Importance of Equity

It took me awhile to understand the true meaning of equity when it comes to notes, especially delinquent ones. You were always taught to analyze the borrower, the property, and the value; then the market changed. I own a home in a really nice area outside of Philadelphia that's upside down at least $150K. I owe more than it's worth. Most of America is still dramatically upside down (Nearly 11 million Americans are underwater on their mortgages, meaning they owe more than their homes are worth). So why do I continue to pay it? From a Real Estate perspective, it's a bad deal, if I just looked at the equity. I guess the real reason besides maintaining my credit and that I feel the area will absolutely bounce back is what I like to call "emotional equity". I had lived at the house over 12 years and raised my children there. I enjoyed hearing a rooster crow in the early morning, and the herd of deer crossing the yard, as well being on a dead end street. I enjoyed the large barbeques with family and friends. I'm emotionally attached to the property. I remember the day I sold my grandma's house and I got in my car and cried. I spent much of my childhood there and when I sold it, I felt like I was a selling a piece of my childhood away.

After the market crashed, the first delinquent assets that we began to purchase were slightly upside down (the combined 1st and 2nd mortgage exceeded the value) and our initial strategy was to stop our legal process at the Demand Letter. Wow! What a big mistake that proved to be. We lost a lot of money. We thought that if the Homeowner was upside down we couldn't go any further. Today if the Homeowner is current on the 1st mortgage, we go all the way to Foreclosure, even if they're dramatically upside down. Why? The same reason: "emotional equity," the most important kind of equity. Where can a family of seven go with bad credit and a pet? Don't they need 1st month, last month, and a month security to rent a place? Don't they need to pack up and pay a mover? Besides having a FC and a judgment on their record, might it pay them to work it out, or might current market rent be higher than what they were paying? What about all the improvements they put into the home and the memories they have there, as well as the fact that their oldest daughter is graduating High School in 2 years? So the real opportunity today is not through "traditional equity" deals, but through "emotional equity deals". Try not to miss the boat.