Life Estate, Will They Lend With This On The Deed?

[The Warrior Monk]

Chances are that if its being appraised for a lender, it's the fee simple rights that need to be appraised. A lender is not likely to lend on a remainderman interest without the appropriate compensation (likely by lower LTV ratio and higher interest rate), and I've never seen it done. A discussion with the lender is in order.

 

[Peter LeQuire]

Lenders of any type will require that their lien take precedence to a partial interest, and would not make a loan on a property encumbered with a life estate without a subordination agreement. Such an arrangement is probably not saleable to a GSE.

 

[OSU Beavers]

This is a purchase money loan from one of the five major US Lenders. I asked the Chief Appraiser for guidance on how they want me to value the encumbered estate. His response was "Just send in the report and we will figure out what to do with it" Gee thanks.

 

[timd354]

I found this burred in the sales agreement:

"Expressly reserving life estate in the above described property unto the Seller and its assigns. The Seller shall have full ownership, possession and the use of the property, as well as rents, revenues and profits generated by the property during the term of the Seller's natural life."


Will the bank lend with this on the deed?

Yes, some lenders will lend on life estates as long as everyone with an interest in the property (the life tenant and the remainderman) signs the mortgage. If that is what they are doing, they should be asking you to appraise the property in its current "as is" state as a fee simple property (before title is transferred) as that they will be holding a security interest that is secured by the fee simple ownership if both the life tenant and remindrman sign the mortgage.

Remember, appraisers appraise property interests and there is no reason that this property cannot be appraised for its fee simple value. This is actually should not be a difficult assignment and as long you make the proper disclosures as to what property interest is being appraised (fee simple) and adequately report the results of your analysis of the purchase contract (which will transfer only the reminderman's interest in a to be created life estate), you will be fine.

 

[timd354]

It would not be a fee simple transaction; good luck finding comparables subject to a similar life estate. They exist, difficult to track down though.

The appraiser is not being asked to appraise the transaction, he is being asked to appraiser a property right. When banks lend on life estates, they typically have both the life tenant and the remianderman sign the mortgage, meaning that the mortgage is being secured by the full fee simple property. Thus, the lender is likely requeting and needs an appraisal of the fee simple property interest of the subject property. This can be done with no problem as long as the appraiser provides the proper disclosures and no life estate comps will be needed. I need more details, but in this case it appears that such an appraisal could be done "as is" without needing to use a hypothtetical condition, since as of the effective date of the appraisal, the property appears to be a fee simple property (based on the limited information provided by the OP) and the life estate will not be created until after closing and after the appraisal effective date although the appraiser must be sure to disclose the results of his analysis of the sale contrract, which would indicate that the purchase contract is creating and transferring a life estate.

 

[timd354]

Lenders of any type will require that their lien take precedence to a partial interest, and would not make a loan on a property encumbered with a life estate without a subordination agreement. Such an arrangement is probably not saleable to a GSE.

The appraiser is not being asked to appraise the transaction, he is being asked to appraiser a property right. When banks lend on life estates, they typically have both the life tenant and the remianderman sign the mortgage, meaning that the mortgage is being secured by the full fee simple property. Thus, the lender is likely requeting and needs an appraisal of the fee simple property interest of the subject property. This can be done with no problem as long as the appraiser provides the proper disclosures and no life estate comps will be needed. I need more details, but in this case it appears that such an appraisal could be done "as is" without needing to use a hypothtetical condition, since as of the effective date of the appraisal, the property appears to be a fee simple property (based on the limited information provided by the OP) and the life estate will not be created until after closing and after the appraisal effective date although the appraiser must be sure to disclose the results of his analysis of the sale contrract, which would indicate that the purchase contract is creating and transferring a life estate.

A subordiantion agreement is not required. What would be required is that every owner of the each of the partial interests (the life tenant & the reminderman) to sign the actual security instrument (i.e., the mortgage or deed of trust).

 

[Mike Kennedy]

"If circumstances change and the life tenant decides she needs or wants to sell the home, this requires the agreement of all remaindermen. One party can't sell the property without the consent and signatures of the others on the documents conveying it to a buyer. However, any party can sell his own share of interest to someone else without the consent of the others. The buyer would become a co-owner with the life tenant and the other remaindermen.
There's typically no way out of life estates except by agreement, such as if the property is sold."
http://trusts-estates.lawyers.com/estate-planning/life-estates.html

IMO, Appraisal Valuation based on HC the Life Estate was revoked prior to/on the Effective Date of appraisal and subject to legal termination.

p.s. my attorney-clients insist upon it.

 

[Peter LeQuire]

A subordination agreement is not required. What would be required is that every owner of the each of the partial interests (the life tenant & the reminderman) to sign the actual security instrument (i.e., the mortgage or deed of trust).

Dang! I've been parsed! Whether by signing the security interest document (mortgage, trust deed, etc.) or by separate agreement, the holder of the life estate would be required to acknowledge the priority of the lender's lien. Thanks for clarifying.

 

[RSW]

FWIW, I've come across a few instances over the years of a property with a life estate and a mortgage. All were through local banks and non-GSE. From what I was told, the person holding the life estate had to sign documents that the life estate would terminate if the property were foreclosed on, thereby protecting the lender's interest.

That is what I have found, too. I've appraised several properties where a LE was involved.

 

[OSU Beavers]

Sounds like a Fee Simple valuation would require a hypothetical condition.

Moot point now, cancelled by the lender.