Get Your Real Estate Financing Appraisal Right The First Time With Seller Financing

By Author: Keith S. Donald
Total Articles: 9
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Real estate financing has become more challenging as a result of the sub prime lender problems during the past year. Even though the typical home seller is facing significant home loan lending challenges, the property "rehabber" was in some cases the victim of a two punch combination.

For many "rehabbers", punch number one was the misfortune of following the
trends for one month too many. The result was basically paying too much for their rehab property without realizing it at the time.

The second punch, for many the knockout, came when they could not refinance
their property with the same lenders they had been using for years.

Of course this involves complex issues. One of the issues was with the
professional property appraisal.

Typical rehab real estate financing works like this. The buyer/investor researches properties that will provide a satisfactory profit after buying and fixing up the property at a cost no greater than 70% of the After Repaired Value, (ARV).

The ARV is determined by an appraisal that is done before any funds are dispersed by the lender. This process ...
... confirms several important things. Which repairs are to be done to maximize the value appreciation of the property? What is the total cost for the projected repairs? What will the value of the property be after the repairs are completed? Finally, what loan to value, L-T-V, ratio will the lender authorize for the investment?

Processes closely resembling that system have been used successfully for years, that is until 2006. Beginning in 2006, many lenders typically involved in rehab refinance made a critical change in the system.

The appraisal used to determine the value of the completed rehab property was
frequently ignored or disallowed. This change in procedure was implemented
without warning to the investor or their rehab lender. The results of this unilateral change in procedure is an unfortunate series of "falling dominoes" throughout the real estate financing marketplace.

For example, investors that could not get their properties refinanced were
frequently forced into foreclosure. Too many investors also made the mistake of filing for bankruptcy in an attempt to delay the foreclosures. That created a "double whammy" they really did not need.

What happened to the private and hard money lenders that funded the investor's rehab deals? It depends on the situation. In some cases the properties were completed as planned and the typical options were pursued. There was foreclosure, property sale at auction; Real Estate Owned, (REO) and re-sale, or some other acceptable alternative for the conversion of the property into a performing asset. Everything worked out OK.

There were also some cases when the work was not completed as planned.
Instead of a nicely completed rehab, there were many instances where the work
was poorly done, or not done at all. In cases like that someone often got creative with the rehab funds and made some really bad decisions. These were the kinds of decisions that resulted in significant value reductions to the property.

It should also be obvious that some of the really bad results were caused by
selfish and greedy hucksters, liars, cheaters and serious fraud artists.

The responses to these conditions led to circumstances where the lenders were
sometimes only willing to refinance properties for about the amount the investor had invested! They got no credit for the rehab at all.

That left the investor with principal and interest payments due to their lender that were greater than the amount he or she could get in refinance funding. Even with the required second appraisal that estimated the property values after the repairs, in many cases the appraisal was completely ignored.

I maintain that behavior like this is an affront to the profession of property appraisers, and to private and hard money lenders. While it is true that property values can be influenced by many factors, appraisers provide a necessary and valuable service to the real estate industry.

There is a very special relationship between the first and the second appraisal.

The first appraisal provides a conditional value, based on specified improvements being made. Repairs and other considerations are spelled out as conditions to be met for the estimated value recorded as the ARV.

The second appraisal confirms whether the conditions described in the first
appraisal have been satisfied. They are supposed to work hand in hand. When
their relationship is affected the way it has been for the past year, it creates problems that should never exist, and makes real estate financing difficult if not impossible through traditional channels.

At last count more than sixty of the so-called sub-prime lenders that were directly involved in the kinds of transactions described here are out of business or have suspended their sub-prime lending operations.

The point of this article is to make you aware that alternatives do exist for real estate financing that are "outside the box" of prime and sub-prime lenders. You can actually take control of the funding for your property sale. You can structure the financing so there is only one appraisal required. It is essential for our purposes.

You can fund your buyer and get your cash at closing in many cases. The solution to the problems described above is the new application of a very old and dear friend. Say hello to the new and improved seller financing, where no banks are needed when you sell or buy.

Copyright 2007 TDO Properties, LLC All Rights Reserved

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