The Mortgage Professor: Two is one too many homes, even on a big lot



The Mortgage Professor

Q: 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?

A: 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 the loan amount will be smaller and the required down payment will be larger.

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.

If you can't pay, sell

Q: I own a home with a current market value of $350,000, have a mortgage balance of $150,000, but I am no longer able to make the payments. If the lender forecloses and sells the property for $350,000, is the lender obliged to return the net equity of $200,000 to me?

A: 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 $200,000. 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 also will 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?

Q: 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?

A: 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.

The writer is Professor of Finance Emeritus at the Wharton School of the University of Pennsylvania. Comments and questions can be left at

Last modified: April 17, 2014
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