Furniture and other personal property complicate things when they’re included on a real estate sales contract. I am sure you’ve seen the words “furnished” or “turnkey” on some listings – is that an incentive to the buyers? Or a matter of convenience? What if you were planning to purchase the home with a mortgage loan? How would the lender look at the furniture? No one would have written better on this subject than Chris Carter with Paramount Residential Mortgage Croup 239-898-5455. I’ve always enjoyed reading his newsletters that offer great advice. I am sharing this one, since we have quite a share of these properties in our Naples market.
“The problem arises when a buyer will be using financing and an appraisal is needed – and it’s not a good idea on cash deals, either. Even if the contract states that the furniture and other items being left have “no value” or are being left solely “for seller’s convenience,” very few, if any, lenders will accept a purchase contract that includes personal property.
The LTV (Loan To Value) ratio is a fundamental risk evaluation measurement used by ALL lenders.By including personal property in a home or condo’s overall sale price, the “V” part of that calculation is unclear, preventing a lender from knowing how much of the real estate’s market value is being covered by the mortgage loan.
A loan for 90% of a property’s value is more risky than one for 70% of its value. If the value includes more than just the real estate, LTV will be artificially lower than it really is, yet the loan will carry higher risk.
In areas where there are lots of second homes in seasonal markets (South Florida, the coastal mid-Atlantic states, others), many properties are traditionally sold furnished and even fully “turnkey” in some cases. A mortgage is a loan in which real property (building and dirt) is pledged by the borrower as collateral (security) for the repayment of that loan. Mortgages do not cover personal property.
If personal property (furniture, rugs, kitchen stuff, electronics, artwork, golf carts, boats, etc.) is lumped together with the real property (home and land), what part of the overall value does either one contribute? Note: Kitchen and laundry appliances are usually considered OK to convey with the house or condo and do not fall into the same personal property category we’re discussing today. They are accepted as basic components of habitability and occupancy.
This arrangement may be convenient for the seller and buyer, but it really muddies the waters even on a cash deal!As we discussed recently, all mortgage applications require an independent appraisal of property value. Remember that appraisers first look at the sales contract for details about the transaction. The contract price is the baseline for comparison. Real estate appraisers would have to “back out” any personal property to arrive at an accurate value for the real estate by itself. This can only be done once the personal property is itemized and appraised in a separate independent appraisal. Real estate appraisers will not give a value opinion on personal property.
Here’s another concern about using the sales contract for personal property: Especially on cash deals, if the transaction goes through a licensed real estate agent/broker and a separate value is stated in the contract for included personal property, the seller may be required to collect state sales tax on the amount allocated to personal property! Yes, really.
Sidestep the complications – Keep personal property entirely off the contract! Another aspect of this valuation issue is the inducement to buy concept. Sellers have been known to “sweeten the pot” for a hesitant buyer or try and rationalize an above-market price by tossing furniture or other personal property into the deal. Both of these practices artificially inflate the property’s value. So if it’s mostly lenders who have a problem with including personal property on a real estate contract, how come it’s not a good idea on cash deals, either? In addition to the sales tax issue: * If the cash buyer wants to use Delayed Financing, personal property on the original contract will not only require a more involved and expensive appraisal, it will reduce the loan amount available and could even prevent financing altogether until a much later date.
* Appraisers may have a problem using a cash deal that included personal property as a market comp for future appraisals. This makes establishing the value of nearby similar properties (maybe your next listing) more difficult. Important note – the sales contracts (FR/BAR, NABOR, etc.) we use include provisions for selling homes furnished, partially furnished, turnkey, or any combination in between. Each also allows for an addendum, amendment, and/or contingency to be written in and agreed upon by the seller and buyer. Please understand that while something may be perfectly legal, traditional, and accepted in the local market, it still may not work within current financing guidelines.
Looking for a Mortgage Advisor/Originator? Give Chris a call 239-898-5455.
If you are Buying, Selling, or Relocating to Naples and need help from dedicated Real Estate professionals – call us today at 239-776-5077 and will get you started.
Call Ellie at (239) 776-5077 or Tim at (239) 272-4848
Ellie@StepsToTheBeach.com or TimCranch@StepsToTheBeach.com
