Recent Questions In My Mailbox: Two Homes on One Parcel Is a
Headache For Sellers
Two Homes on One
Parcel: A Headache For Home Sellers
“We have a beautiful home with 5 acres, and there is a second smaller structure on the property. We have been trying to sell since 2008 with no bites until recently, when a buyer appeared. We lost the sale, however, because the bank refused to finance two structures on one parcel… Any suggestions?”
Yes, split your parcel into two parcels, each with a
structure, and sell them separately.
Two structures on one parcel is a big problem for the owner
trying to sell it because potential buyers will have
difficulties getting financed. If the second structure is a
habitable unit, the question arises of whether the buyer
will rent it out. Under the rules, such a buyer is an
investor rather than a permanent occupant. Investors are
subject to more strict underwriting rules than permanent
occupants, and pay more for their mortgage.
If the second structure is some kind of an appendage to the
main house, such as a barn or recreation facility, a
potential purchaser will face a different problem.
An appraisal of the
property will be based on the assumption that the second
structure has no value, which means that the loan amount
will be smaller and the required down payment will be
Home appraisals are based primarily on “comparables”. These
are recent sale prices of homes that are similar to the
property being valued. But a parcel with two structures will
not have any comparables, forcing the appraiser to ignore
the second structure.
The appraisal will therefore undervalue the property
as a whole.
The problem posed by two structures on one parcel will
seldom arise in connection with very expensive homes,
because the margin of error in appraisals is very large even
without the complication posed by multiple structures, and
eligible buyers will not need much if any financing.
But the lower the price range within which the
property falls, the more are potential
buyers dependent on financing a major portion of the price,
and the greater is the penalty posed by multiple structures.
Remodeling in Process: A Headache For Refinancers
“I applied to refinance my jumbo mortgage and was almost
through the process when the loan officer asked if there had
been any remodeling done. I am in the process of
replacing a bay window and am just now applying for the
required town building permit which can take a couple of
months. Will that hold up the refinance?”
It might. On the face of it, the lender should not be
concerned about improvements in the property that increase
its value, since that makes the loan a safer investment. But
in fact the lender is concerned that in the process of
making an “improvement”, the owner may have violated local
building codes, which could make the property unsalable in
the future. This danger is greatest when the owner does the
work himself and doesn’t want to be bothered with (or
doesn’t know about) the local building codes.
If a loan officer asks about improvements, it is because he
is following the instructions of the underwriter, who wants
to make sure that work on the house has been done legally
and is in compliance with building codes. The underwriter
will want this verified by the local government entity that
enforces the codes.
Since you have improvements in process, don’t be surprised
if the loan officer tells you to come back after they have
been completed and document that they are in compliance with
Bottom line: Borrowers should not refinance and remodel at
the same time.
If You Can’t Pay, Sell
“I own a home with a current market value of 350K, have a
mortgage balance of 150K, but
I am no longer able to make the payments. If the
lender forecloses and sells the property for 350K, is the
lender obliged to return the net equity of 200K to me?”
In some states the lender is obliged to pay you the net
equity, except that the amount in your case would be much
smaller than 200K. The lender will probably sell for a
knock-down price to get it off their books fast, and they
will bill you for their foreclosure expenses, unpaid
interest and whatever else the law allows.
Waiting in the house while the foreclosure mills grind does
have the advantage that you can live rent-free and your need
to find alternative housing is deferred, but it will cost
you a major portion of your equity, and it will also
torpedo your credit. The better option is to sell the house
and pay off the mortgage, because you will realize more of
the equity and avoid besmirching your credit.
The case for selling the house rather than going through
foreclosure is even stronger in states that provide a right
of redemption and therefore do not require lenders to pay
off the excess realized on a foreclosure sale. In states
where borrowers who have been foreclosed have a right of
redemption, the borrower can recover the house by paying off
the loan balance plus foreclosure expenses within the legal
redemption period, which can range from 10 days (in New
Jersey) to 12 months (in Alabama). The lender is barred from
selling the house during the redemption period, In such
cases, unless the borrower finds the money needed to redeem,
any equity is lost.
How Do You Decide to Buy a House?
My wife and I have found our dream house, and we can afford
it, but we are having trouble making the decision…Do you
know of a good decision-making process we can use?
Yes, use the same process you used when you decided to get
married. The decisions are similar in that, after you have
analyzed all the pros and cons, you feel the right decision
in your gut.