How to use the equity .

[Dennis Williams]

What do you do when your appraisal comes in $100k OVER the purchase price.

My goal is to buy 20 units each year and we are about to close on our first 4 unit building next week. The appraisal came in a lot higher than I expected. What would you do with the $100k equity?

- Business term loans up to $100k

- HELOC up to $80k

- Or ..........

[Don Konipol]

@Dennis Williams. First of all, you’ll not be able to borrow based on appraised value for a minimum of one year after the purchase is completed; lenders will use the lower of cost or appraised value.

Secondly, while the appraisal may indeed be indicative of a great buy on your part, understand that an appraisal is one persons opinion of value. I’ve seen appraisers make glaring mistakes in their analysis. The most usual is using comps that aren’t really comparable, and not making enough of an adjustment to reflect the difference.

If, after 12 months of ownership you have another appraisal performed, and this appraisal confirms the value as concluded by the former appraisal, then you may be able to monetize the equity. Why may? Because, ( assuming we’re talking about investment property), the property will still have to generate sufficient net income to make the payments on the additional financing; your debt and income ratios will have to be below a certain threshold; and you credit score will need to be satisfactory.

So while theoretically increasing your net worth by $100,000 with a property purchase is a very good thing, it doesn’t necessarily lead to a “liquidity event”.