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Don47

Appraisals

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Please let me know if anyone has experience with the following situation. When you enter into an agreement with a seller using a L/O strategy, it will be necessary to establish his home's value. It is usually not best to go with his numbers unless he has had a recent appraisal. I have not found many sellers who have done this. I was told by my mortgage banker that the seller could hire a realtor to complete a "BPO" appraisal as he called it, that could establish a fairly accurate value of the property. He further mentioned that with so many foreclosures currently that home values have dropped and in some cases significantly. The problem comes up when the tenant/buyer is ready to exercise his option to purchase and the lender orders an appraisal. Once completed, the value could come in well below the sellers expectation. The value may even be below what the sellers owes. It seems that the number of foreclosures have driven down the houses selling on the retail market, especially if their condition is good. What position does this put the tenant/buyer in, since the seller cannot sell because the lender will only lend on the appraised value, which could be much lower than the contract price? Thanks.

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Don, you're correct on all counts.

First, we can never take a seller's word on their house's value. Every homeowner I have ever spoken to inflates the value by ten percent at a minimum. It's human nature. Do your own market analysis and make your offer based on that, and have proof in hand.

And, yes, foreclosures and current market conditions mean that a property priced today may not appraise in a year. But there are no guarantees for either party. This type of deal has inherent risks that cannot be eliminated completely. If prices take off, the homeowner is obligated to sell at the agreed to lower price from last year. If prices collapse, the buyer has the option to see the deal through of walk away.

The reality is that with a motivated homeowner, they will probably be willing to somehow make the deal work. Perhaps offer to lower the price. Maybe carry a second to offset the difference. If everyone wants the same result, a cooperative effort will get it done.

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Don, you're correct on all counts.

First, we can never take a seller's word on their house's value. Every homeowner I have ever spoken to inflates the value by ten percent at a minimum. It's human nature. Do your own market analysis and make your offer based on that, and have proof in hand.

And, yes, foreclosures and current market conditions mean that a property priced today may not appraise in a year. But there are no guarantees for either party. This type of deal has inherent risks that cannot be eliminated completely. If prices take off, the homeowner is obligated to sell at the agreed to lower price from last year. If prices collapse, the buyer has the option to see the deal through of walk away.

The reality is that with a motivated homeowner, they will probably be willing to somehow make the deal work. Perhaps offer to lower the price. Maybe carry a second to offset the difference. If everyone wants the same result, a cooperative effort will get it done.

 

If the deal falls through due to the seller not being motivated enough, does the tenant/buyer get his option deposit back?

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Don, Lease Purchasing 101: option money is never refundable. Both parties enter the deal aware of and accepting the possible outcomes.

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