Hi, I’m new to investing and have read some books but none of them seem to explain why its important to buy a house with equity if you are wholesaling? Why do end buyers want a house with equity. Are authors interchanging equity with the term value?
The equity is the difference between the value of the house (what the house will sell for in 30 days) and the mortgage. Equity is important because it is where your profit comes from. A person can’t sell a house for less than his mortgage is so if the mortgage is more than the value of the house you have no deal. In other words if there is little of no equity or negative equity then you can’t do the deal.
Pre 2008 at height of the market, many were buying houses without equity because the houses were appreciating in value very quickly, creating equity in as little as 3-6 months. But we know how all that turned out.
Wholesaling by definition is selling a commodity for resale at Retail prices. The ARV (after repair value) is the Retail price. A rehabber must be able to buy a house at a low enough price, then add his renovation costs, holding costs, acquisition and closing costs and still make a profit.
So you as a wholesaler must understand the numbers and ratios of your buyers, the investors who would rehab the house then sell at retail. Once you know their numbers you then build a cut for yourself which means you need to control the houses at below wholesale costs.
For example:
ARV of a house is $200k
Rehab costs estimate is $30k
All other costs + profit is 30% of ARV = $60k
So your formula is ARV x 70% - $30k = $110k is the wholesale price.
You want $10k wholesale fee for yourself so your goal is to control that house for $100k.
End buyers will want equity on different levels. It depends on who is buying the home. If a contractor/investor is buying a house to rehab then Joolkano’s explanation is right on.
On the other hand, if you are selling to a home owner, then their equity reflects the amount of cash they bring as a down payment if they are getting bank financing. When they turn around and refinance, their equity is the difference between the appraised value and the balance on their mortgage.