Owner-Financed Value vs. Appraised Value

Posted on Dec 28 2015 - 8:16pm by Lance Edwards

Mitch StephenBY MITCH STEPHEN— Appraisers seem to get confused about value when different terms are injected into a sale. There is no doubt terms can effect price. Here’s an extreme example: Can YOU buy a million dollar home?

Most people would say, “NO.”

If you ask those same people if they could buy a million dollar home and pay just $1,000/mo, most of those who said “No” will now say “Yes!”

At some point, average buyers could buy a million dollar home if the terms make the payments affordable enough – right?

Now, what if I told you were paying $1 million for the home, but it was only appraised at $800,000? Well, for $1000/mo, who cares! You’re moving in, right?

Terms can change value. It was never more evident in 2008 when the bank quit lending money. When there were no “terms” to buy houses the prices dropped like a rock in most parts of the country. In my hometown, 70 percent of the sales in lesser neighborhoods were all cash at low, low prices.

VALUE by definition is what a willing seller will sell for and a willing buyer will buy for. The “owner finance” value is simply a price for high risk, low credit score buyers who cannot qualify for a government backed loan and have to find a private loan to buy a home.

PREDATORY LENDING refers to lenders who insert unusually strenuous clauses into their contracts (usually in fine print) in an effort to regain control of the property so they call sell it all over again. Furthermore, a predatory lender may be short on disclosures.

What I find remarkably about people who think the “owner financed” pricing is somehow a rip-off (or in this case suggest it may be “predatory”) is that the owner financing model I use is based on moving an occupant from being a RENTER to an OWNER for the same monthly cost as rent.

I say “same monthly cost,” but that’s only true in the first year or so. The fact is, as rents increase, my buyer’s principle and interest payment amount DOES NOT increase. As time passes, the renters pay more and more but my buyer’s payment remains the same. So, over time my buyer’s pay less than rent and substantially less than rent the longer they remain in the home.

What will the rents be in 20 years from now? Heaven only knows! To get a handle on that question, look at what rents are now compared to what they were 20 years ago.

Now think about this:
If you’d have bought 20 years ago under my standard 10.5 percent interest, 20-year amortized plan…your payment next month is $0…your home is paid off!
At what point does a renter’s payment become $0? Answer: upon their death!

I make a distinction between the “OWNER FINANCED VALUE” and other ways of arriving at value in the name of full disclosure! When you use the term “Owner Financed Value” both your private lender and your buyer are put on notice (disclosed) as to another kind of value.

The APPRAISED VALUE is based on sales typically consummated by cash or a new loan…. (New Loans = institutional loans generally backed by the government; FHA, VA etc).

Neither cash nor a new loan are an option for the buyers that end up using owner financing to gain ownership of a home. The system is set up such that it makes home ownership all but impossible for a large segment of the population.

An offer to “owner finance” for the same monthly cost as rent seems logical to me, and apparently it’s seemed logical for over 1,300 renters and counting….and that’s just Mitch Stephen in San Antonio, TX.

There must be tens of thousands of renters that have converted to buyers via owner financing across the country. Where would those renters be today without an “own for the price of rent” formula? They’d still be in an apartment!

In the markets outside of real estate, you have “wholesale value” and you have “retail value.” Is it predatory to sell for “retail” when “wholesale” pricing exists? No!
Last but not least, it is not my plan to get the house back. The strategy of taking back houses is a losing strategy. It is an urban myth.

You hear people say, “Hey, if they don’t pay you just take the house back and sell it again,” as if it’s the same house when you get it back. Let me tell you something: Homes rarely come back in the condition you sold them in. The expense and time it takes to put a home back into a resale position makes the “repo plan” a losing plan.

When I sell a home, I never want to see it again. I’m in it for the payments – Period! And you should be too.