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Faux-Market Value

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Posted On: 06/25/2008

Q: As a broker, I wrote an offer for a client on an FHA foreclosure house, and after a counter offer my clients were able to get the property for $374,500. Then I get a call from my client's lender today saying that the appraisal came in at $347,000 - $27,500 below the accepted price. I was floored!

I've been in the business for more than 35 years, and I had never had an appraisal come in so ridiculously low. I have buyers who are willing to settle at the price negotiated, which is fair, and now FHA wants the house values to drop even more? It doesn't make sense! Who established fair-market value in this case? Apparently not the buyer!

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A: At first it would seem that the agreement of an informed buyer and an informed seller would represent fair-market value. But that agreement is between the buyer and the seller; the lender is a different party with different interests. The lender - the party who actually employs the appraiser - wants the most conservative valuation possible because if the loan goes into default the lender does not want to be in the position of having a property that is worth less than the loan balance. As to the FHA, it's an insurance provider, and it, too, is not looking for extra risk.

The reality is that the buyer and seller in your situation are welcome to close their deal if the buyer can come up with cash, financing or both to make the transaction work. However, what the buyer and the seller cannot do is force a lender or insurer to accept their terms. The bottom line: If you need the lender's money you also need to accept that it's the lender's definition of fair-market value that counts.

Q: I lost my husband two years ago. I have been struggling to make ends meet. I was hoping my lender would just extend my term as the home is financed at a fixed 5 percent on a 15-year note. They told me I have to be 90 days delinquent to qualify for a loan modification, but I have not even been 30 days late. Should I miss a few payments.

A: You have a fabulous rate, but a 15-year term means you're required to make larger payments each month than you would need with 30-year financing.

You should not miss any mortgage payments. That would have the effect of reducing your credit standing, meaning you would only qualify for a more expensive loan, if you could qualify for any financing in today's market.

There are several alternatives. First, could any family members help with monthly payments? They could then receive the house as part of your estate. Second, speak with other lenders. There are plenty of lenders who make loans that require no cash to close - the cost of closing is financed with a bigger loan balance or a somewhat higher rate. Third, keep the current loan and take on another job, get a safe but less-expensive car to reduce costs, take in a boarder, etc.

Q: How reliable, if at all, are the investor groups that advertise they can buy your house within days and pay cash for it?

A: The purpose of any investor group is to make money. That means in exchange for a quick sale you must give up something - and that "something" is typically a huge discount on the fair-market value of the property.

If you have a need to sell quickly or with a substantial discount, you need to step back and look at your alternatives. For instance, can you rent the property? Can you modify the current mortgage? Can you refinance? Is there someone who would buy with a smaller discount?

If a discount makes sense in your circumstances, why not list the property with a local real-estate broker? Offer to pay some or all buyer closing costs and provide a jumbo commission big enough to attract instant broker interest. This may well be cheaper than selling to an investment group, though a quick sale in the open market cannot be guaranteed.

Not all investors play fair. For this reason you must sign no documents unless they have first been reviewed by an attorney or legal clinic - and certainly not an attorney or legal clinic suggested by the investment group. If you cannot afford legal services, please contact a community housing organization or ask if you local bar association can help find an attorney to provide pro bono assistance.

Peter G. Miller is the author of The Common-Sense Mortgage and a veteran real estate columnist. Have a question? Please write to peter@ctwfeatures.com.

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