Hi guys! My partner and I have been sending out direct mail for the past 3 months and we've finally found a deal (SFH). Comps are at $80k, seller wanted $60k and after negotiations we got the property under contract for $42.5k. The property is occupied with a tenant paying $750/month and the lease expires in one year. Since the property is occupied and we can't BRRRR, we've decided to finance with a conventional loan. We found a lender that will take 15% down but they want $5,849 in closing costs for "Loan Costs" and "Other Costs". My understanding is that closing costs should be 2% - 5% of the value of the property.... this is over 13% which seems outrageous. The interest rate offered is 5.875% which is better than other lenders we've talked to, but are we being ripped off? This is a reputable company that I found through Bigger Pockets, so what am I missing? Why is this so high?

You should probably be around 5.375 if you had 740 plus credit and 50k plus loan amount. Since you don’t have either of those, you’re probably looking at around .25 added to your interest rate for loan amount and .125 for the credit score which puts you at 5.625 so that seems competitive to me. Where you’re not competitive is the points. Also your appraisal seems high. Should be closer to 500, maybe lower. I could be wrong on that. 12 months for insurance premium is your first year insurance up front. The extra 4 months for insurance is for your escrow account. That’s normal. Your loan officer should be able to mention all of this for You.

The ones that will do it jack up their rates/fees/etc to make it at least break even. And it generates goodwill among the Realtor community locally.

@Ellen Morrison - To me, I wouldn’t count property taxes, insurance, and prepaid interest as closing costs. Those are just expenses happening up front. So if you exclude those, that is closer to the figure of “closing costs” that you were quoted. It’s tough for anyone to give a ballpark for those as there’s a huge swing if property taxes were paid last month coming due next month. I think of closing costs as loan expenses only + title + transfer fees/taxes. Just my two cents there. Also, someone mentioned this, but closing costs as a % of purchase don’t hold up at lower purchase prices. Title work is essentially the same for a $50k or $500k house (other than the actual insurance policy cost).

$700 appraisal fee is outrageous unless this is a unique property. Appraisals should be from $400-500 on the consumer side. - I worked for an appraisal management company.

Need a break down, points, fees, prorated property tax,title insurance, transfer fee, courier fee. If you question you can try another title company.

15% down v 25% down is 2% of the loan amount in fees right there holding constant the rate, highlighting how silly it is to think of closing costs as a "fixed" percentage. FNMA LLPAs, page 2 of 7, 85% LTV v 75% LTV: https://www.fanniemae.com/content/pricing/llpa-mat... FWIW, if you borrow say $500k or so, the closing costs expressed as a percentage will drop down a bunch. :P Loans below $100k or so aren't very profitable. Dodd Frank and CFPB are expensive mistresses to satiate with compliance costs, which naturally is passed onto you. Below $50k, the lender is losing money and most won't do it no matter what.

Loan Estimate and it looks like you put that up already. I guess you could ask to have the points lowered but everything else looks within normal parameters for an investment property. Your rate seems high, but your loan amount is low so there's a hit for that. The other fees like taxes and insurance you can't do anything about those. The lender takes additional months to because they will pay your taxes and they want a pad. When you refinance again you get that pad back but have to put up reserves again, so it becomes a wash. Escrow and title do the same work no matter how big or small the loan amount is. In the future if you use the same title and escrow you might be able to make a deal with them fees wise. All and all this isn't a bad thing. You found a lender that can do the deal under 50k which is huge in this industry.

Most of it is in line but your interest rate is to high, and you’re paying too many points. Check out US bank if your loan is above 35k. They charge 770 processing fee, that’s it. Then appraisal of about 500. You can see it would likely be cheaper.

They’ll do 15 percent down but that may vary on loan amount. I did 15 percent down last summer with them but my purchase price was 55k

Am I being ripped off with Closing Costs?

Laura HinesPro Member

Rental Property Investor · Lawrence, KS · Member since 2018 · 28 posts · 42 votes

7y

Another thing to think about is that is just an estimate. We closed on a house last week and our original closing cost estimate was $5,375 but the actual numbers when everything was said and done was $3,906 which is a big difference. Your processing fee and appraisal seems kinda high to me.

1 Reply

Will C.

Rental Property Investor · Richmond, VA · Member since 2016 · 279 posts · 133 votes

7y

@Ellen Morrison

Like others have touched on, your closing costs are higher because the loan is so small. The institution is getting their money upfront.

2 Reply

Eric M.

Flipper/Rehabber · Louisville, KY · Member since 2008 · 1k+ posts · 1k+ votes

7y

Originally posted by @Ellen Morrison:

@Caleb Heimsoth the last time I had it pulled it was 719. Also, what is the Homeowner's Insurance Premium and why are we paying that for $750 plus 4 months worth of homeowner's insurance for $475?

The closing costs in your list are not egregious, but not great. You are overpaying about double for the appraisal. The processing fee is BS and high but that is the nature of the business as are the points. Percentage of closing costs on a such a small loan is always going to be out of whack. There are fixed fees that wouldn;t change if the the loan was 500K.

I would check on exactly why there are 2 items for Homeowners Insurance. The lender is going to require insurance because if the house burns down how are you going to pay them back the loan if you don't have insurance. If you think the amount they are charging is too much and you can find a better deal on your own, you can typically buy the 12 months required on your own and provide proof to the lender. Ask the lender. But either way, you need to have HO insurance for a year whether you pay inside closing or outside closing.

1 Reply

Mike Freske

Attorney · Minneapolis, MN · Member since 2018 · 62 posts · 36 votes

7y

@Ellen Morrison

Some lenders may make a distinction between “closing costs” and “pre-paids.”

Need to know how they define each.

1 Reply

Jake Roland

Rental Property Investor · Opelika, AL · Member since 2017 · 113 posts · 93 votes

7y

Appraisal and loan points are what look high to me...

1 Reply

Victor S.

WorldWide · Member since 2016 · 1k+ posts · 1k+ votes

7y

can you do 20% and waive the escrow? that should cut down on those prepaids. this lender doesn't look very competitive, imho.

0 Reply

Kevin Meehan

Lender · New York City, NY · Member since 2017 · 10 posts · 3 votes

7y

Many of the responses to your post were very good.

As you learned in real estate brokerage class, every property is unique in some way.
Add to that: Every borrower, lender, broker, title company, appraiser, etc. is also unique

When building your real estate empire, keep focused on building relationships with those that you can trust and will take care of you today and in the future, even if that means spending a few extra dollars now and then. Yes, small deals do cost more to close from everyone's perspective. However, look at the big picture of the relationships you may be developing. The company that may cost you an extra $500 today, may also be the company that sends you a lead down the road that is priceless. On this deal, based on the numbers you provided, the potential ROI is fantastic and that is the most important aspect of investing. Best wishes on your success.

FYI - Since we close on investment properties nationwide, I can attest to the respondent that correctly stated 2-5% is a general rule thumb and really just applies to closing cost. That percentage rule excludes escrows for tax & insurance, prepaid interest, etc.. which varies by location, loan amount etc. In NY we have a mortgage tax that alone cost up to 2%.

0 Reply

Christopher Lombardi

Developer · Point Pleasant Beach, NJ · Member since 2015 · 303 posts · 216 votes

7y

@Ellen Morrison it doesn’t seem that unreasonable. They have to pay their attorney, maybe the title company if that’s included and other fees. I would ask them for a breakdown though. Nice deal. Good luck.

0 Reply

Matt M.

Specialist · Easton, PA · Member since 2018 · 1k+ posts · 2k+ votes

7y

@Ellen Morrison

The only thing that looks outrageous to me is the appraisal fee. We pay $4-450 out here.

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Nathan Paul Konyndyk

Property Manager · Denver, CO · Member since 2018 · 14 posts · 5 votes

7y

@Ellen Morrison Great post. Thanks for being transparent and thorough with your question/ response. I learned some things from your post. All the best. A yr or 2 of positive cash flow will soften the upfront cost of your investment.

0 Reply

Ned J.Pro Member

Investor · Manteca, CA · Member since 2017 · 1k+ posts · 2k+ votes

7y

As stated, just make sure you mentally separate closing fees and pre-paids....... the pre-pay items are what they are....you are just paying normal expenses up front.

The fees are the only thing to compare really and most look pretty reasonable ..... your interest rate and points are not very good in my opinion.....

0 Reply

Josue Vargas

Real Estate Agent · San Antonio, TX · Member since 2017 · 814 posts · 466 votes

7y

I think there are some cost you can negotiate. Appraisal seems a little bit extreme for a $42K property. I'm paying $640 on an appraisal for a $300K property with rent market value included...

The points as well seems high, but this may depend on the credit score, preference on rates, availability of funds, etc.

Pre-paid costs such as taxes, interests, insurance, etc. are mostly costs you are paying up-front and these costs are not going towards your Lender, but towards things you have to pay on your property regardless.

Title insurance and other costs regarding tile company are usually paid by the seller. Looks like you are getting a very good deal and seller may not want to pay this for you.

0 Reply

Matt Herbert

Rental Property Investor · Gilford, NH · Member since 2019 · 50 posts · 20 votes

7y

@Ellen Morrison, you should consider talking to the lender and see if they will let you do your own escrow. My lender lets me manage all of my own escrow accounts, which has the dual benefit of reducing my upfront costs, and allowing me to earn interest on my escrow dollars.

Also, my insurance agent is usually more than happy to send the bank a binder saying I've paid my 12 months of insurance, but then put me on a regular monthly payment plan. Again, this saves me a bunch of upfront costs.

1 Reply

Lori TaylorBusiness Member

Property Manager · Peoria, AZ · Member since 2019 · 5 posts · 3 votes

7y

@Ellen Morrison

The processing fee likely goes to to your lender for the cost of doing your loan (paying the underwriter, processor etc). The title fees will be separate from that.

To me your appraisal fee is normal (not sure what maker you are in, but in mine $750 is pretty normal). The only thing I see that seems really high is the discount points to buy the rate down.

Yes on average, you can look at 1%-3% for your loan fees, but those are going to be much higher on a small loan amount as many of those costs are fixed.

Hope that helps a little!

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Ellen Morrison

OP

Realtor · Berkley MI · Member since 2018 · 28 posts · 13 votes

7y

@Kenneth Cowan I knew what the property taxes would be and I have a quote for property insurance that is under $500 for the year... I think the total just surprised me the most - it is almost the same as the down payment! lol

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Ellen Morrison

OP

Realtor · Berkley MI · Member since 2018 · 28 posts · 13 votes

7y

@Danny Randazzo thanks!

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Ellen Morrison

OP

Realtor · Berkley MI · Member since 2018 · 28 posts · 13 votes

7y

@Laura Hines that's good to know. Once I asked about it, he told me the actual costs would probably be lower than estimated (ie. the appraisal fee)

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Am I being ripped off with Closing Costs?

Am I being ripped off with Closing Costs?

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