Why You Should Be Concerned About Real Estate Closing Fees…
Real Estate Closing Fees (also known as junk fees) are charges that any money lender charges borrowers in excess of closing points, accrued interest and pre-paid expenses. These usually include a myriad of “strangely named” charges. They can be as simple as an Inspection Fee or Document Review or Document Preparation but the issue is how much is charged for these services.
The inspection of the property is important to protect the lender to make sure a structure is even on the property. A survey is questionable if the property is inside a community or is over 10 years old. The lender has the right to protect his investment with whatever documents or inspections are necessary. The question is whether he makes money on non-essential requirements. I believe I have seen probably 20 different junk fees on HUD Statements under different names.
For example, should the lender charge for document review when he has been using the same documents he has used for years? Should he be able to markup the cost of a survey or inspection? The part of these junk fees that becomes onerous is when the junk fees exceed the closing points for the loan. If you are not careful you could have 3 points in closing fees and 5 – 6 additional points in junk fees. Unfortunately you may not see these fees until you get to the closing table.
Some hard money lenders charge a “flat-fee” for all the costs that a borrower would normally be charged. In one case a lender charges $1,195 for the document prep, closing costs, document review and miscellaneous necessary expenses that the borrower would usually pay. This lender advertises “No Junk Fees” and properly so. Other lenders advertise seemingly “Lowest Rates” but may charge excessive junk fees. Don’t be seduced by the lowest interest rate as it may be the most expensive loan in the end!
An investor looking for a hard money loan should check several sources and ask the potential lender what additional fees he will be charged. Don’t take a short answer like “I charge usual and customary fees” but rather ask, “Can you send me a HUD that you closed recently?” If the lender refuses it’s likely you saved yourself a lot of grief and aggravation.
What if you are a new investor and you can’t find a hard money lender to work with you? You have two options, pay what it takes to get the money and do the deal or you could also look for a “private lender” (friends or family members) to loan you the money. When you explain how much you expect to make, you may get asked to split the profit with them but pay them no interest. Warning, it will always be much less expensive to borrow high-priced money than to do a partnership with a private lender where they get half of the profit!
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