8

I viewed a model home that was originally priced at about $207,000. The builder is offering it for $173,000 since it was a model. He says that for this reason the home will already have over $30,000 in equity when I purchase it. Is this true, and if so, what does that mean for me? Equity is foreign language in my mind.

  • 5
    Sure you will. Put down 30k, and mortgage 143k. You'll have 30k equity right off the bat. Equity = MarketPrice - Mortgage. The builder is selling for the current market price. (Although, in 5 years time, no one will care if it was the model.) – Chris Cudmore Jun 4 '12 at 19:11
  • 7
    "because it was a model." So why does he think he can't get $207,000 today, but implies that you can, tomorrow? People will say anything to induce you to part with your money. What is the house worth to you? What rent would you save by living here? That's what matters. – JoeTaxpayer Jun 4 '12 at 19:52
  • 1
    A fun thing to do would be to go to the county and find out what the "taxable value" of the property is. Compare that to the $173,000 sale price. If the taxable value is less (and it almost certainly is) you can go back and tell the salesperson/builder that you would, in fact, have negative equity at time of purchase, and perhaps negotiate a lower price. (Note that the taxable valuation may not include the new house if the valuation hasn't been updated). Your local county auditor may have a website with this info available online. Good luck! – Bob Jarvis Jun 6 '12 at 17:25
17

This statement is a come-on, an attempt to impress you with the "wonderful deal" you would be getting if you bought the house. It is not a reality-based statement.

Equity is just a fancy word for how much something you own is worth in cash to you. If you own a bicycle, you could maybe sell it for say $20, so you have equity of $20 in it. This is despite the fact that you paid $100 for it long before, and despite it having more utility for you than $20 would, and despite it being emotionally priceless to you; the equity is $20 since that is all the cash you could get for it in the market.

In the case of houses, you have to account for the fact that you (presumably) have borrowed much of the money to buy the house (via a mortgage), and have to pay off the borrowing. You also have to assess how much you could actually sell the house for. This selling price is the hard thing to determine, and depends on hard-to-assess factors, such as economic conditions locally and how effective the salesman or broker is. So for a house that you already own, your equity (estimate) is how much you would be left with after selling it and paying off the borrowings on the house.

In this case, the salesman is trying to imply that the house would be worth $30,000 to you the day you bought it, which is patently absurd. He is implying it is "really worth" $207,000 despite the fact that the builder can't sell it at that price (because he would do so if he could). If you tried selling it in the months after buying it, you probably could not get more than$173,000 for it (and maybe less), and like most buyers you would start out with an equity, or net worth to you, of slightly less than your down payment.

  • 2
    Addendum. More generally, as answers.com/equity puts it, equity is "the residual value of a business or property beyond any mortgage thereon and liability therein." This is why you will also hear the term 'equity' in relation to publicly traded stocks on stock markets (also called equity markets) or "private equity" (which borrows money, buys a business, then tries to make the business worth more). The same basic formula of "what you own minus what you owe" applies, as does the question of measuring the value of what you own (often coming down to how much cash it could fetch if sold). – user296 Jun 4 '12 at 18:53
  • 3
    I like this answer except for one thing: What a house (or a bike) is worth to the owner is irrelevant. All that matters is what the owner can sell it for (i.e. its worth to the market). If that $20 bike is priceless to me because I grew up riding it, that does not increase my equity in it. – BigEndian Jun 4 '12 at 21:05
  • @BigEndian, I've edited the answer to address the point you raise. But equity is not "its worth to the market"; the market values the house at $173,000 but the owner only has say $40,000 equity because of the mortgage. That's why I said "worth to you". – mgkrebbs Jun 4 '12 at 22:29
5

It doesn't mean anything to you, its a sales pitch. You know how much equity your home has when you have an appraiser write an appraisal report for you/your bank, and even then it doesn't mean much unless you want to cash out on that equity (with a home-equity loan or a mortgage refinance). Or when you try to sell the house.

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.