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?
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 and Selling Your Mortgage Note
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 Realtor.com can also be good places to research value trends.
Title Insurance and Purchasing Notes
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.
Who Pays the 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!