The Importance of the Right Type of Appraisal When Filing Bankruptcy

— by Victoria Ring

An attorney in Florida called me today to discuss his clients case. An appraisal had been done eight months ago by a real estate agent for $175,000. However, the debtors only owed $161,000 to the first mortgage company and $12,000 to the second for a total of $173,000. The attorney originally filed a Motion to Strip the second lien so that the debtors could afford to keep their home in a Chapter 13.

However, this decision created a major problem: The home was NOT underwater. In other words, the debtors actually had equity in their home since the appraisal came in at $175,000 and the debtors only owed a total of $173,000.

This fact alone made the home ineligible for a cramdown or strip. These are normally only successfully proposed and confirmed if there is NO EQUITY. In fact, the true value of the home (which needs to be less than what is owed) is the basis of the argument for the debtor attorney. Without that basis, the mortgage company will always file a Motion for Relief from Stay.

The Florida attorney was considering allowing the case to be dismissed and refile as a Chapter 7. Unfortunately, this solution would have caused the debtors to lose their home due to the fact that they were several months behind in their second mortgage.

The Solution

Since the amount owed cannot be changed, the answer is to review the amount of the appraisal.  We found there were two things wrong with it:

1.  Age of the Appraisal

The appraisal was already 8 months old. With the real estate market changing almost on a daily basis, it would be wise to get a new appraisal and present this as the actual market value of the home, especially if the amount came in lower than $175,000.

2.  The Type of Appraisal

Just like you list the yard sale or pawn shop value on a bankruptcy petition for personal property; there are two different types of appraisals for real property.

The first type of appraisal is a real estate appraisal, which is the most common. Because attorneys do not normally educate their debtors about the two different types, most debtors will call the real estate agent in their area. They never tell them they are filing bankruptcy so the appraiser determines a value as if the clients were reselling their property. This price almost always includes a six-percent padding for the commission of the real estate agent. Therefore, a standard real estate appraisal is often higher than the true market value.

As we know, the bankruptcy court can only liquidate real and personal property for the market value, not the real estate or replacement value. In fact, the court normally gets less than the market value, which is then turned over to the creditors for distribution and the debtors lose the asset.

The second type of appraisal is often called a DRIVE BY appraisal. These types of appraisals are often less expensive because the appraiser normally never enters the home. When an appraiser knows the appraisal is for a bankruptcy filing, he or she will compare the comps in the neighborhood a determine a more true market value without all the commission money padding.

Attorneys Should Team with Area Appraisers

One of the most useful tools a bankruptcy attorney can have is to know several good appraisers in their area.  These appraisers should know the difference between a standard real estate appraisal and a market value appraisal. Then, attorneys can provide their clients with a list of these appraisers to obtain a true market value of their home plus save their clients some money compared to a full real estate appraisal.

The Moral of the Story

Although you cannot rely 100-percent on Zillow, the attorney and I were able to determine that the home listed for $162,000. This tells us that the $175,000 appraisal done 8 months ago is probably incorrect. The Florida attorney obtained a new appraisal and hopefully will be able to get the Chapter 13 Plan confirmed so that the debtors can stay in their home.

Notice how one simple adjustment changed the lives of the debtors. It is often the little things that matter the most; so I hope this article helps to save the homes of many debtors by attorneys advising their clients to obtain the correct type of appraisal for a bankruptcy filing.


Chapter 7 and Chapter 13 Online School

Testimonials From Students

Assistance With Marketing and Other Training

Contact the Author: Victoria Ring
Phone: 719-375-1504

Comments are closed.