A Home Equity Loan the Story Continues

Yesterday, I introduced you to James and Linda.  They were listing their home for sale and were suprised to learn that they would be responsible for paying off their home equity loan at closing.  Selling their house at the recommended list price would leave them bringing over $30,000 to the closing table.

James suggested a solution that many other homeowners in his shoes consider.  Let me tell you about it:

Faced with the daunting numbers James had a plan.  Rather than listing the house at the recommended list price of $255,000 and bringing cash to closing, they would simply list higher to make up the difference.  James pointed out that his house had many features that other homes in the addition did not have like granite countertops, and crown moulding (it was after all the builder's model home).  They had also added a shed out back!  James said, "Let's list at $280,000.  I'm not taking less than I owe on this house!"

Whoa!  Slow down there James!  Let's review.  You owe just $233,000 on the house.  Selling for $255,000 is NOT selling for less than you owe.  It is NOT taking a loss on the house.  It is NOT selling the house for less than it's worth.

The additional $33,000 is your consumer debt that you elected to attach to your house by way of a home equity loan without having the equity to cover the debt!

Recommended price ranges are provided to sellers based on market value of the house not the net goal for the seller.  Keep in mind even if a REALTOR can find a buyer willing to pay your inflated list price, the buyer will typically have the house appraised.  In order for the buyer to obtain financing, the house must appraise for at least the purchase price.  Appraisers will use the Fannie Mae guidelines when making their assement of the property.  Fannie Mae defines market value as;

the most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller, each acting prudently, knowledgeably and assuming the price is not affected by undue stimulus. Implicit in this definition is the consummation of a sale as of a specified date and the passing of title from seller to buyer under conditions whereby: (1) buyer and seller are typically motivated; (2) both parties are well informed or well advised, and each acting in what he considers his own best interest; (3) a reasonable time is allowed for exposure in the open market; (4) payment is made in terms of cash in U.S. dollars or in terms of financial arrangements comparable thereto; and (5) the price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale.