Equity. Why the hype?

Question

Hello,

I have potentially an ignorant question: What is all the hype about finding properties with equity in it?

I have learned that a lot of REIs only market toward properties that have 50-70%+ equity.

I understand that if you own a home that has a lot of equity in it, you can borrow against that equity using a HELOC or Home Equity loan.

Here is the point I am hung up on... if you purchase a house that has 75% equity in it with conventional financing... doesn't this "reset" the equity in the house? The seller's mortgage will get paid for and your new mortgage will start. So if you made a 20% down-payment, then there is only 20% equity in the home....

The only situation I see equity as important is if you are a fix/flipper who is using private or hard money to purchase the property in cash. Then you can purchase the property without a mortgage and borrow all the old equity in the home with a HELOC or Home Equity Loan. This can fund the rehab costs of the fix/flipper

Am I missing something?

Alexander Timberlake · Answer

Thanks everyone! This helps clarify it in my mind.

Wes Brand · Answer

or a slightly different phrasing of the same concept: the minimum price these sellers will ever accept is the amount outstanding on their mortgage. If they sell for less than that they'll still owe the bank money for an asset they don't control.

Or what the poster above me said ;)

Kevin Siedlecki · Answer

@Alexander Timberlake - You are looking at it from the opposite angle, which is why it doesn't make sense to you. Let me rephrase your point slightly, and hopefully that will clarify the importance.

You are looking for motivated sellers with equity in their property. When you are looking for deals, you want to find someone who needs to sell quickly, and is therefor willing to part with the property for significantly less than thy could get if they had time to list the property and wait for a retail buyer. These sellers just want out, so they are likely to sell for just the balance of the mortgage, or slightly more. Basically, the more equity they have, the lower the mortgage, and the better price you can get.

Equity. Why the hype?

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