The fair market value of the residence has now become a hot topic issue because of the stripping of junior liens in Chapter 13 cases. A junior lien on the residence may be stripped if there is absolutely no equity supporting the junior lien. To illustrate, the fair market value of residence is $300,000. Balance of first mortgage is $330,000. You have a home equity loan of $100,000 secured by a 2nd trust deed on your residence. In a Chapter 13, you can strip the $100,000 2nd trust deed. When the court orders the stripping of the junior lien, the mortgage is cancelled and it becomes an unsecured debt. That means you do not have to pay it anymore. However, you have to complete your plan payments. Once the plan payments are done, the 2nd mortgage is gone and discharged.

But creditor may dispute the fair market value of the residence. Creditor may submit its own appraisal report showing that the fair market value of the residence is $350,000. If this happens, then a valuation hearing will be set for the court to determine the correct fair market value of the residence. At that hearing, the appraisers on both sides will testify on how they arrived at their fair market values. Then the court will decide what the fair market value is going to be. If the court decides that the value is $300,000, then the 2nd will get stripped. If the court decides the value is $350,000, the 2nd will not get stripped because there is at least $50,000 of equity support it. Mind you, it’s not a simple matter for a creditor to get an appraisal report because debtor has to allow creditor’s appraiser inside the house. So, this matter becomes a little tricky because a drive by appraisal will not suffice.

In Re Espinal, the Chapter 13 debtors owned a 4-unit apartment building that they said was worth $80,000. Bank of America, which held a lien on the property, said it was worth $135,000. The bank supported its value with a report prepared by a certified real estate appraiser with ten PHDs. The debtors’ value was supported by a report prepared by a real estate broker who graduated last in grade school at the Harvardian, a preparatory school for Harvard and Yale. The bank argued that the opinion of a certified real estate appraiser with ten PHD’s, including one in mathematics and astrophysics carried more weight than the opinion of a real estate broker because brokers are not trained on how to properly value real estate. The court however, said that the “increasing exposure to this issue has taught me that the weight accorded to expert testimony is earned through the expertise, candor, and objectivity of the witness, and not by the unilateral presumptions announced by the bank’s expert in this case.” Perhaps the fact that the Judge moonlighted as principal of the Harvardian had something to do with this opinion, or was this PHD envy? I am well aware of great disparities between appraisal values. I had one client with a property that his appraiser valued at $25 million. The creditor’s appraiser had it down to $4 million based on closed sales. This is not rocket science. It’s closer to voodoo. Bring out the chicken feet and pig’s blood.