Investor · Laurel, MD · Member since 2012 · 149 posts · 33 votes
I've been reading this forum continuously for the past two months and am amazed at the amount of information here. Thank you all for contributing and sharing!
One of the things that I'm still trying to wrap my head around is the role of equity when buying a property. Specifically, I hear of investors avoiding sellers with equity or the opposite - looking for sellers with equity. This subject seems to come up more when talking about motivated sellers and short sales. Anyways - why is equity important when analyzing a deal? How does it affect the investor's thinking? Is seller having equity in his/her home good or bad?
This question probably sounds extremely basic and silly, but I'm still at that stage - lots of silly questions.
Investor · Maui, HI · Member since 2009 · 13k+ posts · 3k+ votes
13y
Hey Leonid Sapronov I'll do my best to make sense of it
Equity is the amount of money left in the deal. So, if a house is worth $100,000 and the owners have a mortgage of $60,000 - then there is $40,000 in equity in the deal. SO...
An investor wants to get that equity for themselves. So if they can get the homeowner to sell the house for $60,000 - then the investor can re-sell at $100,000 and keep the $40,000 in equity as profit.
Sometimes, though, a seller has no equity. So, for example, they might owe $105,000 and the property is only worth $100,000. That means they are "upside down" and they have no equity. This is a problem for investors because, without any equity, the investor cannot make money. Unless...
A short sale is when the bank says "yeah, I know John Homeowner owes us $105,000 - but we will take $70,000 and call it good." Now, suddenly, there is equity in the deal again, because the investor can buy it for $70,000 and re-sell it for $100,000.
So - having a lot of equity in a potential property is ALWAYS a great thing, and preferred. However, if there isn't equity, there are ways to make equity - like a short sale (or fixing the property up and making it worth more money, forcing equity to happen.)
Make sense?
Don't ever worry about asking silly questions! The way I see it - for every one person who asks a question - no matter how basic or advanced - there are thousands of others who don't ask but always wonder. That's the power of forums. So you, by asking, have helped out a lot more than just yourself. :)
Investor · Laurel, MD · Member since 2012 · 149 posts · 33 votes
13y
Brandon, thanks for the thorough reply!
I realized my mistake, which was an erroneous definition of equity that I had in my head. All this time I was under the impression that home equity meant the portion of mortgage already paid off, whereas in reality it's tied to the fair market value of a home. Now everything clicks into place :-)
Ok, now that we've cleared that hurdle, I'm gonna guess that investors avoid sellers with equity because those sellers would be reluctant to give up that equity at a discount? I.e., if a seller owns the property outright, he would, very naturally, want to sell it as close to fair market value as possible and, thus, unwilling to take a loss unless they were motivated?