Listsource, Yellowletters: % Equity

[Petit Morne]

Hello,

How can Listsource/Yellowletters tell how much equity an owner has in their property? I did not think this sort of information was public knowledge. How accurate is their equity information?

[Sean OToole]

List services, and property data providers, calculate (estimate) equity using two computer models - value and debt.

First you need an estimate of the property value, commonly known as an automated valuation model, or AVM. The most well known of these is the Zillow Zestimate, but they've been used by banks and others for years. This is also your first point at which some degree of error can be introduced, as AVM's are typically based on public record sales, and public records don't include attributes like view, curb appeal, and other less tangible items that can effect price. AVM's therefore tend to be very good in large subdivisions of homogenous homes with regular sales activity, and get increasingly bad as surrounding homes get more diverse, or there are fewer sales on which to base the estimate.

On the debt side, each loan made against a property is public record, including the loan amount, and often, the basic terms of the loan are available as well. The trick then becomes figuring out which loans are still open and outstanding (using either a model or by sorting through reconveyances, or both), and what the balance on those loans is (not public record at all, can only guess). Where the models have the most trouble is with home equity lines of credit (HELOCs), as that loan could be open and have a zero balance, or the borrower could have used the entire line.

Overall estimated equity is a great tool for narrowing the field to properties that are likely underwater, owned free and clear, fully encumbered, etc, around which many real estate investing strategies, including most creative financing strategies are based.