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What is your home really worth?

Updated on January 16, 2012

What is your home really worth?

The simple answer is – how much do you want to borrow? In today’s real estate market, with “upside down” or “underwater mortgages,” many people have been unable to take advantage of the lowest rates in history. However, borrowers who are relocating are finding the mortgage market just as unfriendly and that the shenanigans with appraisals still continues.

My own personal experience is the perfect case in point. I sold one home (at a $30,000 loss considering the upgrades and lost equity) to relocate. With the real estate market being what it is, I thought being extremely selective about a new purchase would stave off a lot of the loss I had already endured. My new home was a construction foreclosure (in reality, the developer sold it to the bank). The development was never completed, only about 16 homes were constructed, and 30 more lots are available for future development. Each home in the development sits on approximately 1 acre. Only two homes in the development did not sell and the developer (and her son) took out loans against the properties for $280,000 each in 2008. By 2009, both homes were in foreclosure and were assigned to their respective banks through “deed in lieu of foreclosure” documents. Those banks immediately sold them to Freddie Mac, who placed them on the open market (but not at the same time).

In 2010, when I purchased my home, there were three homes for sale in the development. One sold for $239,200 (the month prior to me having purchased my home), another was listed for $249,900 (that was taken off the market when my home closed), and of course the one I purchased at auction for $149,000 (originally listed on the MLS at $279,900 and marked down to $189,900 at the time it was dually listed at auction). All of these homes sit on similar sized lots and are very similar in construction materials and size. At the time of purchase, my home had a $244,680 tax assessed value. Having lost $30,000 in the sale of the previous property (no short sale here – I took the loss personally), I did not have 20% to put down on the new house. I was going to have to take out a FHA mortgage.

Prior to the appraisal having been ordered, I questioned the mortgage broker about the PMI assessment on my Good Faith agreement. PMI is only assessed to insure the lender has enough cash equity to endure the cost of foreclosure and subsequent broker commissions once the home is resold (hence, the 20% equity floor when calculating PMI). Conservatively, the home I purchased should have had a minimal value of $230,000 at the time of closing (roughly $80,000 built-in equity). However, since I purchased the home at auction for considerably less than its value and was taking out an FHA loan, consideration had to be made to justify the PMI assessment. The appraisal was ordered and low and behold, the value came back at $168,000 (which would justify PMI assessments of nearly $4,000 upfront and monthly PMI payments of approximately $80/mo. for 5 years [roughly $8,800]). The appraisal had many flaws (the only comparables used were other foreclosures in less desirable areas and of dissimilar construction materials [one home literally had a mobile home backdoor neighbor with a rebel flag flying]). I disputed the appraisal, however, the appraiser stood by her assessment. I filed a complaint with my state’s appraisal board (which is a whole other story).

Luckily, I have a great friend who loaned me the cash to purchase the home outright to stave off the unwarranted fees. I made monthly payments to him for a year until I had a “vested” interest in the home to do a “refinance”/“cash-out” mortgage. Since purchasing my home, one other sold in the neighborhood for $245,900 the month prior to closing on the “refinance” loan. Another sold just outside the neighborhood for $229,900 the week prior to the current appraisal. And the other developer foreclosure sold for $180,000 the same week as the refinance. As part of the “refinance,” I also wanted to purchase the “unimproved” (no water or utility lines) lot next door that had a $27,000 tax assessed value. Can you guess what the new appraisal came in at after owning this home for 1 year? Let me help you out for a second here – $149,000 for the original purchase plus $27,000 for the lot next door for a grand total of $176,000. For a refinance/cash out mortgage, a loan cannot exceed 80% of its appraised value. Would it surprise you if I told you the appraisal came in at $221,000?

So again, I ask the question – what is a home really worth? And again, I will ask you – how much do you want to borrow?


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