Know the Market Value of the property

Why Market Value is so important in Your Investment Decision.

The market value of the property should be made available to you before you commit your mortgage investment funds.

The market value of the property is critical to your decision to lend your funds or purchase a mortgage because there is the possibility that the only way to recover your investment is through the sale of the property.

The market value is generally presented in the form of an appraisal report which considers comparable sales and other relevant data by a competent professional. The appraised value is the appraiser's final estimate of market value.

Fair market value is often defined as the price that the property would sell for on the open market, agreed on between a willing buyer and a willing seller, with neither being required to act, and both having reasonable knowledge of the relevant facts.

However, this is not the realistic perspective needed for mortgage investing. What is important to a mortgage investor is the sales price that can be realized in a fast sale with a "willing buyer" and a "willing seller."

You should review the appraisal with the appraiser, mortgage loan broker, title insurance broker, and local realtors with this in mind to understand the trends that could affect market value during the term of the loan.

Although you or your mortgage loan broker customarily retains the appraisal services, the borrower typically pays for the cost of the appraisal report. The property is the security for your investment, so you should make an effort to inspect it, even though your mortgage loan broker, real estate broker, or appraiser may also have inspected the property.

The loan-to-value ratio is the total loans against the property, including your loan, divided by the market value of the property. For example, if a borrower has a first mortgage in the amount of $25,000.00 and is requesting a second mortgage in the amount of $40,000.00 and no other liens will be placed against the property, which is valued at $100,000.00, the loan-to-value ratio is 65% ($25,000.00 + $40,000.00 divided by $100,000.00 = 65%).

The lower the loan-to-value ratio and the greater the borrower’s equity, the more incentive for the borrower to protect the equity in the property (i.e., sell or refinance the property if unable to make payments under your promissory note) or for a third-party bidder to purchase the property at a foreclosure sale.

If the total loans or other liens exceed a reasonable loan-to-value ratio or exceed the market value, the property will provide little or no security for your investment. A sufficient equity should be maintained in the property to allow for the fees, costs, and expenses that you will incur in foreclosing if that become necessary.

It is important to note that the borrower’s equity is not the same as the protective equity. The borrower’s equity is the difference between the market value of the property and the total indebtedness secured by the property. The protective equity is the difference between the market value of the property and the total indebtedness of loans senior to your loan and your loan, but does not include loans junior to your loan.

The existence of a lien junior to your loan will diminish the borrower’s equity, increase the borrower’s payments or debt service, and reduce the borrower’s ability to refinance. In the event of a default regarding senior loans (liens), beneficiaries who have a right of lien upon a property of another (lienors) and who are junior are entitled to protect their security interest in the property by paying the borrower’s delinquencies on senior liens and/or by commencing their own foreclosure action. Therefore, junior lien holders should keep informed of defaults in connection with senior loans (liens).

Preliminary Report
The mortgage loan broker is required to provide you with the option to apply to purchase title insurance or an endorsement to an existing policy. The Preliminary Title Report (Prelim) is prepared by a title company and is an offer to insure and does not provide conclusive information about the status of title.

Title insurance companies offer different types of coverage. You should ask your mortgage loan broker or the title company for an explanation of the different types of coverage available (e.g., CLTA and ALTA) and to what extent you are insured.

You should not consider a Prelim as providing you with reasonably current information unless it is dated within 90 days of your examination of the report. Therefore, you should ask your mortgage loan broker to provide an amended and current Prelim dated as closely as possible to your commitment to fund a loan or purchase a promissory note.

The current Prelim should provide the following information regarding the property:

  1. the name(s) of the owner (s);
  2. legal description, street address (if available), and the assessor’s parcel number;
  3. assessor’s plat map, which illustrates the configuration, dimensions, and general location of the property;
  4. assessed valuation;
  5. existence and priority of liens and encumbrances;
  6. the name of the owner (s) of existing lien (s); i.e., the owner of record of any deed of trust (lien) which you may be purchasing;
  7. requests for notices concerning status of the liens, notices of default (NOD), and notices of trustee’s sale (NOS);
  8. notice of a lawsuit or bankruptcy affecting the property; and
  9. A potential off-record interest of a spouse or other party.

 In reviewing the current Prelim for the above information, be alert to various problems which might affect the market value and equity of the property and the security for your loan. If any issues are encountered, ask your mortgage loan broker or a title officer for a full explanation.

For further information please contact: Jorge Garcia-Pulido, President/CEO 305-796-4799

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