Seller Financing for a Low Appraisal

[Marcell Z.]

Is it possible to use seller financing as a 2nd mortgage to make up for an appraisal coming in below a buyers offer price?

Example:
$250,000 offer received from a buyer
Appraisal comes in at $200,000
Buyer cannot get loan for more than $200,000

Can I have the buyer sign a promissory note/2nd Trust Deed for the $50,000 difference from their purchase offer and the appraised value of the home since the 1st mortgage lender will not lend any higher than the appraised amount?

[Derek W.]

I have tried to do this on a few occasions when my appraisals also came in lower than the offer price. In my two cases one was an FHA and one a VA loan. Both have very strict language against the sellers carrying a note in second position, and consider it to be loan fraud if you do. I don’t know about conventional financing or not, I haven’t crossed that bridge yet. The VA loan simply fell out of escrow and I was able to quickly get an FHA buyer. The appraisal came in 25k higher than the VA appraisal, (go figure! Shows how subjective appraisal are!) so I was able to sell the property for what I wanted. On the other property the FHA loan came in 15k lower than my bottom line. But the buyers owned a nice car free and clear worth approximately 15k. They signed the car over to me, and I am selling it back to them on payments that may or may not be similar in value to the 15k we were short on the deal. So I am not violating the agreement I signed with FHA by carrying back a second loan, but have collateral to secure a lien against to collect payments on. They still got the house, they still drive the car, I got my profit in the form of monthly payments, and everyone is very happy. If you sign a separate agreement outside of escrow, but use the house as collateral, it will be overturned by any judge and then you have an unsecured promissory note. When the buyers refuse to pay you on your second, you have no way to enforce it. So you have to have collateral outside of the house to enforce the payments. To make it even cleaner, have them deed the collateral (car, other house, jewelry, etc) into your friend’s name (as long as you trust them) and let your friend give you the payments. Then you have an arms length transaction totally separate from the real estate deal.