Often times when a buyer and seller are negotiating over the sale of a home, the buyer indicates they would like to have certain personal property from the home. There are times when the seller is OK with that, either due to not wanting those items, or wanting the buyer to have them to help facilitate the sale.
However, there is a problem with this. The problem with including personal items like furniture, rugs, chandeliers, a pool table, and these sorts of personal items is that once they are written into the contract they inherently have value. Yet, the document being used to buy and sell real estate is a real estate contract, also used to contractually bind parties in a real estate transaction; it is not supposed to be a pool table contract!
The writers of mortgage guidelines have a problem with including personal property in a real estate contract. Let’s say an underwriter is analyzing a loan application for a home and it includes several items of personal property that obviously have some value. They would have a problem in calculating the loan-to-value on the loan.
Home Value Example:
- $500,000 sales price on a home
- $400,000 loan amount, which is an 80% loan-to-value with a 20% down payment
- Assume there are several items of personal property built into the sales contract that likely have several thousand dollars of value, let’s assume $5,000 of value.
The underwriter would have no choice but to determine that the home was valued at $495,000 since there was personal property valued at $5,000 built into the sales contract. Hence, if the loan program called for an 80% loan-to-value, the loan amount could not be $400,000, it would have to be 80% of $495,000, or $396,000. This would leave the buyer $4,000 short of their desired loan amount.
Fannie Mae does not want to lend on a pool table, it wants to lend on the house. The solution to enable a seller to convey personal items to a buyer in a real estate transaction is a simple one. You can put in a real estate sales contract anything you would like, such as a pool table, window treatments, a chandelier, or patio furniture. It is all acceptable, except you have to say that the personal property conveying “has no value.” Using the above example, the buyer and seller came to terms to sell the home at $500,000 while giving no value and no consideration to the personal property conveying.
This way the underwriter can approve a loan and represent to the agencies that these loans are backed by, such as Fannie Mae, Freddie Mac, FHA and VA. The agreed upon purchase price of the home was determined strictly by valuing the house itself and not any personal property that may have been included in the sales contract. This ensures all parties that the sales price of the collateral that the loan is being based on was valued on its own merits. Which is obviously important to an underwriter when determining how much of a loan to make on a property.