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I think this is a hard concept for people to understand. I have had to explain it a few times to new home owners. The good news is that I have seen a few examples lately of instant equity when people are purchasing homes, which is great news when buyers feel like the interest rates are high. And just like any other market anomaly, this too shall pass. So if you are considering buying, here’s an idea of how this will help you! I wanted to crunch some numbers and show how this benefits buyers in this market.
Let me give you a couple of stories of what I have seen in the market.
One recent buyer in the Mint Hill, NC area purchased a home for $374,900. The appraisal came back at $395,000!
Another buyer recently went under contract on a property for $239, 500 in the Derita area of Charlotte, NC. That appraisal came in at an $11,000 increase for instant equity.
This is happening because of exactly what buyers were hoping for…prices are coming down! There has been so little movement in the market during the past winter months that sellers are dropping prices left and right. You want a deal (as everyone seems to), buy in January or February. The prices of the homes are adjusting, but the appraisals have not caught up. Appraisers generally look at sales for the last 3-6 months. If little inventory is moving, the appraiser only sees the inflated prices that existed when the market was busy. I also look at those same numbers when helping sellers determine a list price, but I use market conditions to guide my clients. Busier market = higher list price. Appraisals do not include market conditions or fluctuations.
But what does that mean for my buyers? It’s like they walk into ownership of that property with money saved in the bank. It is not money that they can actually use. It’s a sort of credit. It increased the value of the home, but they are still paying the mortgage at the list price they agreed to. A homeowner can borrow against the equity in the home through a Home Equity Line of Credit (HELOC) or Home Equity Loan. Obviously, it is a loan of some sort and monthly payments are required and there is a fee for borrowing in the interest rate, but it can help homeowners do repairs or make improvements.
For folks who have owned your home for 10 or more years (the average time that people choose to sell is 11 years) you probably have a considerable amount of money in equity in the home. I often advise clients to use that equity to improve their home before they sale. If possible, borrow against that equity to make necessary adjustment to the condition or style of the home to get the absolute highest market value out of your home. We can list it sometimes in a completely different market bracket. Obviously we will sit down and compare the cost of the renovation with the increase in the value of the house and how close those numbers may be before making that decision. If you have to pay $10K for the reno and you’re only going to increase the list price by $10K, like any other investment, it may not be worth the work and time for the renovation. At closing the HELOC will be paid by the attorney so, in some cases, you aren’t even making a payment or paying the interest.
I look at equity a lot like I look at net worth. It’s kinda like fake money. It’s not something that you have liquid in the bank. It requires a little bit of work to get the value out of something. You have to sell an asset to make it liquid. But I do think equity is a lot easier to use than other investments. I amy be a little bias, thought, since real estate is literally what I do!
