Real Estate Investors often prefer mailing to homeowners with high equity when looking for off-market seller leads. They are preferred because the equity can give the seller more room to negotiate – it can allow them accept a lower price and still come out of the deal with cash.
Calculating equity isn’t as easy as it might seem.
A definition of equity:
“In the context of real estate, the difference between the current fair market value of the property and the amount the owner still owes on the mortgage. It is the amount that the owner would receive after selling a property and paying off the mortgage.”
Another way of putting it:
- Low equity the mortgage is close to or greater than their home value
- High equity, their mortgage is a smaller portion of the home value
The easiest way to know equity would be to look at their loan balance and compare it to their home value. Unfortunately, loan balance is credit bureau information and is not available through legal sources for seller lists.
Loan to Value (LTV) is used as a tool to estimate equity.
LTV compares the FULL amount of the most recent mortgage loan(s) to the current market value of the home.
How LTV is calculated:
- Original Loan amount / Current home market value
- Lower number LTV = Higher Equity
- Calculations should include “total mortgages” as provided by the county, including the 2nd mortgage and equity loans.
Examples:
Original loan in 2010 for $236,000 / Home Value in 2018 is $400,000
LTV = 59%
Equity = at least 41%
In reality it will be much higher, because they have been making payments against the principal for 10 years.
Original loan in 2007 for $125,000 / Home Value in 2018 is $156,250
LTV = 80%
Equity = at least 20%
In markets where homes appreciate slowly or prices even drop, it takes a long to time to build equity.
The full loan amount is used because loans have such varying terms that aren’t part of the public record. It is impossible to accurately manipulate the data go guestimate the remaining balance based on the age of the loan.
What works for investors?
Most investors getting a high equity off market list will specify LTV of 0-59%. (at least 41% equity plus the payments made)
Some counties don’t provide complete information for all properties. In this case, we also include the “unknown”. This will eliminate all the known low equity, but give you the chance to contact people who might have high equity, but we just don’t know.
What about Free and Clear?
Unfortunately, there isn’t a national standard dataset for “no mortgage” or “mortgage discharge” when counties report to list compilers. Many lists saying “free and clear” include the properties where they didn’t get loan information and high equity. It’s hard to say if there really wasn’t a loan or if the county just didn’t send the info over.
As with any list, it can be easier to work with a list broker who can make recommendations and answer your questions.
