What to do when selling and there’s a low appraisal

Question

Hi we are looking to sell to our current tenants and they are getting an FHA loan. The appraisal came in $30k under the agreed upon price. The price we agreed to was what OpenDoor had already offered us so we could always go with them however we want to help out the tenant. Any recommendations on how to overcome the $30k? They don’t have that much in the bank. I was thinking maybe we act as the bank and provide a second note? Or maybe do a formal private loan uncollateralized? Looking for other recommendations. Thanks in advance

Russell Brazil · Answer

Have them switch to a conventional loan.

Daniel Hennek · Answer

Your max CLTV is going to be 97% for a conventional loan.  That is 97% of the purchase price or appraised value(whichever is less)...see a problem there?

You have a person here who you claim is "in lending" but they don't know how to calculate the dollar amount for their maximum CLTV?  I'd call that a red flag and you should be looking for red flags if you're thinking about loaning anyone money, secured or not.  Maybe it's simple ignorance, ok but that's actually not ok if you want this to work and not just waste everyone's time until someone who knows better gets a hold of it.  I'll help lay out some example numbers for you so you can understand what I'm getting at.

Let's assume for arguments sake a purchase price of $200,000 with an appraised value of $170,000.

For the FHA she was going to bring 3.5% probably right?  So $7,000 down and a base loan of $193,000 before the FHA UFMIP.  So she was ready to bring 7k out of pocket.  Let's convert this to conventional now using her available $7,000 down.

$170,000 appraised value means a maximum 1st mortgage at 97% LTV of $164,900 leaving $35,100 she still has to come up with to pay you your $200,000.  Apply her $7,000 down and she still needs $28,100.  So how is she going to come up with this $28,100?  She thinks with a 2nd mortgage note?  That would mean a first mortgage of $164,900 at 97% LTV, a second mortgage at $28,100 for a total combined amount of $193,000 and a CLTV of 113.5%.  Now use your actual numbers to see what proposed CLTV you're looking at.  Remember, maximum CLTV is 97% so you're dead in the water at anything above that.

You're trying pretty hard to help this person, which is admirable but not pragmatic.  You should think about why lenders won't make large un-secured loans, and or who they'd make those loans to.  Most borrowers looking at an FHA loan are doing so because their credit doesn't allow them to get better terms with conventional, or they simply can't qualify for conventional period.  If you're thinking about giving these people an unsecured loan wouldn't you at least want to qualify them?  Look at their credit?  Ask them to make some attestations to statements of fact?  If they were FHA buyers then it's a pretty good bet they wouldn't get a large unsecured loan from most, or any banks.  The people that can get a large unsecured loan from a bank don't look at FHA loans.

Life happens to people.  When life happens to them do you want that to automatically trickle down to you?  The thing that normally prevents people from passing off the fallout from their hard life events onto others is security...that's why it's called security.

Jason Rhodewalt · Answer

Thanks for the responses everyone. Talking to the tenant today, who happens to be in the lending business, she suggested that we stick to the original price and hold a second note for 20% and move to a conventional loan. I’m not really interested in loaning more money - I’m not really in that business. I’m also unsure of the tax implications as we intend to do a 1031 exchange with the proceeds.

I’m leaning more towards the uncollateralized loan. It’s not a large amount so it would kill us if they did stop paying and might just be cleaner. Still open to other ideas as well. Thanks for everyone’s thoughts

Daniel Hennek · Answer

Sell it to Opendoor then, or hand over $30k to these people you want to help so badly.  There's nothing you can do to help them buy the place so stop trying.  You can't write a second note to cover this because the loan product will not allow it.  Here's the guidance below:

All second liens must be made or held by the eligible governmental body or instrumentality.

Second liens cannot be delegated to another party that is not permitted to provide this level of secondary financing.

There's nothing to do about the appraisal unless you can find higher value comps that weren't used but should have been.  The buyer has to bring more money since their LTV is going to be based on the appraised value or purchase price whichever is less.

There is also the possibility that your appraiser didn't do the right time adjustments.  There's been guidance going out to appraisers all over the nation about getting better with their time adjustments because too many values are coming in low.  So maybe you can get the appraised value increased if there are legitimate mistakes made on the appraisal report, but it's a long shot.

Jaron Walling · Answer

@Jason Rhodewalt Yeah you could do a Subject-to financing deal but an agreement needs to be made and signed by both parties. In my opinion it's a higher level deal that most retail buyers (tenants) may not understand. What concerns me is the massive difference in appraisal compared to price. I'm curious who's to blame for that? I guess it doesn't matter since you have a back up offer.

I would not entertain any uncollateralized loans. That's risky in 2021.

What to do when selling and there’s a low appraisal

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