Refinance Challenge on Buy and Hold Purchased in 2022
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Quote from @Jeremy I.:
I bought a rental in 2022 through owner financing and used the realtors CMA to value the house. The note is due in a month and I've been trying to refinance the house and the appraisal came back approximately $150,000 lower than the purchase price of the house, which is causing me to have to bring approximately $65,000 to close. I'm trying to determine what my options are, and how to proceed. I've thought about hiring a lawyer to renegotiate with the prior owner, approaching a wholesaler, or allowing the house to go into foreclosure. All bad options. Any help will be greatly appreciated.
I see in your profile that you are seeking investors to avoid hard money lenders. I am not not trying to pile on here BUT if you had a lender on this trasnaction you would likely not be in this place. Properties in the price range we are likely talking about have not lost 20-40% of value. The appraisal that a lender would have required you to get when you purchased when have likely shown that the interested party CMA was garbage. Sure, lenders charge for their services but they also look out for you. A bad deal for you is a bad deal for the lender too.
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7 Replies
- Lender · Charleston, SC · Member since 2019 · 1k+ posts · 1k+ votes1y
The damage is done. As the old saying goes, "you make your money when you buy." Not being harsh, just pointing out the reality.
I doubt that selling will help much, as it sounds like this would be a short sale and the existing note holder would have to agree to accepting the short payoff. Does the prior owner still hold the note? If so, you may be able to negotiate an extension on the current loan.
I would look into the long term viability of the property. What are the numbers for it as a rental property? Even if you overpaid, if you can rent it for long enough, tenants will eventually pay for the property for you. From here, it's a matter of estimating cashflows/financial performance and then determining whether the better course is to take the loss on the chin now vs hold the property and earn your way out of it over a period of time.
I wouldnt give any weight to what you've already spent on the property. That part is a sunk cost. All that matters now is: does it make more sense to walk away as is, or to invest another $65,000 given what you can expect to earn going forward, considering the opportunity cost on that $65k.
- 1yMike GrudzienPro MemberLender · Eugene, OR · Member since 2019 · 2k+ posts · 1k+ votes
This is a tough call. I'm going to be watching for answers, too.
- 1yDon KonipolBusiness MemberInvestor · The Woodlands TX / Avon, CT · Member since 2009 · 6k+ posts · 10k+ votesFirst you need to determine if the appraisal is accurate. Did the appraiser use appropriate comps? Were the proper differences between the comps and subject property accounted for? For example, does the subject property contain a large additional acreage that wasn’t given consideration?
Quote from @Jeremy I.:
I bought a rental in 2022 through owner financing and used the realtors CMA to value the house. The note is due in a month and I've been trying to refinance the house and the appraisal came back approximately $150,000 lower than the purchase price of the house, which is causing me to have to bring approximately $65,000 to close. I'm trying to determine what my options are, and how to proceed. I've thought about hiring a lawyer to renegotiate with the prior owner, approaching a wholesaler, or allowing the house to go into foreclosure. All bad options. Any help will be greatly appreciated.
Once you’ve determined that the appraisal IS accurate, you need to answer these questions to have all information to proceed
1. Do you have personal liability on the existing mortgage note? If so, is your financial position one in which you have other assets vulnerable to make up a shortfall in foreclosure?
2. Who holds the current mortgage note? An individual or an institution? Is it the seller of the property or has the original note holder sold the note?
3. Assuming the appraisal is accurate, does the amount of the note exceed the property value? If so by how much? If the note holder were to obtain ow worship thru foreclosure, how much would they net after all foreclosure, listing, fees, etc? How much $ would they lose vis a vi the principal remaining note balance?
4. As the note is currently structured, is the property (including all expenses including straight line depreciation) cash flow positive? If so by how much? If not what would the note payments have to be to at least be at break even.
5. What does the future look like for the subject property? Has the area suffered a recent decline due to some extraneous factor like a factory closing? Does the area have future potential for “gentrification?
once I determined the answers to these questions I would approach the note holder, show them the appraisal, and state my dilemma. Let it sink in for a few days (weeks), then approach the, with a”solution”; which in my mind would be a downward” adjustment to note balance, reduction in interest rate, extension of term, longer amortization, etc. This can be made more palatable to the note holder see by offering a percentage of the “upside” when the property is eventually sold. - Investor · Clairemont, CA · Member since 2011 · 3k+ posts · 2k+ votes1y
Your loan holder has a problem too...if you default they have costs to foreclose, obtain physical possession and resell. So while you have this looming deadline that is your problem, not finding a solution to that creates a problem for them too. Go over Don's list above and get the hard facts, then use that in a discussion with them. I'd be polite and gentle, but be clear that this is their problem too. Evaluate how long it would take for you to pay down the loan to a refinance able LTV, and get an extension for at least that length if at all possible.
If you can survive the issue, RE is very forgiving long term. I rode values down and back up in 2008 on my first flip. I was all in $180K, at the bottom it was worth maybe $50K and I sold seven years later for somewhere around $195K. So figure out a solution that you can survive and you'll most likely come out ok.
- 1yDaniel TanasaBusiness MemberRealtor · Houston, TX · Member since 2019 · 351 posts · 174 votes
Hello Jeremy,
Sorry to hear about your troubles. As it was mentioned before, probably going to the seller and asking for an extension or loan modification will be the best way to go about it. I assume you're fine continuing to make the same payment as you did until now, so just go to the seller with the appraisal and explain to him you're not able to refinance. They should be able to extend it for you as is in their interest as well. You can also ask them to discount the note for you in order to be able to refinance. See which option they are willing to take and you should be able to find a solution.
Good luck! Let us know how it goes.
Quote from @Jeremy I.:
I bought a rental in 2022 through owner financing and used the realtors CMA to value the house. The note is due in a month and I've been trying to refinance the house and the appraisal came back approximately $150,000 lower than the purchase price of the house, which is causing me to have to bring approximately $65,000 to close. I'm trying to determine what my options are, and how to proceed. I've thought about hiring a lawyer to renegotiate with the prior owner, approaching a wholesaler, or allowing the house to go into foreclosure. All bad options. Any help will be greatly appreciated.
I see in your profile that you are seeking investors to avoid hard money lenders. I am not not trying to pile on here BUT if you had a lender on this trasnaction you would likely not be in this place. Properties in the price range we are likely talking about have not lost 20-40% of value. The appraisal that a lender would have required you to get when you purchased when have likely shown that the interested party CMA was garbage. Sure, lenders charge for their services but they also look out for you. A bad deal for you is a bad deal for the lender too.
Hurst Real Estate, INC4.992 Reviews- 1yErik EstradaBusiness MemberLender · Member since 2022 · 6k+ posts · 1k+ votes
I guess this is good example as to why having skin in the game is extremely important. I think you might be better off renegotiating the loan terms so you can successfully refinance.
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