Who Pays Costs When Buying Notes?.

January 23, 2019

Wondering how costs are handled when buying mortgage notes? You are not alone! Here is a question we recently received from a note broker:

If the note buyer wants the seller to pay the closing costs, does the note buyer back the closing costs out and then send me the offer or do I back the closing costs out myself along with my fee and then present the offer to the seller? If I back out the costs, where would I get the cost of the closing to do this?

Great question!

There are generally two types of offers when it comes to buying notes:

  1. Wholesale– a gross offer with the note broker or seller paying costs; or
  2. Retail – a net offer with the note buyer/investor paying costs.

If the note buyer quotes a transaction wholesale and wants you, as the note broker, to pay closing costs then you need to subtract both your fee and the estimated costs from the note buyer’s quote before making your offer to the seller. You could also just deduct your fee and have the note seller pay the costs. However many sellers are reluctant to pay any costs upfront so it is a selling point if you can eliminate the risk to them.
The amount of closing costs will vary by the state, size of the deal, and the type of property. These costs usually include property valuation, title insurance, recording fees, and the closing fee to an attorney or title company.

  • Property Valuation

A drive-by appraisal on a residential property averages $250 – $300 but if the investor only wants a BPO or Broker’s Price Opinion the cost will be quite a bit lower (about $75-$100).
Appraisals can be thousands of dollars on a commercial or special use property so be careful on anything that is not a single-family home.
Before you risk your own funds on a property evaluation it makes sense to do some homework by checking values for similar homes that recently sold in the area. The tax assessor’s office and online evaluation sites like can also be good places to research value trends.

  • Title Insurance

Title insurance is based on the balance of the note but a good average is $400-$600 for deals under $150,000. Again, this can vary by state and the amount of title insurance.
If an attorney has to issue an opinion of the title it can cost over $1,000 even on a smaller deal – especially in states using the old Abstract of Title method.
Some title companies charge a basic search fee to issue a preliminary commitment of title ($75-$100) and then charge the title premium based on the amount of insurance at closing. To find out what is customary for the area run a quick online search or call a title company located in the same county as the property.
It’s possible to save hundreds of dollars on title fees if there is an existing mortgagee’s title policy insuring the note holder. Many title companies will charge under $100 to do an update to an existing mortgagee’s title policy. The easiest way to check is to get a copy of the HUD-1 settlement statement or closing statement from when the seller sold the property to the buyer. Then look for the closing costs related to title insurance.
Hopefully, you will see a charge for both an owner’s title policy and a lender’s title policy. The next step is to get a copy of the policy from either the seller or directly from the title company. If only an owner’s title policy was issued the title company might still be willing to issue the loan policy for a reduced fee, depending on how long it has been since the sale.

  • Closing Fees

If an outside closing is setup to handle the exchange of transfer documents for proceeds, the closing fee will average $250 – $350 depending on whether an attorney or a title company is used. If a title company performs the closing they will often reduce their fee if they are also getting the title order.
If a seller ever demands to use an attorney to review their documents or handle the closing – always agree. Just be sure the seller understands they will pay the costs associated with their own attorney.
Recording fees are paid to the county and are usually under $50 unless it is a real estate contract where deed tax might be involved. Many counties charge Deed Tax based on a percentage of the consideration when a Warranty Deed is recorded. This doesn’t apply with the purchase of a Mortgage or Deed of Trust.
However, with a real estate contract, the fee simple title stays vested with the seller until the contract is paid in full so the transfer involves an assignment of the contract and a deed to the property. If the transaction involves a real estate or land contract you’ll want to check with both the note buyer and Title Company for any special requirements for fees.

Retail or Wholesale Note Purchase?

Some investors will pay for the appraisal and pass on just the title and closing costs. This is a little bit of retail and wholesale combined into one, but at least the investor covers the primary upfront cost of an appraisal. Usually, the title policy premium and closing fees can be deducted from proceeds at the actual closing.
Keep in mind that an offer from a note buyer can be modified or withdrawn for a variety of reasons. This includes items discovered during due diligence such as poor credit, low property value, delinquent taxes, or improper documentation. You want to do as much research as possible before risking your own funds. In some cases, it might be appropriate to have a seller pay or share in the costs to be certain they are serious about moving forward or withholding information.
Until you get a good feel for note buying costs it is better to double-check before quoting whenever you are going to pay the expenses. We encourage note brokers starting out to try going retail instead of wholesale until they get a few deals under their belt. As your comfort level increases with the note buying process it can make sense to accept wholesale offers – if it also comes with better pricing!

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Why buy real estate notes?.

August 8, 2018
Why buy real estate notes?

“Gail, why are you investing in real estate notes? You were doing so well “fixing and flipping” properties!”

It’s a fair question given the fact I am a licensed real estate agent and have been buying and selling homes since I was a kid—literally. I was 19 when I bought my first home and had spent a childhood cleaning and painting my Dad’s and uncle’s rental properties. They were both successful real estate brokers in the San Francisco Bay Area so I did well for myself supplementing my allowance on weekends and during summer vacation. It also made me realize that, over time, true financial wealth and freedom can be had by investing in real estate.

We were doing fine in our business model of buying properties and either fixing them up and selling them or holding them for our personal portfolio. Then along came all of these ridiculous television shows “Fixing This Flop” and the like depicting how “easy” it is to make a fortune in real estate. Next thing I know, I am competing for scarce inventory against my fellow investors who know how to manage a renovation, newbies who think they know how to manage a renovation, and buyers who want to build sweat equity and live in the property. My profit margins suddenly dropped and I had to stay on top of every penny that went into a renovation. I danced in the streets if I manage to make anything over 12% net return on investment (ROI)!

Always being one to “zag” when everyone else is “zigging,” I started to research what options and opportunities existed in the real estate industry. We jumped on the “multi-family” and commercial wagon. So did all of the disgruntled seasoned investors who discovered what I was already starkly aware. The prices on those properties escalated too.

There is a constant barrage of “Real Estate Gurus” that tout the latest and greatest ways to make serious cash in the real estate investment world. Some say you can be successful with their “get rich quick” schemes. Others will say that you can get rich over time. The one thing I genuinely know is that cashflow is king/queen in this business. Living in hurricane alley makes it a real challenge to buy and hold properties for that coveted cashflow.

So what’s left? The other observation I’ve made in my life is that banks have money—and lots of it. They say “He/She who holds the gold gets to make all of the rules. Who has the gold? Banks do. I am almost embarrassed to admit I had no idea that a person could buy and sell notes. It makes sense since they are essentially personal property. There are notes secured by everything from automobiles to zebras! Well not zebras, per se, but pretty much everything in between. One can definitely invest in notes secured by real estate. In this country, there are trillions of dollars (yes, with a “T”) worth of defaulted mortgage notes. That surely limits the competition! Additionally, there is only about 4,000 note investors in this country. Although, I am not a gambling woman, I liked these odds.

Let’s get down to returns. Recall I mentioned I was struggling to make a 12% net ROI on my “flips?” Let’s just say that I smile, no I break out into laughter when I realize I was willing to stay on top of a project and scrimp and save to make that.

So what is this note investing all about? It is about being mobile. We invest all over the country and I am not anchored to a location until a project is complete. It means offering greater than average returns for those holding self-directed IRAs (SDIRA). It mean being able to help struggling borrowers keep their homes because the note holder is now is the bank. It means having a real estate investment or REO without worrying about a stopped up toilet or a vacancy. The bank gets paid every month no matter what! Cash flow without the headaches!

We welcome you to call us if you are interested in finding out if investing in distressed notes and assets might be something that would fit into your investment strategy. Please call, email, or text and I assure you that I will personally call you back so we can chat about this exciting way to build financial wealth and freedom SLOWLY! Slow and steady wins the race—the real estate investment race, that is!

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