Equity, why does it matter?

[Tim Hsu]

Hi Everyone,

This will be my first post and I was wondering if all the veterans could help this newbie out. I'm currently reading J Scott's book on flipping homes and I came across a section where it recommends looking at more "established" neighborhoods because homeowners tend to have more equity in there home. Why would it matter if a home has equity? I understand that equity is the difference between the market price and the amount owed on the mortgage but it is not connecting in my brain why that would help me as a buyer. Thanks again for your help.

-Tim

[Darron Stewart]

Guessing at the context and how it may help you...

If a house is being sold for what it is worth, $100k and has a mortgage of $100k, then there is nothing for seller to receive at closing and nothing for you to gain vs any house down the street.

However, if a owner has been in the house 20 years, and its worth $100k and only owes $25k, then there is a lot of spread to negotiate, if you can get to $70k, owner may feel thrilled to walk with $45k and you get $30k in equity so how is this important?  Now you have $30k you can pull from, sell quick and make $30k, etc.  You would have a potential $30k gain.  And if you decide to rent, it should easily cash-flow since it was purchased a bit under market.

Bottom line, you can't get anything out of a property if there is nothing, zero equity, in it.