount).  This is why they can seem so high relative to the total loan amount on these micro loan amounts (and one of the reasons many lenders won't even bother doing them). 

With that being said, I took a look at some of the individual charges, and some of them do seem a little high (i.e. processing fee, underwriting fee, etc).  However, not totally out of line.  Ultimately though, you may be limited in terms of not having a lot of options to shop a loan like this around.  You don't mention what market you're in, but I know where I'm at I wouldn't even be able to find ONE lender to do a loan this small much less MANY to shop around closing costs with.  So perhaps just consider yourself lucky that you did find one willing to even fund the deal because I've personally read countless posts on here from other users who weren't able to find lenders to do that.  And now just do what you need to do to close the deal. 

Good luck.

Exactly running this type of low balance loan through any % calculator is a waste of time..  I mean really who is going to process a loan for 1.5 % on 36k  thats a whopping 500.00 bucks..  now a small regional bank holding the paper may do this for 1 point and the interest.. but the third party costs are still gong to run up into 2k or more for any closing these days..

On the private side.. NO lender can stay in business if they dont make at least 3 to 4k per file NET TO them in the way of points and junk fee's you would go broke if you did it for anything less than that.

@Caroline Gerardo , will do! Asking costs nothing...it is worth a shot. I am almost at 1.5 points now... :(

Originally posted by @Robert Nelson Fueston :

@Steve Morris , I did not...I was originally going to pay cash for it...but then an opportunity came along needing the cash I was going to use (for a down payment on another property)...so I turned to a loan (and the banker mentioned that they rarely give out loans for that small amount - so I thought I was lucky they were willing to do it). I am learning so much! Thank you B.P. community for being awesome!!!

I have never gotten a GFE from my commercial bank here in Oregon on non owner occ loans.. I know its the law on owner occ though

@Jay Meola if you don’t mind me asking, what type of property were you able to buy with $323,000? Thanks

I can guess who is your lender. The fee is about right though. 50k price in the midwest seems normal. But for triplex ? wow that could be the cheapest in OH.......

@Robert Nelson Fueston I was averaging closer to 3k in closing costs at that price range. I would shop around just case.