Expert: Matt Heisler - 9/29/2011

Question
QUESTION: I accepted an offer on my house.  The buyers had pre-approval for a VA mortgage.  The house passed inspection, pest inspection and the VA appraisal, but, in the end, the buyers were turned down based on the self-employment income of the husband.
Next, the buyers applied for an FHA loan with a different lender.  They wouldn't accept the VA appraisal (despite it being on an FHA form), and did another.  It came in  $29,000 less than the sale price (and $36,000 less than the VA appraisal)!   Everything I had read made it seem that the VA appraisal was going to be stricter than an FHA, but that certainly wasn't my experience.
 
The buyers are still willing to continue with the deal at the original price and their agent and mine sent comps to the appraiser to try to persuade him to change his mind.  He will not.  Therefore, the lender will not lend any more than the FHA appraised value, and the buyers don't have the ability to pay more in cash or go with a conventional loan.  

I apparently now have the option of reducing the price by $29,000 or abandoning the deal.  The downside of abandoning the deal is that: 1) the FHA appraisal will stay with the house for four months, 2) fall/winter is not the best time to sell, 3) I already emptied the house (I had staged it for selling), because the original (VA) deal didn't fall thru until the day before the scheduled closing!  

It occurred to me that the buyers might be fine with signing a note agreeing to pay me an additional sum, not as a 2nd mortgage, but just as a personal loan.  However, my realtor says that's not permitted.  Any ideas?

ANSWER: You have basically gone through most of the options.  It's hard for me to give advice without understanding the amounts we're talking about.  For example, if the home is 290K, 29 K is a big miss, I would walk and do another deal, assuming my market was healthy.  If my home was 600K, and my market was slow, I would eat the 29K, as it's only 5%, which I'll probably lose in the next go round.  My nose is telling me the buyer isn't strong enough to purchase you home at market value, and the appraiser feels "pressured" to be conservative.  Not supposed to work that way, but I doubt you're surprised I think it might in this case.

You seem like a sharp person.  This is a math problem.  If you project how long your home will sit empty and used, and what your're likely to get as a new offer, you can figure out whether to settle or Walk.  Bummer about the appraiser - I've had better luck with getting appraisals altered, but if you can't, you can't.  

Matt
<a href=http://www.homesellinginmass.net/">My Blog</a>

---------- FOLLOW-UP ----------

QUESTION: This is in a suburb of Detroit, which has been very badly hit by the downturn.  It's a 4-bedroom, 2,200 sf. house on 3/4 of an acre, selling for $179,000, so, yes, $29,000 is a big hit.  

I don't think the appraiser was pressured to be conservative.  According to my realtor, the lender has been trying to make this work.

What about my question regarding a personal note?  Is that really forbidden if not tied to the house as a second mortgage?  My realtor says he'd be interested in knowing also.  He asked at his office and was told that a "2nd" isn't allowed by FHA.  What if it isn't a 2nd?    

Thanks!

Answer
"The Lender" is a collection of people, who, by and large, don't know what each other is doing. "The Lender" trying to make this work is a bunch of hooey.  They already have a good appraisal, and won't use it.  How is that trying?  I won't bore you with the arcane details of appraisal underwriting, but they are all pressured to protect the bank, which they did poorly on the way up, and overly at this point in the asset cycle.  

But I digress.

Any type of note that uses the home as collateral is a mortgage (a 2nd mortgage, hence the term).  Any type of "unsecured" note would not be considered a mortgage, technically, but you'll need to ask a real estate attorney in Michigan as to how to execute that properly.  You certainly aren't the first one to think of it, but you are trying to walk some pretty murky ground here. If it's not done properly it becomes mortgage fraud, and the buyer would face some pretty stiff penalties for that (jail time) if caught/convicted.  The buyer has to sign all these statements about the truth of what they owe to who, and this would be in a gross violation of that. The real problem though, is that if the bank finds out about the extra debt, and you'll need to tell them, (unsecured or no), it very likely will no longer qualify them for the mortgage (they are borderline), so no mortgage.  To be safe, you'd have to get them to agree to the debt after the closing, and then, well, why would they sign anything? And if they do sign it, and it's unsecured, why would they pay? How would you collect?  Pay an attorney $15K to put a lien on their house and go to court?  (Where a judge will probably not look kindly on your efforts to skirt the mortgage laws).

As you can see, IMHO, that strategy is legally questionable, ethically wrong, and dangerous for both parties (And your Realtor should have already said that).  I empathize with your position - 29K is a lot of lettuce, and I've heard this type of story too many times for my liking - but there's not too much you can do at this point.  

A real long shot would be to do a rent-to-own, or use-and-occupancy for four months and have the buyer re-apply, get a new appraisal, and hope for the best. That gets the buyer the house and you your money in four months - you're a landlord until then.  Doubt the buyers will go for it though.

Good Luck-