On behalf of an very close investor friend that's dealing with this:
Buddy picked up a property in a rural community in New Mexico for 1/2 of what the property should have sold for. Seller had listed it 25% less than what it should have gone for because they needed to sell ASAP. Buddy offered 1/3 off their listing & seller took the cash & quick close offer because of the personal circumstances they were dealing with. (actual numbers not being disclosed to protect the innocent!)
My buddy discovers there were other interested parties but they didn't have financing lined up in time & one of the parties is willing to pay the original listing price which they have qualified and have been approved for. So 1 day after my buddy closes he goes under contract thinking this will be the quickest flip ever! (wait for it...)
A couple days before closing my buddy discovers that the buyers lender (they are doing a in-house loan) claims that since it's a flip they'll only pay 10% more than what my buddy bought it for and lender says that he's making too much money off the re-sale and he needs to reduce his asking price to 10% more than what he bought it for. (Uh, what's that? Did I hear that correctly?)
Buddy isn't suppose to know what lender said so there's some back & forth and then lender seems to cover their butt and comes back a couple days before they were suppose to close saying they need 2 appraisals of property because it's a flip. A flip that the lender knew that it was from day 1. Buddy is frustrated but is confident (as is his agent) that appraisals will come back above what he is trying to sell for, and goes forward because he figures it'll take longer to have to relist & start all over.
First appraiser comes & goes & buddy is waiting to hear on that report. Second appraiser is scheduled but tells my buddy's agent that they need to know how much he bought the property for because he needs that info to help him assess the property.
STOP RIGHT THERE! I've never claimed to be an expert but I've never heard of such a thing. I thought an appraiser is appraising a property at that moment in time on what it appraises for based on the current market. How is the previous purchase price relevant in this situation. Even if it's a flip, how is that amount relevant not knowing the circumstances on how that amount was agreed on. What if my buddy got it for $10K because seller was REALLY desperate or paid $10K but also gave the seller a $40K RV. Does that mean the lender is only going to loan 10% more than the actual purchase price on a property that's worth, say $100,000? That makes NO sense!
So I'm trying to process this and knowing that it's a flip maybe there's some rules I'm not aware of. But I still don't see how if the lender knows that previous purchase number, how are they able to only lend 10% more? How does the lender/appraiser know if/what repairs/upgrades were made to the property and how much they cost and how to determine if the previous owner did the upgrades or was it the new owner? And how does the lender/appraiser take into account that the previous seller NEEDED to sell the property, even at a greatly reduced price? Is that accounted for somehow? Or what if oil was discovered under the area and sent home values soaring. Would the lender still only approve a loan amount for previous purchase price +10%? (Don't think so!)
Realistically I can't see how the previous purchase price should play into an appraisers report or even considered by the lender for evaluation. A property's current value at that moment in time is all that should matter. Don't know where the two appraisals will come back at but I told my buddy I'd find it highly suspicious if the appraiser that asked for his purchase price comes in much lower than the other appraiser's valuation and very close to the previous purchase price + 10% that the lender THINKS the buyer should be selling for because they don't need to make that much money off this property. If that happens, isn't that the very definition of collusion?
Am I wrong? If so, what am I missing? Anyone else encounter anything like this? Asking because I Just hate to see my buddy getting screwed over.
@Dan K. I'd like to hear an appraiser chime in, but my understanding is that appraisals are based almost completely on comparable properties that have actually sold in the immediate area and fairly recently. I've never had an appraiser ask what the seller paid, but that's public record around here.
The key might be that this is a portfolio (in-house) loan. It's quite possible that the lender has imposed conditions that would not be in play if they sold the loan on the secondary market.
Your contract with the buyer will drive a lot of what can happen next. If the buyer has a financing contingency and the lender won't do the deal at the agreed upon price, it's most likely that the buyer can get out and get their deposits back.
If you had a clause that disallows a cancellation of the sale due to appraisal, then you could either force the sale (sue for specific performance if necessary) or retain deposits - again, depending on how your contract is written.
Back to the appraisal, I wonder how the lender would have handled it if you bought the property from a family member for $1,000. Might be a good question to as them.
@Charlie MacPherson Thanks for the response & insight. I talked with my buddy and he did confirm it was an in-house loan that, as you suggested, may have conditions set up for if/when the loan would be sold. Through his agent they were able to have the buyer press the lender to perform in a timely manner, as up until then the lender was dragging the process out and adding on items (the 2 appraisals) only at the last minute.
Regardless, they were able to finally close. My buddy is marking the experience up to 'been there, done that, glad I survived' as well as the joys of dealing with small rural markets.
@Dan K. Glad it worked out!
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