"Listing Before you Refinance"

by Attorney William Bronchick

A big mistake that investors often make is listing a property for sale and then trying to refinance the property after it won’t sell. If you decide you would like to take equity from the property, do not list the property for sale. Lenders are leery about giving borrowers money for property that was listed on the MLS and didn’t sell.

Appraisers have access to the MLS and check to see if a property was previously listed. Because the vast majority of properties sell through the MLS system, it is a very good indicator of true market value. Thus, if a property was listed for 90 days in a market where the average time on the market is 60 days, there is good reason to question the value of the property. It’s one thing to say a property is theoretically worth $200,000, but if it doesn’t sell on the open market for that price within a reasonable time period, then it’s probably not worth $200,000. If you try to refinance based on a $200,000 value, chances are the appraisal will come back much lower.

You should decide your "exit" strategy before you purchase the property. If you use bridge financing, then intend to keep it as a rental, you are going to need to refinance the debt you used to acquire the property. If you buy a fixer, for example, then improve the value, you can get a loan based on an appraisal of the new (increased) value of the property.

Example: You purchase a property for $150,000 that needs $15,000 in rehab. When complete, the property should sell for $200,000, but in its "as is" condition, it will only appraise for $175,000. After the rehab, you are into the property for $165,000, you refinance for 80 percent of the new value ($200,000), and you end up with a $160,000 loan, thus only $5,000 actually comes out of your pocket.

However, if you listed the property on the MLS for $200,000 for several months and it did not sell at that price, you are likely to get an appraisal for $190,000 or less, meaning you can only borrow $152,000 (80% of $190,000), in which case your out-of-pocket expense is $13,000.  The problem is further compounded if you dropped the price several times, then decided to take it off the market for a refinance, expecting an appraisal for the original listing price.

The lesson here is to be careful about showing value if you intend to refinance the property. Appraisals are opinions of value, but the people who review the appraisals look at the real market to determine whether they want to lend. In some cases you can justify the value despite your listing price that didn’t result in a sale, but it is difficult to convince a loan underwriter if you bought the property for 25 percent less just a few months ago. 

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