Home Mortgage Loans And The Value Of The Home Appraisal

October 30, 2007
By: Keith S. Donald



Home mortgage loans are not created in a vacuum. The home appraisal is vitally important to financing your home loan at the correct value. If your property is priced too high, it may sit on the market much longer than it has to. If it is priced too low, you leave too much money on the table.

While home owner loans are gaining in popularity, there are some very important things you need to know that will not only save you some money, but help make you more money as well.

Some homes in smaller markets have a difficult time getting bank financing simply because of the size of the home mortgage loans. Size does matter. If your loan requirements are too small for the traditional lenders, you have to create home loan lending solutions.

That is exactly what happened in this case. The property seller provided a home mortgage loan so the buyer could purchase the single family residence in a south Georgia community. It is amazing what you learn from some of the deals you don't do.

The home owner determined the sale price of the property would be $45,000. The buyer provided a $2,000 down payment. A promissory note was created for $43,000 at 10% interest and interest only payments. There was a balloon payment due in five years. The buyer's credit was fair, leaning towards good. No home appraisal had been ordered.

Four payments had already been made on the loan, and things were moving along according to plans. At this point the seller and I discussed the possibility of pulling his cash out of the transaction with a note sale. Naturally he agreed to take a look. All of the required information was gathered, processed, and evaluated. We developed a couple of options for the seller to consider. Of course one solution was for a purchase of the whole note, and another was for all of the payments and a portion of the balloon note.

Honestly, the quotes were very good. Either solution would have been an excellent return for the seller. He actually agreed with me. Then he shared this truth. He had sold the property to the buyer at a discount. Of course I asked how much of a discount and he wasn't sure, but he thought it was pretty big.

When I checked the value of the property, I determined it was worth somewhere between $66,000 and $77,000. Remember he sold it for $45,000. That means his sale price discount was between 32% and 42%! In his efforts to quickly move the property he actually left between $21,000 and $32,000 on the table! He went on to provide a home owner loan to finance the transaction!

This was a perfect example of what not to do with seller financing. By agreeing to such a large sale price discount, the seller simply left entirely too much money on the table. Even though the cash we offered was substantial, it was not possible to make up the difference created by such a large sale price discount.

Ideally, an owner provided home mortgage loan will justify a small premium in the sale price because of the added risk by the property seller. The home appraisal is an excellent tool for determining current market value. If he had simply ordered one he would have easily made a lot more money on this transaction.

For reasons like this, our philosophy is the home appraisal of the property should also be the contract sale price for the property. Even though we deal in discounted mortgages, our payouts are typically much greater than you might expect. In a case like this one, the seller would certainly have been able to capture close to 90% of the money left on the table.

Each transaction is unique and requires special attention and analysis to provide the biggest payout possible. If you are considering a seller provided home mortgage loan for your buyer, you might want to take advantage of the services of a discount mortgage professional. We can not only help you save money, but we can help you make more money as well.

In the example described above, it was a great deal for the buyer, but not nearly as good as it could have been for the property seller. His best position is to maximize his cash flow and profits by having the transaction run to full term. Even then he will never recapture the money lost with the discount he gave the buyer.

In the current residential home sales market, you really need to explore non-traditional lending sources. It will probably save you some time and money.

When you get a professional home appraisal to validate the sale price of your property, that is a great start. From there your buyer evaluation, deal structure, and subsequent home mortgage loan will more closely resemble a win-win situation for the seller and the buyer.

Confirm your home mortgage value with a professional home appraisal. Once your property value is confirmed, you are ready to structure top dollar home mortgage financing for your seller financed property. Your appraisal should not be too high, or too low, but just right.