Home Selling in 60402>Question Details

Pudgy, Home Seller in 60402

My husband and I took a line of credit on the 11 room, 3 story house to downsize to a 1 level ranch as he was unable to walk. Shortly after we

Asked by Pudgy, 60402 Wed Mar 10, 2010

moved, he passed away (quite suddenly. Without his income, this has been quite a financial journey for me as now I am unable to retire due to the financial harship of trying to keep up both houses. After 2 years and reducing the house for sale by $80,000, a beautiful young couple with a child wanted to buy the house. We agreed on a sales price of $185,000 and I would give them $5,000 to assist them with their closing costs. With the little money I have left, I would be able to add the $15,000 and pay off the line of credit. The house I currently live in would be without debt. Now the FHA appraisal came back with a $140,000 value and the lender will not budge for this young couple and I cannot afford to sell them the house for that little amount. Do we have any recourse with some other lending institution? The couple has excellent credit, are both professionals with about $110,000 annual income. What happened to stimulating the economy?

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Hello Pudgy and thanks for your post.

Forgive me, but I'm going to be a "cold hearted" real estate professional. I am an SRES or Senior Real Estate Specialist and the very last thing I want to see is any senior or individual of retirement age making decisions for which they are forced.

First, I would caution against ever becoming emotionally involved with a buyer. Certainly, as agents, we like to present our buyers as "people" with "families" and "hopes and dreams", but, at the end of the day, this is a business transaction that, hopefully, benefits all equally. While I'm certain your buyers are charming people, don't get too caught up in their "back story" when trying to determine how best to handle your personal finances.

Second, why are people with great credit scores and an annual combined income of $110,000 or maybe separately with an income of $110,000 each and a combined income of $220,000 utilizing an FHA loan? FHA loans are generally for individuals who do not have enough money for a down payment and who do not make enough money and/or who have poor credit scores. Yet at $110K (combined), these buyers gross $9200 per month and probably have a take home of $5300 per month after taxes. At 3.5% for a downpayment, they're only putting down $6500?? Unless they are incredibly poor at financial planning, this $6500 probably represents only 3 months of savings. Or , maybe, they're very good at financial planning and have chosen NOT to spend their savings by using an FHA loan to buy a home.

Now, the home has appraised at $45,000 less than the sales price, which may a fault of the colder weather season in Illinois that prevents a lot of sales activity. The truth is that there is very little that you, as the seller, can do to assist the buyers especially since, as you have already mentioned, you cannot afford to lower the price to $140,000 and I suspect that this would not be such a huge issue had the buyers used a conventional loan and agreed to the standard 20 percent down payment.

While the buyers consider their options (get a new lender, pay more money to buy the home or walk away), you and your agent should be working to determine the current price of your home based on comparables in the area. If the price is too low, it may be time to rent the home or take it off the market for a couple of months to allow the listing to "renew" rather than to be "stale."

Either way, I would resist the urge to accommodate any buyer while also putting your own financial security at jeopardy.

Good luck!

Grace Morioka, SRES
Area Pro Realty
0 votes Thank Flag Link Wed Mar 10, 2010
There are a number of other possibilities. If I read your question correctly, you need to come up with $15,000 to pay off the line of credit. Then the house you live in would be debt-free.

You don't say what mortgage is on the house that you'd be selling for $185,000.

Three possibilities are a lease-option, wrap mortgage, or private financing.

Again, without all the numbers this can't be precise. But here are the broad outlines:

Private Financing: Sell the house to the couple for $185,000, with 10% down. Set up a mortgage that works for both of you--30 years at 6%, maybe. So they pay you $18,500 as the downpayment. Their payments to you would be $1,000 a month, principle and interest. They'd also have to pay the taxes. There'd be $3,500 left to pay closing costs--which should be a lot lower than if you were using a commercial lender, since you'll cut out all the junk fees. So you get your $15,000 . . . they buy the hosue for the agreed-upon $185,000 . . . they get most of what they'd expected anyway in closing costs . . . it all works out. A real estate lawyer can do it all for you.

Lease Option: Lease the property to the couple with an option to purchase. Make it a 3 or 4 year lease option, unless they want to do it sooner. The option fee--non-refundable--can be whatever the two of you agree on. Make it $15,000, if you wish. The option fee gets credited to the purchase price if they buy. Charge whatever fair market rent would be. Perhaps slightly more, and credit the extra to the purchase price. I'm guessing a house that costs $185,000 might rent for $1,200-$1,400. So you charge them $1,300, with $200 credited to the purchase price. Every month they pay you $1,300. And at any point during the option period--again, it's whatever the two of you want, but typically 2-5 years--they can buy for the agreed-upon price. If you make it 5 years, you and they have a full 5 years for property values to go up and for the house to appraise at $185,000. In the meantime, you've got the $15,000 to pay off the line of credit, and you're getting $1,300 a month in rent. Also, lease-options can (and should) be set up so that the tenant-buyers take most of the responsibilities for maintenance and repairs, so your risks should be minimized. Again, a good real estate lawyer can set it all up.

Or you can do a wrap mortgage. You didn't say how much of a mortgage is on the house. But, just for example, let's say it's $100,000. You collect $15,000 from them. They're left owing $170,000. You've got your underlying mortgage of $100,000. You "wrap" that with another mortgage of $70,000. Every month, they pay you for both the $100,000 and the $70,000 mortgage. You send the payment for the $100,000 to the bank, and you keep the payment from the $70,000. Again, they're buying the house for $185,000 and you've got your $15,000 to pay off the line of credit. Again, a good real estate lawyer can set this all up.

So, right there are three ways you can get the $15,000 you need and the young couple can buy the house they want for $185,000.

One other note: There is absolutely no need or reason for you to do a short sale or a "strategic default," as another answer here mentions. You'll injure your credit; you may imperil the home with the line of credit, and the young couple won't be able to buy your home. As I said above, there are at least three good ways for them to buy, for you to sell, and for both of you to get exactly what you want.

Hope that helps.
0 votes Thank Flag Link Wed Mar 10, 2010
Don Tepper, Real Estate Pro in Burke, VA
This happens from time to time. Normally it happens when a seller thinks a home is worth what they paid for it or what they need out of it. We all know it is only worth what a buyer is willing to pay for it and a seller is willing to sell it for...in cash. Now when a lender is involved everything changes and you have to add in the 3rd criteria of recent similar solds in the area. If the comps show $140k it will be an uphill climb but not impossible. Your agent can send comps supporting the higher price and request they be used, or you can shop other lenders to do new appraisals. The new appraisals will be similar no doubt and the buyers will normally be turned off at the prospect of shopping numbers until they tell you what you want to hear. Normally in this type of case these buyers will go elsewhere as they will think they are getting a bad deal and wont want to pay more for a home than an appraiser said it should be worth. Rarely will they make up the difference and normally no one wants to walk into their new home in a negative equity position. Your agent should be able to do everything possible to make something work out that both the buyer and seller can live with. I suspect if the buyers havent moved on... they will soon.
0 votes Thank Flag Link Wed Mar 10, 2010
I had a similar problem in Brookline Ma. The appraisal came in 40K below the agreed price. I, as the buyer broker, the listing broker and the mortgage broker all worked very diligently to do an accurate appraisal, since the bank appraiser's value was not accurate. We did get the appraiser to look at our appraisal and present it to the bank. Everything worked out
FHA loans are very difficult and rigid, it they can get another type of mortgage it would be better.
The Realtors and mortgage brokers should be helping you solve this problem
0 votes Thank Flag Link Wed Mar 10, 2010
Your situation is very sad and I'm sorry you are going through it. You have several options, but I would hope your agent would be the one advising you to the specifics, as state laws vary.
You could ask the buyers to make up the difference; you indicate they have excellent income.
You could pursue the sale as a short sale, requiring your lender to make up some or all of the shortfall. With your other home being free and clear this may be difficult.
You could obtain a loan on your current home to make up the shortfall, but this could put you in a difficult cash flow position.
You could ask the buyers to pursue a loan with a different lender and hope that a different appraiser could come up with a better valuation. Your agent would be the best one to consult with if they can supply comparables to support your sale price.
You could elect to do a "strategic default.” This is where you just quit paying on the property and allow the lender to take it over. (I am not advising this, but informing you of what some people in your position have done. If you pursue this option, consult an attorney as it may not be as clear cut as it seems.)
I’m certain there are other options, but these are a few which occur to me. I hope this turns out okay for you.
0 votes Thank Flag Link Wed Mar 10, 2010
What is your agent suggesting--and have you reviewed the recently closed similar properties in the immediate area--if so what does the data suggest as to your offer v. the appraisal--You can try and ask the lender for another appraisal, sometimes it works, others it doesn't--more importantly what are your buyers feeling since it appraised for less--
0 votes Thank Flag Link Wed Mar 10, 2010
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