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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", residential lenders will not accept a purchase contract that includes personal property.
If personal property is also conveying, it should be documented and valued in a completely separate agreement,
not in the sales contract or an addendum.
(Don't combine these two)
In a mortgage, real property (building and land) is pledged by the borrower as collateral (security) for the repayment of
money loaned for its purchase.
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?
And - if a separate value is given to personal property included on a real estate contract, the seller can then be responsible for collecting sales tax on that amount and sending it to the State. Yes, really.
Kitchen and laundry appliances are generally 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 as are attached light fixtures, window coverings, and HVAC or pool mechanical equipment.
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, and the loan will carry higher risk for the lender.
In areas where there are lots of second homes in seasonal markets (South Florida, the coastal mid-Atlantic states, others), properties are often sold furnished and even fully "turnkey" in some cases.
This arrangement may be convenient for the seller, but it really muddies the waters - even on a cash deal!
As we discussed as recently as last week, all mortgage applications require an independent appraisal of property value. 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.
Another aspect of this valuation issue is the inducement to buy concept. Sellers have been known to "sweeten the pot" for hesitant buyers or try to get an above-market price by tossing furniture or other personal property into the deal.
Both of these practices artificially inflate the real property's fair market value and are prohibited on both government-insured and conventional loan programs.
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?
- If the cash buyer wants to use Delayed Financing,
personal property on the original sales contract requires
a new appraisal for the real estate alone, which reduces any
cash-out loan amount the owner may have been planning.
- Appraisers will 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
properties (maybe your next listing) more difficult.
It's pretty difficult to use a recently closed sale that included
furniture in a CMA at your next listing appointment. No one
can accurately tell how much that furniture contributed to
the sale price.
Sidestep the complications -
keep personal property entirely off the contract!
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