Why have I been told to only work with houses with EQUITY? Where is the equity in houses used…?..for rehabber, for homeowners, for me? Can you give me an example using a house that has equity that one may handle? ((if you can explain it in a numbers scenario that would be great)
It depends on what you’re trying to do, but all other things being equal, a deal with equity is more preferable to a deal without.
If your goal is to buy houses and the resell them (usually after fixing them up), you’ll likely need that equity in order to make your profit.
Equity comes from two sources. You can either just buy the property at a discount, or you can create the equity by increasing the property’s value through upgrades or even construction. If you can do both in a deal, then you’ve really hit a home run.
For example, let’s say you find a house that is worth, in its current condition, $100,000. This assumes an orderly marketing process where no one is under any pressure to buy or sell. In this example, though, the seller finds himself needing to sell NOW, so you are able to buy the property for $75,000.
This deal will give you $25,000 in equity. (Technically, equity is the difference between what you owe and what it’s worth; if you paid cash for the property, you’d have $100,000 in equity. However, let’s treat equity here as is relevant to us in this forum, which is to say that it’s really your gross profit margin on a deal. Maybe the correct term is not “equity” as much as it is “free equity.”)
Pretty sweet deal, and it should give you enough margin to cover your expenses and still earn you a modest profit.
But let’s say that you paid full value for the house, or $100,000. Is there a way to get free equity in that deal? Sure, maybe there are upgrades that could be done, or maybe you could add square footage for cheap, or any of a hundred other things that make property more valluable. If you buy the house for $100,000 and put $25,000 into it, maybe the market will allow that house to now sell for $150,000. (Not likely, just an example…)
Again, you’ve created $25,000 in equity, although it’s not really free since you had to invest $25,000. As you can see, this type of deal is not as good as the first one where you simly bought the property right, but it is a way to create value and profit.
Now, if you could buy a house for $75,000 and put $25,000 and sell it for $150,000, then you’ve really got a winner on your hands.
But do you need equity in a deal to make it work?
There are a lot of pre-foreclosures where there are no equity, but maybe you can create the equity by doing a short sale.
Or, if you are good at finding subject-to deals and also finding lease-option tenants, you can make money that way, even if there is no equity in the house.
I’m not an expert on short sales or sandwich leases, so I’ll let someone else address those methods.
Thank you for the explanation! If we focus on wholesaling, and assigning contracts…where is the money for the homeowners? I thought that the preforeclosed homeowners walked away with some cash also, to help them start another life for themself? I will get my assignment fee but I thought that we were leaving money for those homeowners too?
cont.
I am very confident to start wholesaling, except for the number part of it. I just need to know how it is broken down for everyone involved. Does there always need to be equity in a home to wholesale? Can I wholesale without equity? If you can talk in numbers again that would be great…
To answer your question, I’ll ask you one. Would you buy a house that had no equity in it? Or would you buy a house that had $80K in equity (and needed just $15K in repairs - which means you could make $55 - 65K if you fixed it & sold it)?
- is the title co. actually assigning that 15K to the rehabber to fix up the house at the closing, after I wholesaled it?
and
- Ok I have a 100K home and have 20K in equity…I find $3000 in repairs, that leaves 17k in equity, is that equity split between me and the seller?? Please be patient with me…hehe
First of all, stop thinking on behalf of the seller. You keep saying the seller needs to walk away with money, and splitting profit with the seller…etc.
You negotiate what the seller gets. if he has plenty of equity and there is room for him to get some back, then great, if not, then so be it. I am buying a house now where the seller is paying me $10k to buy their house.
As far as the numbers goes, it all depends on the deal and price range. If the average house price is $100k, needs $20k in repairs and you plan to wholesale it, then you need to get it at around $45k or it may not be a deal.
This assuming you know how to estimate repairs. $20k in repairs is a lot of repairs.
Sounds like a motivated seller to me! They are the ones we as investors obviously should focus on!