If I buy a foreclosure home at a very low price, do I walk into equity?
Readers Ask the we buy houses team
I just bought a bank-owned home… The appraiser had it appraised at 555K. I had purchased it for 460K. Sounds great, right? It is! But, not necessarily. The lender who gave me the mortgage sees 460K as the “house value” even though the recorded appraisal (done in feb) was 555K. The appraiser checked all kinds of things such as condition of the home, size, amenities, neighborhood comps (they used lots of comps), etc… Her appraisal was extremely conservative as well. So, i want to make some upgrades to the kitchen (it’s very 1970’s-ish.. ugh) so wanted to take out a home equity loan. NO CAN DO since they use the 460K as the value of the home. The general rule of thumb is… the purchase price is the value that lenders use for the 1st year of residence. After you’ve been there 1 year and can prove you can make payments ON TIME and no hiccups, then you can refinance and take equity out and they will then use the appraised price (must get a new appraisal). Luckily for me, my neighbor right behind me has a slightly smaller lot with less comps and it sold for 545K last month so I know my house has equity =)
If you have multiple foreclosures in your area, then chances are, the home values in your area are ALL depressed and therefore, no equity. I’m sure my neighborhood didn’t appreciate the price i bought the house for, but in a year they won’t care.
The We Buy Houses Team Answers:
Yes and no. When you buy a home whether it is a foreclosure or someone just not asking full value on the home, the appraiser will hit the value close to whatever the sales price is not what the actual value of the home is. So therefore no you will not have equity in the home.
But if you are doing your research you know that the other houses are selling for more then what you are buying your home for then yes you have the equity there. That is why people are flipping foreclosures, some people know the value is much higher then what the bank is asking for it and they can afford to sit on that house for a couple months while it is on the market without doing any improvements to house. Other people will buy the house do some improvements to build even more equity then sell the house for an even bigger profit.