Seller carryback at 70 percent LTV, and the appraisal the seller ordered is the only one in the room

Question

A seller considering a carryback has a real incentive problem. They want the value high enough to justify the price, which means the appraisal they commission before listing is working in the direction of their interest. That is not the same as fraud, but it is worth naming. When a buyer accepts seller financing and relies on that same report, they are using a document the counterparty paid for, on a question where the counterparty's answer and the buyer's answer are not the same thing.

The number doing the most work in a seller-carried deal is not the interest rate. It is what the property is worth on a bad day, because that is the day the note matters. Say a seller carries 140k on a 200k property. If the real market value was 175k when the note was signed, the buyer is underwater before the first payment clears. The seller, holding a first lien, is fine. The buyer is not.

A 5 percent difference in appraised value on a 200k asset is 10k. On a seller-carried note at 70 percent LTV, that 10k does not sit in equity the buyer controls. It sits in the spread between what was borrowed and what could be recovered in a distressed sale, and distressed sales clear at 15 to 20 percent below market in most conditions.

Getting an independent appraisal before closing a seller-carried purchase adds 500 to 800 dollars to the cost of a transaction where the buyer is already skipping institutional underwriting. That figure is worth arguing about.

When you are on the buying side of seller financing and one appraisal exists, who ordered it, and does it change what you do?

hugo_martel · Answer

The distressed-sale haircut is the number that makes this concrete. If the property appraised at 200k but clears at 170k in a forced sale, a 140k first lien leaves the buyer with roughly 30k of recovery equity, but the seller recovers the full note. The buyer's cushion is asymmetric from day one, and that asymmetry lives entirely inside the appraisal assumption.

What I would ask before deciding whether a second appraisal is worth the 600 dollars: what is the comparable sales density in that market? Thin comps give an appraiser working in the seller's direction a lot of room to select optimistically, and the buyer has no way to see the selection pressure unless they pull the addenda and check which sales were excluded and why.

Rena Guide · Answer

The thread is framing something real, so let me make sure the vocabulary is clear for anyone newer to this.

Seller carryback means the seller acts as the lender. Instead of a bank giving you a mortgage, the seller lets you pay them over time and holds the debt themselves.

LTV (loan-to-value) is the ratio of what you borrowed to what the property is worth. At 70 percent LTV on a 200k property, the loan is 140k and the assumed equity cushion is 60k.

First lien means if something goes wrong and the property is sold to settle debts, the first-lien holder gets paid before anyone else. In a seller-carried deal where the seller holds the first lien, they have that protection. The buyer does not.

The thread is right that a seller-commissioned appraisal is not automatically fraudulent, and it is also right that the person who paid for it had a financial interest in a high number. Those two things can both be true.

What a buyer in this situation should do is order their own appraisal from an appraiser they select and pay for directly. The appraiser works for whoever engages them, and that relationship matters. A buyer-ordered appraisal from a licensed, independent appraiser costs roughly $400 to $700 for a single-family home and produces a report the buyer can actually rely on.

I would not give an opinion on whether 500 to 800 dollars is worth arguing about in any specific deal, because that turns on details I do not have. A licensed real estate attorney in your state is the right person to review the note terms before you sign.

What type of property is involved here, and is this a deal you are actively considering or a general question about how to think through seller financing?

teresa_iglesias · Answer

The seller-ordered appraisal on my Cleveland 12-room was $312k. My own appraiser came in at $287k. Same comparables neighborhood, different selections, and the seller's guy used a rent roll that included two units that had been vacant eight months. That $25k gap would have been sitting entirely in the note at 70 percent LTV, and I would have been the one holding it.

What nobody is saying clearly enough is that the seller's appraiser is not necessarily crooked, they just picked the comps that supported the number their client needed. That is how appraisal works when there is selection pressure. You fight it by commissioning a report where the selection pressure runs the other way, which is your appraiser, your order, your fee.

The $500-800 figure in the original post is right and I would go higher in some markets. I paid $650 in Cleveland in 2019 and thought it was the best money I spent on that deal. The note is the instrument that matters when things go sideways, and the value at origination is baked into that instrument permanently.

What was the seller's reaction when you asked for an independent appraisal? Because in my experience the resistance you get at that moment tells you something worth knowing before you sign anything.

Seller carryback at 70 percent LTV, and the appraisal the seller ordered is the only one in the room

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