To start the show, Jason Hartman talks about artificially intelligent ads, Edward Snowden, and an article talking about private equities buying distressed home loans. Then, he interviews Joe to discuss closing costs. Joe explains what the lender fees are, the requirements for good faith estimates, and the title insurance. They also talk about points, fixed and variable costs, and recording fees.

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Welcome to the creating wealth show with Jason Hartman. You’re about to learn a new slant on investing some exciting techniques and fresh new approaches to the world’s most historically proven asset class that will enable you to create more wealth and freedom than you ever thought possible. Jason is a genuine self made multi millionaire who’s actually been there and done it. He’s a successful investor, lender, developer and entrepreneur who’s owned properties in 11 states had hundreds of tenants and been involved in 1000s of real estate transactions. This program will help you follow in Jason’s footsteps on the road to your financial independence day, you really can do it. And now here’s your host, Jason Hartman with the complete solution for real estate investors.

Jason Hartman 1:03
Hey, welcome to the creating wealth show. This is your host Jason Hartman, Episode Number 575 575. And today, we will be talking about understanding closing costs, understanding good faith estimates, loan points and title insurance. You know, obviously, you could go into a lot more depth about all of these subjects, there’s no question about that. Literally, you could dedicate a whole show to each one. This is kind of an overview. closing costs do vary depends on the area depends on the deal depends on the loan structuring. And one of the things that few people few borrowers seem to understand is about the concept of buy downs, we have covered that on past episodes. We’re going to touch on a little bit today. But again, this is meant to be an overview. You could go deep into every one of these subjects. But either way, I think you will like it. And you’ll learn some stuff here. So that’s good. Since our topic today is you know, very real estate focused. I just in the intro portion wanted to talk about maybe a couple general things real quickly. Number one, I’m in Boise, Idaho today. And it seems like I’m always moving around when I’m talking to you. last couple of years, I’ve been really making it a point to attend a lot of conferences. Of course, we’ve got the venture Alliance, we just finished our awesome weekend. They’re in Newport, Rhode Island, Martha’s Vineyard, Providence, Rhode Island, and I flew back to San Diego, picked up my dog and put the clothes in the laundry, did a few things The next day, and then got on a plane again to come to Boise. But this time Coco came along. It’s always nice when I can bring the pup with me my daughter, lol. Anyway, she’s here. And I wanted to talk again about a couple of things before we get to our guest and talk really real estate specific stuff.

Interesting article on Newser today. And this is about character, and really the essence of a person in that age old discussion about character versus intellect. And you know, my grandma passed away a few years back at age 96, she had Alzheimer’s, and suffered with that for about the last 12 years of her life. And I tell you, that is tough of all the ailments, one can suffer. I don’t know if there’s really anything worse than losing one’s mind. You know, we can lose our health and suffer all sorts of different things. But your mind is just that’s, that’s you, I guess, right? Well, this article was kind of interesting. It says your essence is rooted in your character, not your intellect, who you are may have more to do with what you stand for, than what we know than what you know, right? In an attempt to begin to tackle the age old question of what’s shapes one’s identity. Researchers at Duke University and the University of Arizona survey the caregivers of those with different neurodegenerative diseases, to see which one seemed most likely to strip away the essence of a person. And the article goes on to say, reporting in the Journal of psychological science, they said that people can be stripped of their abilities to move, think and even remember, but it’s not until they are stripped of their moral characteristics IE courage, kindness, and honesty that their caregivers begin to feel that the person’s true identity is slipping away. Essentially, the article says, identity is not what we know. But it’s what we stand for. According to Scientific American. To test this, the researchers asked caregivers of 248 people suffering from either Alzheimer’s or dementia, or lateral sclerosis, ALS, such questions as How much do you sense that the patient is still the same person underneath, those caring for the ALS patients were at least likely to feel an essential metamorphosis and identity has occurred. Well, those caring for FTD patients who suffer from frontal control damage, that impacts things like empathy and impulse, or most likely to feel that the patient’s identity had changed, reports, The Wall Street Journal for this article calls on like, every source. It’s amazing, which it calls this research profound. Our moral character, after all, is what links us to other people, a statistical analysis of all three groups found changes in moral behavior to predict changes in perceived identity, more than changes in memory or intellect. So my comment is, I guess what they’re saying is that intellect really is largely memory, right? I mean, if we know a bunch of things, what how do we know them? Well, we know them by thinking them through, I guess, taking things in our experience, and assimilating what we think of those things, and then remembering that, or just simply remembering things that we learned and regurgitating them, right. That’s largely what our educational system unfortunately, is. It’s not about thinking it’s about remembering and regurgitating. And I don’t think that’s a very good thing. But certainly that’s that’s part of intellectual growth is simply memory, rote memory. So the article goes on to say, regardless of the type of disease, okay, so that’s very interesting. And I remember Denis waitley, saying years ago, of course, he was on the show, when I had, you know, discovered his great material, and he has books and audio cassettes. Yes, those old audio cassettes many years ago, he said a great quote, he said, if you don’t stand for something, you’ll fall for anything. So what is the essence of a person? Is it what we know? Or is it what we stand for? This article says, drawing on many, many sources, and the study mentioned that it is what we stand for, that determines who we really are.

Another interesting article, also news are one of my favorite little apps that Now check this out, like under the category of it’s an amazing time to be alive, right? There are now they are now experimenting with these artificially intelligent ads that are reading our emotions, and serving up content based on the emotions Now remember, that movie Minority Report, right? Where they would have this pre crime division. And it’s interesting, I’ve been reading about that how more and more police and government are using these kinds of ideas there. They’re using algorithms to predict crime. They’re using traffic patterns. They’re using events and weather. And it’s amazing, but scary at the same time. Of course, you know, this whole big brother thing is really worrisome. And by the way, on a tangent here, Edward Snowden is now on Twitter. And he’s got a whole bunch of followers joining him on Twitter. So that’s interesting. You can you can now follow Edward Snowden hero or villain, you decide. I think he’s kind of a hero. It’s telling the truth, pointing out what big brother has been doing to us. And you know, look at on a tangent here, someone could easily convince me that Edward Snowden is a villain, and he is a bad guy. And he should be in prison, if you could show me one important, classified thing that really damaged our country in any way. You know, the government, when you when you have a government job, the government can just say everything’s classified. So, you know, by any small discussion, or release of information, you know, you’re suddenly a traitor, and you should be shipped off to prison and court martialed. Right. But you know, the question is, should it be classified? That’s really the question. So I have yet to hear about anything that Edward Snowden did, that puts this country in any real Jeopardy, you know, military intelligence, etc, things like that. Now, maybe I’ve missed that. I’m totally open to that possibility. But if he tells me that, that I’ll say he’s a bad guy, but until then, sounds like he just did the citizens and the rest of the world a favor in disclosing what our government was doing to us or is doing to us. But you know, we didn’t know about it before Snowden, right. Anyway. So these ads are now using cameras on billboards. And they’re literally looking at faces, interpreting the expressions on the faces, and serving up ad content based on our moods and emotions. That’s right out of minority report the movie, right? Remember when he was walking by and the scanners on these billboards in like a bus station or something like that, or a train station, or scanning the eyes, and serving up ad content based on the eyes of the people walking by, I mean, amazing, yet scary at the same time. Amazing stuff on the real estate subject, of course. And that’s what the rest of the show is about with our guest today. Banks. There’s an article here I’m going to talk about in a future episode, which Oliver just posted. It’s a New York Times article. And it’s entitled as banks retreat, private equity rushes into by troubled home mortgages. So it looks like there is a new secondary mortgage market or maybe not new actually, but it’s getting bigger, rushing into to buy more and mortgages. So we will see how this all evolves, folks.

Anyway, we’ve got our meet the Masters event coming up in Southern California in January, it is going to be awesome. I’m working on a couple of bigger name speakers, you know, we’ve never really gone for, like the bigger name speakers at our events. And until they’re confirmed, of course, I can’t announce them. But there are people you know, of course, we’ve always had our local market specialist and our property managers, CPAs attorneys come in and speak about all of the various aspects of building a fantastic investment property portfolio. That’s again, coming up in early January. So get your early bird tickets now go to Jason Click on the events section. Take advantage of that. And look for more announcements on that. We will look forward to seeing you there. Also, we’ve got a property tour coming up in Orlando, Florida, great market. You know, one of the things about markets, like Illinois and for Florida, is that these are judicial foreclosure states. So the market clears much more slowly, price discovery happens much more slowly. You may have missed the market. In a lot of these areas where the foreclosures happen more quickly, the properties are recycled back onto the market, those opportunities have largely passed and a lot of those markets, Phoenix, Arizona would be one example where the prices have already gone up and the markets recovered quite a bit. But you know, you look at the lag time and some of these other markets, there are some great opportunities for you. So that will be announced and posted soon. Meet the Masters right now you can register for that in January and get your early bird prices. A bunch of you already have go to Jason And check that out. Okay, let’s get to our guests. Let’s talk about closing costs, good faith estimates, financing loan points, and title insurance. Here we go. Hey, I wanted to welcome one of our lenders back to the show to talk about closing costs. You know, this is a constant source of questions for us for our lenders. And we really hope to to pull back the curtain on these closing costs. A lot of lenders want to want to make this kind of mysterious. And I think one of the reasons frankly, they do want to keep it mysterious is so that the consumer doesn’t really know how to shop for a loan. And they don’t really know what questions to ask. And they can get in a position where they’re frankly getting overcharged. So here on the show, we want to help you protect yourself and become your own best advisor when it comes to my 10 commandments of successful investing. You know, I always talk about that thou shalt become educated, that is the first commandment, but the reason to become educated so you can be your own best advisor. So you don’t need to rely on other people. So that’s what we want to do is help you get educated. So you are armed with the knowledge and you can go out into the marketplace and you can compare effectively. So let’s dive into this.

So Joe, you know, I’m looking at a loan quote for just an example buyer here and you know, a purchase price of a property of $142,500 142 five and There’s this whole list of costs, lender fees, appraisal fees. prepaid interest now that people should understand is not really a closing cost, that’s just a proration. There’s insurance escrow reserves, that also not a closing cost. That’s just a impound account, or an escrow account to pay your insurance. And then the next one, tax escrow reserves, same thing, not really closing costs, just just an account to pay your property taxes, back to closing costs that we’ve got title fees, owner’s title, insurance, lenders, title insurance, transfer taxes, recording fees, let’s dive into some of this stuff. Tell us what it’s about. And how does someone know what the amounts of these charges should be?

Joe 15:47
So I get a collection to provide my good faith estimate, you know, constantly. The lender, any lender these days is going to overestimate certain charges, certain third party charges, such as the title fees, the appraisal costs, and possibly recording fees. Each market each county will have different fees in that regard, based on the loan amount and or based on the location of the property. So one, one fee that I typically tell folks to really look at is the lender fee, that fee will never, it’s the hard fee that the lender can quote, it should never really change. And that’s the one that really you should look at front when comparing lender to lender. The good faith estimate can sometimes be somewhat of a misnomer, because the other charges the other third party fees are a lot of the times over inflated or overestimated. Because those fees have not yet been invoiced to the customer or to the lender prior to closing.

Jason Hartman 16:57
Okay, good. So what should these fees be, though? I mean, people should understand these are not regulated by the government? Well, I don’t want to say that because they sort of are. But well, maybe maybe the best way to tackle this is to talk about the requirement to give what lenders call a GFP or a good faith estimate. And that’s shortly after someone applies for a loan. And there have been some recent changes in this policy. Right. And usually, what you’re saying is lenders will try to overestimate the cost on the good faith estimate. But some lenders, you know, they still charge a lot. I mean, you know, talk about that for a moment, if you would I don’t know exactly the question to ask.

Joe 17:45
So for example, prior to, let’s say, 2008, the Great Recession, lenders would provide a good faith estimate to folks and estimate fees, those third party fees, if the client went to closing and those third party fees were higher than that, then the lender estimated, well, then the customer had to pay the higher fee, the government stepped in and said that was unfair to the consumer. And the lender should have a better idea of what these third party fees are. So if they estimate on the low side, then the lender is actually nowadays required to pay the differential, not the consumer. So what lenders are deliberately doing at this point is an overestimating these third party fees on their good faith estimates, which again leads to it being somewhat of a misnomer, in terms of what the actual fees will be when you get to closing.

Jason Hartman 18:37
Okay, so now everybody gets good faith estimates that just save these huge fees, and they massively overestimate them. So they can come in under them, or at the same fees, and they can be okay and not have to pay. So this is why all these laws and regulations, they always have these unintended consequences that they never really seem to work out in practice. But But you know, that’s the government for you, right?

Joe 19:01
I mean, there are there are further changes coming to this. And on October 1. Oh, oh,

Jason Hartman 19:05
well, yeah. So by the time people hear this, the changes may well be in place. Do you want to talk about the new, the new policy, how’s that work?

Joe 19:12
I think they’re just going to overhaul the good faith estimate and the Truth in Lending documents to make it one uniform document and make it much more simple for consumers to understand, you know, what the actual fees are, what their actual bottom line will be. It will be more in line with what the real fees and costs are associated with your loan. So that’s part of the regulations.

Jason Hartman 19:35
Okay. So what are these? Let’s talk about these lender fees, what are the lender fees? Are they points? points are just prepaid interest, okay. Are they points are they processing fees? You know, in the industry, these are called garbage fees, a lot of them So, what are these lender fees

Joe 19:52
When you see this on the statement, a lender fee or an origination fee someone sometimes called and typically are lumped bundled fees by the lender for the processing of the loan, the underwriting of the loan, the credit report that we have to pull, and the flood certificate that we have to get on the property. So sometimes they’re broken out, sometimes they’re bundled into one lender fee, or what’s called an origination fee. These are separate two points, you know, points can be paid to buy down the rate, and improve the payment over time on the loan. appraisal fees, you know, that’s going to vary from Market to Market. So a customer purchasing in Chicago versus the customer purchasing in Memphis may have different title fee or appraisal, sorry, appraisal fees, by as much as 50 or $100. Depending on the appraisal,

Jason Hartman 20:49
well, that’s not a huge deal. So how much how much should the lender fees be? Can you put some dollar amounts in here? Our sample transaction here for the show is $142,500 142. Five. So what are these fees gonna look like?

Joe 21:04
Well, my lender fee would be $1,190.

Jason Hartman 21:07
Okay, so less than 1%.

Joe 21:10
Right? Right. The appraiser the appraisal fee would be 350. split the difference? 350.

Jason Hartman 21:16
Okay, approximately, yeah, give or take 100 bucks. Okay. And prepaid interest. That’s not a closing cost. That’s just a proration. So you shouldn’t stress about that. But what I do want people to know is, will there be 30 days of prepaid interest in there? Will there be 16 days? What will that look like?

Joe 21:35
It depends on what day of the month you close your loan. So if you close on the 20th of October, you will prepay 10 or 11 days of interest to the end of October,

Jason Hartman 21:49
then you won’t make a payment on your on your mortgage on November 1. But your first mortgage payment would come due on December 1. Because on every mortgage, you’re always a month in arrears paying your principal and interest. So when you when you bring in the money to closing, when you probably wire it in, and you think, gosh, why are these closing costs so high? You’ve got to you’ve got to parse out the preparations. Because when you prepay interest, that’s just part of your payment. You notice that? You know, many times you didn’t get a statement asking you to pay again for 45 days. Okay? And the reason is, is because you prepaid some of the interest, okay? So understand that same with insurance and taxes. Okay, let’s go down to title fees. And so those probations just to say it again, or not a closing costs, title fees, what what would those be,

Joe 22:42
So you’ve got owner’s title, and you’ve got lenders title insurance. Now, owner’s title insurance is mandated by lenders by the government to put on a good faith estimate. But it is not a fee that the buyers will pay. It is a seller charge that we simply have to disclose to the buyer. Now that will change back in October with the new regulations as well. But the tight the fee that our buyers need to be concerned about is the lenders title insurance and the closing agent fee for the title company. You know, on average, there are going to be around 15 or 16 $100.

Jason Hartman 23:19
Okay, so what’s always been interesting to me about title insurance, is that you have this odd scenario where all the parties pay for somebody else’s insurance. Isn’t that funny? The seller pays for the buyers title insurance, and the buyer pays for the lenders title insurance, kind of crazy how that evolved.

Joe 23:40
As far as the title companies, they have the route, you know, yeah,

Jason Hartman 23:44
they do. They do. Okay, so the title fees, that’s one of the more expensive charges then right is the lenders title insurance policy?

Joe 23:52
It would definitely be one of the higher fees on your on your closing costs are your hug set on the statement. Okay.

Jason Hartman 23:59
And who is going to set those title fees? I mean, certainly, there are many title companies out there, you can use a different title company, what happens there, what’s the dynamic of that, do you want to just address that for a quick moment.

Joe 24:12
So, in certain states, the seller of the property is responsible for providing clean title for our buyer and or the lender. So, the seller of the property will typically order that title insurance and provide that invoice to the lender so that they buyer the the client can be charged at the closing for that insurance. Right. There are other states where the lenders responsibility to ensure or the buyers responsibility to ensure that title is provided on the on the property prior to closing and you know, that can be shopped out from company to company within the market. But generally speaking they’re they’re pretty consistent with their with their cough.

Jason Hartman 24:59
What about transfer taxes. Now these vary by area, right?

Joe 25:02
Yeah, they’re basically basically municipalities, taxes or stamps on the property. Some municipalities have buyer and seller transfer stamps. And some municipalities have just seller transfer stamps. So when the property is changing hands, maybe it’s just the seller that has to pay the municipality attacks. And in certain cases, they’re municipalities that you’ve had both parties pay a portion of the transfer stamp, so the taxes the it’s really a local charge to the music municipality, for the transaction of transferring ownership in the property. Okay.

Jason Hartman 25:43
And so this is gonna vary by area. And this is not something you can negotiate. Right? This is not a it’s just a government fee. And, you know, it’s their way or the highway, right?

Joe 25:54
Yeah, I mean, to a certain degree, yes. But some, some sellers or some, you know, people who are selling the properties and writing up the contracts, even though they may be responsible for the seller transfers that may put a clause in the contract to make the buyer base. So you would have to, you’d have to look at your contract closely there.

Jason Hartman 26:14
Yeah, this stuff can all be can all vary by what’s actually written in the contract. And it also varies by area. Okay, because each area, and this is one of the great things I always say to our investors is, well, it’s not one of the great things I say, although what I say is pretty great, sometimes, maybe not always, for sure. But it’s one of the great things about real estate, that’s what I meant to say is that it’s so fragmented, and that fragmentation, I always say, embrace the fragmentation, because that keeps the big institutional players out of our business. That’s one of the reasons they don’t like it. Because things vary by area, they the customs are just different in every area. And they don’t like that fragmented stuff. They want it to be all the same nationally, or even, you know, with institutional players globally, in many cases, when it comes to the way various stock markets work, and so forth. Okay, good. Recording fees.

Joe 27:09
Again, that’s going to be county by county, and local area by local area, each county is going to charge you certain amounts to record each page of your closing documents. So that fee can vary based on how big your closing documents and how many pages are in your closing documents. Sure.

Jason Hartman 27:27
Yeah. Okay, good, good. Anything else you want to say we got to wrap up, this was just meant to be a real quickie discussion here. But anything else you want people to know, we’re going to have you back, we’re going to talk about how the loan rate is determined and how to calculate your debt income ratio, and some good stuff coming up on future episodes. But on this topic of closing costs, what else you want people to know

Joe 27:50
if anything, the only thing I would bring up on that in this regard would be if you are paying points, it is an addition, it’s a fee, in addition to the lender fee that’s stated upfront. So if you wanted to pay a point to buy down the interest rate, it would be $1 charge, in addition to the lender fees, and that’s exactly what we’re going to talk about in a future episode,

Jason Hartman 28:12
how mortgages are priced. You know, I’ve owned a couple of mortgage companies over the years, I’ve had different mortgage, I’ll call them relationships over the years in terms of affiliated business arrangements, and so forth inside my real estate company. It’s been interesting for me to learn and understand over the years how loans are priced. So we’re gonna save that for a future episode, but it’s going to be a good one. And then also calculating your debt to income ratio. So you can tell yourself, if you’re going to qualify for a loan without going to a lender, we want people to be empowered. So they know and they can do their own stuff if they want to. So good stuff. Hey, thanks for joining us and talking about closing costs. And we’ll talk to you in a future episode. Okay.

Joe 28:54
Okay, thank you very much.

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I’ve never really thought of Jason as subversive. But I just found out that’s what Wall Street considers him to be.

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Really now How is that possible at all?

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Simple. Wall Street believes that real estate investors are dangerous to their schemes? Because the dirty truth about income property is that it actually works in real life.

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If you want to be able to sit back and collect checks every month, just like a banker. Jason’s creating wealth encyclopedia series is for you. This show is produced by the Hartman media company All rights reserved for distribution or publication rights and media interviews, please visit www dot Hartman or email media at Hartman Nothing on this show should be considered specific personal or professional advice. Please consult an appropriate tax legal real estate or business professional for individualized advice. opinions of guests are their own. And the host is acting on behalf of Platinum properties investor network, Inc. exclusively.