Please Help Me Understand How Equity Matters?

Question

At this risk of outing my foolishness, here goes:

I trust that I should be targeting homes that are close-to or fully paid off, but I can't wrap my brain around WHY. Math stuff, I think.

If someone is struggling and they still owe over 50% on their mortgage, wouldn't they be more eager for me to take the burden off them? Or is it that I'll have to pay off their mortgage and they'll probably want me to pay the home's market(ish) value, so it's ultimately easier to not have to convince people why that just doesn't work as an investment.

If I pay off their mortgage, would the home need to be gifted to me or something?

I'm just not able to play all this forward ...

Thanks for insight and helping me conceptualize!

Meggan Kaiser · Answer

Thanks @Jay Hinrichs. I'm doing that. Still asking here :)

Pavel Shemyakin · Answer

Disclaimer: Not an experienced investor. Have one property under my belt.

From my understanding the question of equity really pokes its head in a situation where a potential seller's problem cannot be solved by the amount of money they would receive from you in the event of sale. Lets say the seller is in a tough spot and needs to sell for one reason or another. The home is worth 100k, he owes 25k Thus - 75k equity. You come in and decide that it would make sense for you to offer him..... lets say.... 85k. He is able to accept the 85, pay off his debt and walk with 60. He may or may not decide to go this route.

Now lets say we have the same piece of property but the seller is highly leveraged and owes 95k. He would be much more reluctant  to consider your proposition because when all is said and done – he would still have an obligation of 10k to worry about. His problem is not solved.

Like i have already stated - not a seasoned investor. Maybe somebody with more experience can chime in.

Jay Hinrichs · Answer

I would recommend you go to the libarary and read some very basic real estate investing books

or better yet take pre license course.. this will give you terms vocabulary and the basics..

then there are 99 ways to skin the real estate cat and you will get 120 of those on BP  LOL

good luck

Account Closed · Answer

You have the basic idea.

Account Closed · Answer

I target homes that have small equity amounts. If someone has a lot of equity and is in distress, they have many options.

For instance, if someone has to bring money in to closing, say the property is worth $200,000 and they owe $180,000. If they list the house in the MLS and are charged 6% real estate fees ($12,000), closing costs ($1,800)  and 3 more months carrying costs ($3,000) (the time it takes to sell and close) that amounts to about $17,000 with no certainty of selling. And, that doesn't include any fix up of the property they have to do. And if they don't fix up the property they can't get top dollar anyway. So, it is likely they are Not going to be successful selling.

On the other hand, if someone has a $200,000 house and owes $40,000 they can sell for $180,000 quickly and get cash or they can find someone who will lend against their equity. Most people need their equity to buy another house anyway.

So, the bottom line is that people who tell you to focus on houses that are in distress that have a lot of equity are trying to keep you doing busy work so they can get the profitable deals. ;-)

Dean Letfus · Answer

As already stated the only reason equity is an issue is when people are underwater so they can't sell to you.  Also just to give you another thing to think about. I look of homes with no debt all the time so that I can ask for seller financing, (sometimes called vendor finance). I have found this a great way to buy higher end homes with little to no money down and low interest rates!But to your question it is only about their ability to close.  However where their debt is under what you're willing to pay, let's say you'd pay 50K for the house and their note is 43K.  This is a good strategy to offer to buy the house for their note balance. In other words you offer to pay off their mortgage. Often people jump at that and you just made 7K in my example.

Jay Hinrichs · Answer

people bring money to close all the time.. especially during the GFC..  but for most NO they don't have it.

Meggan Kaiser · Answer

So helpful @Pavel Shemyakin, thank you!!

Please Help Me Understand How Equity Matters?

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