What is Equity for Creative Financing?
I get a lot of questions from my Subto students and others when it comes to real estate investing and of course, creative finance.
And one big question I’ll sometimes get is – what is equity?
Equity is one of those real estate terms that gets said over and over again, but it’s something people rarely and truly understand.
Because the problem with equity is that it’s very complex and with complexity, comes a lot of misconceptions and misunderstandings.
During one of my Subto student sessions, someone asked about it, so I did a quick video to explain it:
Here’s a quick breakdown on equity and why it matters in creative financing.
What is equity?
The quick explanation of equity is simple – equity is what you have in your pocket after you sell your property.
This is where a lot of homeowners get tripped up.
If you owe a million dollars on your property, which is worth $1.1 million, you do not have $100,000 dollars in equity.
But why not?
Because you have to total up the costs for selling.
Right now, the average cost of selling a home is at 11%.
Doing the calculations, you’ve actually got only $21,000 in equity!
The amount realtors and homeowners believe to be the equity is actually the spread; the spread between what I owe and what Zillow or other companies list the value of the house.
Again, equity is the amount you have in your pocket after selling your property.
But that’s why using creative financing works in these types of situations, because you’re actually giving the seller more of their actual equity.
That’s because when we start using creative financing, we aren’t basing our properties on the equity, but on their cash flow.
Guys, I’ve mentioned a few times how I’m able to cash flow hundreds and thousands of dollars on properties where equity wasn’t even available for the homeowner.
And yet, they walk away with the amount they need and I’m able to cash flow on properties.
It’s a win-win situation for everyone, especially the homeowner, who is able to get out of a distressed situation involving their home.
And now, you also know what equity actually is!
If you have any questions or you want to jump further into learning about creative finance, come join us and our community.