OfflineI just joined last night. Throughout Dean's books, he refers to the importance/benefit of "immediate equity" (based on a lender's appraisal) that his students gain when buying/lease-purchasing a property. However, even though the appraisal is based on comps, real equity is based on what someone will pay for the property. That said, if someone buys a property at 50% below appraisal, that new discounted purchase price is the real value...and therefore there is no real equity.How frequently can you buy a property for 40% to 50% less than the appraisal....and then find a buyer within one year for the original 50% higher appraised value..... and WHY would that occur?
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Rono,
Welcome aboard! Investors are searching high and low, pounding the pavement for THE DEAL! Most retail buyers are not. They want a deal on a turn key house. An investor wants a house at 50% retail that they can do some work on and then sell quickly(lower then retail) for a profit, or the hold onto and rent out and sell down the road but be able to get his money out with refinancing at FMV. Yes it is realistic to find houses for 40-50% below FMV.
Read Deans books and read the forums here. Once you start reading the forums you will see how this is possible, without a shadow of a doubt. Nose in the books and website and ask questions if you don't find the answer somewhere here. Good luck!
SEMPER FI
GET SOME!
Equity = Fair Market Value (aka FMV or Retail price) - What's owed on the property (mortgage, lien, etc.)
As for how someone could buy at a deep discount, what is the motivation for selling the property to begin with?
An example House #1:
You inherit a house from someone who lives in my area. You live out of state. You have no interest in owning / maintaining / managing a property in my area. You had a house fire and now the place is a safety hazard.
Motivation for selling House #1:
1) You don't want to pay the property taxes
2) The city / county is starting to levy fines against you for not fixing up or removing the house.
3) You've found out that kids are playing in the damaged home and may get hurt. You don't want to get sued for the doctors bills and don't have insurance on the property.
4) etc.
Example #2
John and Sue own a house in your area. John (or Sue) receives a promotion at work. That promotion would require that they relocate far enough away that they would have to move.
Motivation for selling house in #2.
1) The promotion is great, but it doesn't pay (or don't want to pay) for a mortgage on house #2 plus rent or mortgage on the house they're moving to.
2) John and Sue do not want to have the burden or responsibility of owning the house.
3) etc.
Example #3
Jim is an avid drinker. He likes to drink and drive. The car accident was his fault. The lawsuit would require him to liquidate everything he owns. Maybe he has a limited time frame on which to come up with as much money as possible. He has to sell everything. Now.
These are just a few examples on why someone may sell at a discount. This is why finding "Motivated Sellers" is such a big deal. For whatever their reason, they need the money now and cannot wait for a Fair Market Value price or a Retail Buyer.
That was from your seller's point of view.
Here's an example of a buyer's point of view.
You have done a great job on finding a motivated seller.
The seller needs cash now. You've negotiated with the seller that you (or your assignees) will purchase that house (say fair market value of $100k) for $50k. (Perhaps the house is paid off and the seller needs money.) Your end buyer has informed you that he (or she) want at least 30% equity. Your end buyer's bank will loan the end buyer upto 75% of the After Repair Value.
So: $100k (value of home after repairs)
minus $70k (purchase price of home for end buyer and repairs)
-----------------
$30k in equity required from your end buyer
(if your end buyer has maxed out the loan with their bank, they may pocket the $5k difference. They bought the house for 70% of fair market value, the bank in this case would loan upto 75% of fair market value, $5k in this example.)
Where you can come in:
$70k (maximum amount that your end buyer would pay for this home including all repairs)
minus $10k (you've taken an educated guess or had estimates drawn up for repairs)
-----------------
$60k to you
minus $50k to pay the original seller
=====================
$10k to you to do with as you please (pay taxes, etc.)
The more thorough the question, the more thorough the answer.
Please fill out your profile with as much info as you're comfortable with.
Thanks.
Is FMV that your are referring to an appraisal within a few months or what the buyer feels the property will be worth (assume no repairs are needed)? I'm a novice and unaware of properties selling for 30% to 50% BELOW a current appraisal that a Lender/Bank has.
After reading your examples, I see where you are coming from, particularly if the seller does NOT have time to wait for a better price AND is forced to get out. If that were not the case, can I assume that a seller will wait and hope to find a buyer that will pay a price closer to what the appraisal (FMV) says?
If that were not the case, can I assume that a seller will wait and hope to find a buyer that will pay a price closer to what the appraisal (FMV) says?
I separated your reply. You've got it exactly in the second part. If the seller can wait patiently for the right buyer to come around to pay close to FMV or asking, then the seller is NOT a motivated seller.
The more thorough the question, the more thorough the answer.
Please fill out your profile with as much info as you're comfortable with.
Thanks.
If I can be helpful in any way, please don't hesitate to ask.