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In this lesson, you will discover the formula and breakdown of the numbers
involved in wholesaling pre-foreclosures from equity to debt pay-off with regards to the ARV formula.
When I visited the first house I first took a look at in Belleville New Jersey sometime in 2004 or 2005,
I had no idea what I was doing outside of the simple desire that I wanted to be a landlord.
Thank goodness that it never went through.
Thanks to my friend who was supposed to be my partner who never came through.
Shortly after that, I met Anthony by way of Bob at the…
then GSREiA in New Jersey when I attended a workshop seminar by a pre-foreclosure wholesaling guru, Rich.
Today, I’d like to pass that knowledge to you.
After Repair Value (The A.R.V)
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First of all, this is the most important number in order to determine if we have a potentially good deal in our hands; the ARV.
I want you to simply answer this question.
What is the subject property in question worth today if it was to be sold at an all-fixed-up condition?
You can use the free tool at www.DealEstimator.com to find that number; you just need the address of the property.
Also, I will give you access to a free 7 days trial of the same software I use for a more comprehensive analysis at www.EmpireBIGData.com
How Much % of Equity Makes A Good Deal?
First of all, let’s not get in the habit of throwing the word ‘deal’ around randomly
…because it’s not really a deal until it has closed, checks are cut and/or money wires are initiated.
What you have before that… are some form of data or leads to prequalify and take through the escrow or transaction process.
We cover that in more detail on the next video so be sure to hit the like button to support us
…and subscribe with the notification bell on to ensure you get notified why we release it.
What is Equity?
Most real estate in the United States are purchased with the leverage of a mortgage debt with the property as a security collateral.
A security collateral is an asset which a borrower is required to pledge to a lender as a condition of obtaining a mortgage loan, which can be sold off if the loan is not repaid.
For example, you took a mortgage debt of $320,000 from your bank, Wells Fargo,
…to purchase a property with an ARV of $400,000, the difference between those 2 numbers is the equity you have in the property.
Equity = $400,000 MINUS the Debt of $320,000 = $80,000
But that’s not all the way accurate.
If you are trying to sell just 3 days later, it’s pretty hard to hide the fact that you’ve also incurred a closing cost estimated at around $10,000 – $20,000.
So equity in the property will have to be adjusted for that; it’s more like $60,000 – $70,000.
How Do You Know If A Property Has Equity
In actuality, equity is the present market value of a property less all debt owed against the ownership of the property.
You can find these numbers by using the same software that I use.
Take a 7 days free trial of it here at: www.EmpireBIGData.com
When no debt is owed against the ownership of a property, it is said to have 100% equity in it (a.k.a free and clear)
And when you owe $320,000 against a $400,000 property, here is the equity available in it for the owner…
Difference = $400,000 MINUS $320,000 = $80,000
Then you have…
Difference DIVIDED-BY Value = $80,000/$400,000 = 20% Equity
You are probably overthinking right now… “Ola, what about the closing cost?”
And you are right but you are still overthinking.
Learn how to make quick estimates with us because in time, closing cost will not be factored into debt-payoff which is the actual variable in calculating the equity in an asset.
Let’s Talk About the Debt Pay-Off
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7 years later, you are ready to sell at 21 years short of the 30 years amortization of the original mortgage loan.
You will have to contact the mortgage lender to request an official document called the payoff.
It shows the remaining principal balance, due interest and some fees required to declare the loan satisfied; that’s a pay-off statement.
So to answer the main question for this lesson, the minimum equity we need to build into our potential deals is 35% of the ARV (and not the debt owed.)
It is after you’ve factored that in, then you still have to adjust for the repair estimate.
Here is a quick example.
ARV of $150,000
Asking Price = $100,000.
Debt Pay Off = $50,000
Repair Estimate = $10k
Desired Assignment Fee = $10,000
How much does the seller keep if he paid a $50,000 debt off?
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The difference of the 100% equity from the 35% equity I would like to build in this deal is 65%.
But this case is a little different because we already have a desired assignment fee of $10,000 which means we can adjust the desired equity.
A cash investor with their own money is often willing to acquire a property with equity as low as 30% so the difference from 100% equity will be 70%.
So I want you to find 70% of the ARV (which is $150,000). That’s $105,000.
Now I want you to adjust that number for the repair estimate and the assignment fees that you want to make.
That will be $105,000 MINUS $10,000 (repair estimate) and $10,000 (desired assignment fee); that will be equal to $85,000.
That means $85,000 will be the maximum I am willing to offer for this property.
So if we pay $85,000 and the seller pays off a debt of $50,000.
The seller will be able to walk away with the difference which is $35,000 less a couple hundred dollars in closing cost.
If they are owning too much to satisfy this debt requirement, a short or discounted payoff (a.k.a shortsale) will need to be negotiated with the mortgage lender.
Check out the next video on the screen to learn how I used shortsales to make $82,000 from a single deal where it would have otherwise been impossible.