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I am selling my house to a friend (for what I owe on the mortgage) which is $107k because I am behind on my payments and don't want to go through foreclosure, but it's worth $155k who gets the extra money?

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    Basically that extra worth will become the buyer's built-in equity. No one gets actual money but should he choose to flip it and sell it quickly, he can benefit from the equity available on it technically. – GµårÐïåñ Sep 18 '15 at 17:39
  • You are very welcome. – GµårÐïåñ Sep 18 '15 at 19:32
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    Isn't there a concept called either arm's length transaction or willing-buyer-willing-seller that is used to describe the "fair" value of a home? – Alex B Sep 21 '15 at 18:38
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    you may get better answers if you describe the situation a bit better. Will you continue living in the house? Is you friend taking over the mortgage or do you pay it back with the 107k? Do you have any agreements regarding you paying rent, if you will keep living there? How did you came by the "worth" of 155k? Could you sell it to someone other? Right now this reads as if you just gifted your friend 48K in equity. I don´t know if that´s what you intendet? – Daniel Feb 27 at 16:33
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There's no objective definition of what your house is worth between sales. If you sell it for $107K, then that's the current functional definition of its worth. There is not "extra" money to be had because you sold it for less than it was worth. If the buyer is able to flip it for more, then the value of the house effectively went up and he will pocket the difference when he sells it.

EDIT This turned out to be unexpectedly controversial, so let me be more precise in my answer. I think this is important because it seems like many people misunderstand equity and how it figures (or doesn't) into the value of their home, which then leads to significant confusion and errors in what's many people's largest single investment.

At any given time there are several possible ways to put a dollar value on your home. A non-exclusive list that includes:

  • The value used by your local authorities to assess property tax
  • The value appraised as part of a sale (if any - if the buyer is paying cash and doesn't need insurance you could potentially have a sale without this appraisal)
  • The appraised value you got when you bought the house
  • The last sale of a "comparable" house in your neighborhood
  • Whatever you happen to believe yourself
  • At the time of a sale, what the buyer and seller agree for the transaction

Some of these obviously are more "official" than others. It would not be strange for these different values to vary by quite a bit at any given time. (This is what I meant in my original answer when I said there's "no objective definition of what your house is worth between sales.")

The interesting thing - and what I meant in my original answer when I wrote "current functional definition of its worth" - is that none of these factor directly into the transaction that the OP described of selling his house except for the last. Using the numbers from the OP's example, that means the $107K. Wherever the OP got the number $155K (either from one of the options on my list above or somewhere else), it won't be directly part of the sale between him and his friend.

(For completeness, with a nod to Eric's comments on my original answer, some of these numbers may indirectly influence the sale. For example, the buyer typically won't be able to get a mortgage for a value greater than the appraised value of the house, and so that might influence what he's willing and able to bid. There may also be tax consequences if the price is artificially low, like, say, a gift. As further expounded below, however, that's not directly relevant to answering the OP's stated question.)

Now, the OP seemed to believe that there is an "extra" $48K in cash up for grabs in this scenario. That comes from the $155K value that the OP claims his house has and the $107K price of the actual proposed sale. This is a complete misconception. When the buyer and seller sit down at closing and the title agent sums up who owes and who receives cash in this transaction, the $155K "theoretical" value will not enter into the calculation and therefore no one will pocket it.

Subsequently, however, after the buyer takes possession, he may sell it. If it's true that he "got a deal" on the transaction at $107K, then he maybe able to flip it and turn a profit. But if that happens, it will be in a completely separate, subsequent transaction. Even if you look to this hypothetical second sale, however, the $155K doesn't really figure. The new owner will have to find his own buyer, and they will have to agree on a price. That might happen to be $155K, but there's no real reason to believe that it will or it won't.

  • I think you can only stretch this so far. If you buy a house for $1, then no one would believe it to truly be worth $1. You would pay property taxes at a higher value. You would insure it at a higher value, etc. The sale transaction may also have tax consequences since it is not a fair market price. – Eric Sep 18 '15 at 21:28
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    @Eric Those things are true but not relevant to the question that the OP asked. He asked "who gets the extra money?" and the answer to that is definitely "no one" because there is no "extra" money. Even in an extreme case like the $1 sale, still no one gets the extra money, although I agree about your comment as regards taxes. The "extra money" gets pocketed at a subsequent sale. In the OP's case, there's nothing to say that the price isn't a fair market price, even if some buyer may consider it a "deal." People in inliquid positions may sell for less; that's part of the market price. – user32479 Sep 18 '15 at 21:34
  • I take issue with your statement of "If you sell it for $107K, then that's the current functional definition of it's worth". I agree with the rest. – Eric Sep 21 '15 at 12:22
  • @Eric I expanded my answer to address your concern and incorporate dialog on JoeTaxpayer's answer below. I have a feeling we all agreed on what the right answer should be and that it's a matter of wording. I was perhaps too terse in my answer? – user32479 Sep 21 '15 at 16:24
  • It gets my +1 now. – Eric Sep 21 '15 at 16:39
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What if there were no mortgage, and you gave the friend the house? They are getting the house' value. In your case the discount from market value is their instant profit. We often think of our house in terms of the equity we have, plus the mortgage. Equity therefore is what's left after the mortgage is paid off, if you sell the house. In your question, you are, in effect, "giving all equity to your friend. Where else would you imagine it goes?

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    The OP asked about "money" and even in this scenario there is no "extra money" to be had. If the friend in your hypothetical sells the house after getting the gift, then they get money and turn a profit. As Eric just noted on my answer, there could be tax consequences to something artificially below market value, but the OP's scenario is not that. The OP is apparently selling at the best deal that he can get under his current circumstances. That's a sale at market value, even if it ultimately turns out to be a "deal" for the buyer. – user32479 Sep 18 '15 at 21:40
  • How are you reading this as "best deal"? He's behind in the mortgage but far from underwater. Why are you ignoring his statement of $155k value? – JoeTaxpayer Sep 19 '15 at 1:46
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    The $155K value has no basis. I can say my house is worth $10M, but that doesn't make it so unless someone offers me $10M for it. I do have several possible "values" for my house - last appraisal, assessed value for property tax, price that I paid, last sale in my neighborhood. Those all vary widely. In any case, his question is about money. You either think someone is going to end up with $48k cash in the bank on this transaction or you don't. You are talking about equity (at best) not money. They are not the same. – user32479 Sep 19 '15 at 13:39
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    Your last 2 sentences, agreed, 100%. There is no $48K, there may be some value, but it really can't be known with high accuracy until a second sale. Are we in agreement now? – JoeTaxpayer Sep 19 '15 at 16:36
  • Definitely closer after the full string of comments, especially the last one. I feel like this is an important distinction though - The OP seemed unclear on the concepts of equity, market value, and the mechanics of the sale. Your original answer (as I read it) also mixes these things. Could have just been because you gave a short answer. (I did too and just expanded mine based on this exchange with you and comments by Eric on my original answer.) Hopefully in net we have something useful to others out of all of this! – user32479 Sep 21 '15 at 16:28

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