Note Professor Newsletter

Equity vs "Market Value" - Continued

Equity is defined as the difference between the amount of encumbrances, and the fair market value of the property. ( I always liked that term, fair market value. What is "unfair" market value.) For example, say you own a property that has a $50,000 first lien, a $10,000 second lien, and a $2,000 city lien. You say the property is worth $100,000. Your equity would then be $38,000. ($100,000 minus the total encumbrances of $62,000) The encumbrances can easily be determined…just add them up. (Want to build up quick equity, just pay down the debt quickly) go to BUILDING EQUITY FAST with GOOD TERMS. This technique can save you hundreds of thousands of dollars.)

But wait, who decided the property was worth $100,000? "I got it from the tax rolls", you say. Are the tax rolls reflective of market value, or is it only an opinion of value based on politics as a basis to bring in revenue? I think we can all agree that the tax rolls are the least reliable method of determining the market value of property.

Others will say, "There are several on the same street that are for sale for $100,000, and mine is as good as theirs. The key word is "for sale". They are not selling, but are "for sale". If something is not selling, is this market value, or the fantasy of a seller.

"I paid $90,000 for the house, so it should be worth $100,000", is another statement I often hear. What does what YOU paid for a property have to do with how much it is worth today? From the other side of the coin, if you paid only $10,000 for the same property, is it now worth only$10,000 because you got a good deal? REMEMBER: What you paid for something has nothing to do with market value.

Here is another often heard statement, "The house across the street appraised for $100,000 a year ago, so mine ought to be worth the same". Was this a refi or lender appraisal? We all know in their eagerness to fund loans, lenders would instruct appraisers to inflate the price of the house to get the loan funded.

Have you seen this happen in your market? You have an appraisal of $100,000, and houses for sale at $100,000, but nobody is buying. Is the house really worth $100,000. Although you have appraisals, tax rolls, what you paid for your house, and all of the houses for sale are at $100,000, but none are selling. Have any of you rehabbers experienced this situation? You might try the REHABBERS' BAILOUT described in the previous issue.

Are you beginning to see what I am saying about equity and its relationship to market value? Equity depends on subjective view of what the market value is. Have you ever heard that it is a "buyers market" or "seller's market"? Remember this, if nothing else from this article…. It is ALWAYS a buyers' market. At times buyers are willing to pay more than other times. You will have a "hot" market or "cold market", but it is always the buyers who determine this, not the sellers. When buyers are buying there is a hot market. When buyers are sitting back and not buying, it is a cold market. It is that simple.

In the next issue, I will go more into different aspects market value and its relationship to equity. If you are going to be successful in real estate or notes, you must learn how to analyze the value of property. Learning the concepts of a financial calculator is a must.

If you have questions, please CONTACT me. If is from your questions and comments that I get my topics.

Have a HAPPY TURKEY DAY.